中国经济管理大学
MBA教辅
加里·阿姆斯特朗
《市场营销学》
教师手册
Contents
Preface
Chapter 1: Marketing: Managing Profitable Customer Relationships 1
Chapter 2: Company and Marketing Strategy: Partnering to Build Customer Relationships 21
Chapter 3: The Marketing Environment 39
Chapter 4: Managing Marketing Information 56
Chapter 5: Consumer and Business Buyer Behavior 76
Chapter 6: Segmentation, Targeting, and Positioning: Building the Right
Relationships with the Right Customers 100
Chapter 7: Product, Services, and Branding Strategy 119
Chapter 8: New-Product Development and Product Life-Cycle Strategies 142
Chapter 9: Pricing Considerations and Strategies 159
Chapter 10: Marketing Channels and Supply Chain Management 185
Chapter 11: Retailing and Wholesaling 208
Chapter 12: Integrated Marketing Communication: Advertising, Sales Promotion, and Public
Relations 224
Chapter 13: Integrated Marketing Communication: Personal Selling and Direct Marketing 250
Chapter 14: Marketing in the Digital Age 272
Chapter 15: The Global Marketplace 294
Chapter 16: Marketing and Society: Social Responsibility and Marketing Ethics 316
Video Case Notes 335
Chapter 1
Marketing: Managing Profitable Customer Relationships
Previewing the Concepts—Chapter Objectives
Define marketing and outline the steps in the marketing process.
2. Explain the importance of understanding customers and the marketplace, and identify the five core marketplace concepts.
3. Identify the key elements of a customer-driven marketing strategy and discuss the marketing management orientations that guide marketing strategy.
4. Discuss customer relationship management and strategies for building lasting customer relationships.
5. Describe the major trends and forces that are changing the marketing landscape in this new age of relationships.
Just the Basics
Chapter Overview
Marketing is all about customer relationships—profitable customer relationships. Whether your company sells expensive systems to a few key customers or toothpaste to millions, understanding the customer is the heart of a successful business. Although everyone within a company must be obsessed with making sure the customer is happy, one of the many roles of marketing is growing current customers and acquiring new ones.
Marketing is defined as a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging value with others. Figure 1-1 of the text shows a model of the marketing process that includes understanding the marketplace and customer needs and wants; designing a customer-driven marketing strategy; constructing a marketing program that delivers superior value; building profitable relationships and creating customer delight; and capturing value from customers to create profits and customer equity. The chapter reviews these five steps, focusing on the relationship aspect of marketing.
Chapter Outline
1. Introduction
a. has come to define Internet shopping.
b. It is a company that is completely customer-driven. Even with millions of customers, they are able to develop a relationship with each and every one.
c. Amazon wants to make each customer feel that their experience is unique and personal.
d. Successful companies of all types share Amazon’s passion for marketing and understanding and satisfying customers needs.
2. What Is Marketing?
A simple definition of marketing is managing profitable customer relationships.
Marketing must both attract new customers and grow the current customers.
Every organization must perform marketing functions, not just for-profit companies. Non-profits also must also perform marketing.
Marketing Defined
Most people think of marketing as selling and/or advertising, “telling and selling.”
e. Marketing must focus on satisfying customer needs.
f. The formal definition of marketing is a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging value with others.
Use Key Term Marketing here.
Use Chapter Objective 1 here.
The Marketing Process
g. Figure 1-1 shows the five-step marketing process.
Understand the marketplace and customer needs and wants.
Design a customer-driven marketing strategy.
Construct a marketing program that delivers superior value.
Build profitable relationships and create customer delight.
Capture value from customers to create profits and customer equity.
h. The first four steps create value for customers and build relationships with them.
i. The last step captures value from the customer in return for the value delivered.
Use Figure 1-1 here.
Let’s Discuss This
At this point, stop and ask students if the marketing process just described was what they had in mind when they signed up for this class. Did they understand the full extent of marketing? What was their conception of marketing when they first walked through the door?
Understanding the Marketplace and Consumer Needs
Companies must first understand what the customer needs and wants, as well as the marketplace in which they operate.
Five core marketplace concepts are reviewed in this section:
Needs, wants, and demands;
Marketing offers (products, services, and experiences);
Value and satisfaction;
Exchanges, transactions, and relationships; and
Markets.
Needs, Wants, and Demands
Human needs are felt deprivation.
They include physical needs (food, clothing, safety); social needs (belonging, affection); and individual needs (knowledge, self-expression).
These needs are not created by marketing; they are intrinsic to humans.
Human needs take the form of wants when culture and personality are applied. They are shaped by society.
Wants become demands when they are backed by buying power.
Value and satisfaction are the motives for people to demand products.
i. Marketing research helps companies understand customers’ needs, wants, and demands.
Use Key Terms Needs, Wants, and Demands here.
Use Discussing the Issues 1 here.
Use Application Questions 1 here.
Applying the Concept
If time permits, have the students break into groups to discuss the concepts of needs, wants and demands as they were applied to their decision-making process for applying to college, and accepting the offer from the University they are attending. Have them discuss their groups’ responses in terms of the needs, wants, and demands, rather than how they might describe it to their friends or family.
Marketing Offers—Products, Services, and Experiences
A marketing offer is a combination of products, services, information or experiences offered to satisfy a need or want.
Marketing offers can also include such things as persons, places, organizations, information, and ideas.
Marketing myopia is paying more attention to the individual products offered, rather than the need satisfied, or benefits produced.
Companies should focus on brand meaning and brand experience, rather than just the product attributes.
Experiences have emerged as differentiating factors for many companies, including Disney, Harley Davidson, and Barnes & Noble
Use Key Term Marketing Offer here.
Use Marketing at Work 1-1 here.
Value and Satisfaction
o. Consumers make their choices based on their perception of the value offered by each company.
p. Companies have to be able to set the right level of expectations—set them too low, and they may succeed in satisfying them, but they won’t be able to attract many customers. If they set expectations too high, they could risk disappointing customers.
Exchange, Transactions, and Relationships
A core concept in marketing is exchange, which is the act of obtaining a desired object from someone by offering them something in return.
A transaction consists of a trade of values between two parties, and is the unit of measurement in marketing.
Marketing consists of actions taken to build and maintain desirable exchange relationships with target audiences.
Use Key Terms Exchange and Transaction here.
Use Chapter Objectives 2 here.
Markets
A market is defined as the set of actual and potential buyers of a product.
Marketers must manage markets to create the desired exchange relationships.
Sellers search for buyers, identify their needs, design good marketing offers, set prices for them, promote them, and store and deliver them.
Marketing generally involves serving a market of final buyers in the face of competitors.
A company’s success depends on how well their entire system meets the needs of the consumer; the system includes their suppliers, their products and services, and any marketing intermediaries they use.
Use Figure 1-2 here.
Designing a Customer-Driven Marketing Strategy
a. Marketing management is defined as the art and science of choosing target markets and building profitable relationships with them.
Use Key Term Marketing Management here.
Selecting Customers to Serve
The company must decide whom it will serve by dividing the market into segments of customers (market segmentation) and selecting which segments to serve (target marketing).
Some marketers need to reduce demand for their product; this is defined as demarketing.
Use Key Term Demarketing here.
Use Discussing the Issues 2 here.
Deciding on a Value Proposition
A company must decide how it will differentiate and position itself.
A company’s value proposition is the set of benefits or values it promises to deliver; these value propositions differentiate one brand from another.
Companies must define value propositions that give them advantage in the marketplace.
Marketing Management Orientations
Companies must decide on their philosophy to guide their marketing strategy.
There are five alternative philosophies.
The production concept says that consumers will favor products that are available and affordable.
In the product concept, consumers favor products that are highest in quality, performance, and innovative features.
Companies that utilize the selling concept undertake large-scale selling and promotional effort to get consumers to buy.
The marketing concept says that the company needs to understand the needs and wants of the target markets and deliver satisfaction better than their competitors do.
The societal marketing concept is a relatively new concept that asks companies to not overlook consumer long-run welfare while meeting their short-run wants.
Figure 1-3 illustrates the differences between the selling concept and the market concept.
Use Key Terms Production Concept, Product Concept, Selling Concept, Marketing Concept, and Societal Marketing Concept here.
Use Figures 1-3 and 1-4 here.
Use Chapter Objectives 3 here.
Use Discussing the Issues 3 here.
Preparing a Marketing Plan and Program
The marketing strategy outlines which customers the company will serve.
Guided by that strategy, marketing programs are developed to deliver value to the target customers.
The marketing mix is the set of tools the company uses to implement the strategy.
The marketing tools are classified into four categories, called the four Ps of marketing: product, price, place, and promotion.
Use Speed Bump here.
Building Customer Relationships
The previous discussion covered the first three steps in the marketing process—understanding the marketplace and customer needs; designing a customer-driven marketing strategy; and constructing marketing programs.
The fourth and most important step is building profitable customer relationships.
Customer Relationship Management
Customer Relationship Management (CRM) is the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction.
A customer evaluates the difference between all the benefits and all the costs of a marketing offer; this is the customer perceived value.
The perceived values and costs may not be accurate or objective.
Customer satisfaction depends on the products’ perceived performance versus the customers’ expectations.
The key is to match customer expectations with company performance.
The marketer must balance customer satisfaction level with profitability.
There are levels of customer relationships.
The basic relationship level is at one extreme and is exhibited in markets with many low-margin customers.
Full partnerships are developed in markets that have few customers and high margins
Many companies today develop customer loyalty and retention programs.
One way of doing that is by offering financial benefits, such as frequency marketing programs.
Companies can also add social benefits, such as club marketing programs.
Yet another approach is structural ties such as FedEx’s Web links to its customers.
Use Key Terms Customer Relationship Management, Customer Satisfaction, and Customer Perceived Value here.
Use Discussing the Issues 4 here.
Use Marketing at Work 1-2 here.
Use Application Questions 2 here.
The Changing Nature of Customer Relationships
Today’s companies are building lasting relationships that are direct. They are targeting fewer, but more profitable customers.
In addition to delivering value to customers, companies are assessing the value they get from customers.
Companies are also trying to use CRM to build profitable, long-term relationships with customers that will enable them to retain the customers they wish to serve.
Direct marketing is growing; some companies sell only through direct channels, such as Dell and Expedia.
Partner Relationship Marketing
Companies work with many partners and engage in partner relationship management.
Inside the company, every functional area could interact with customers; no longer is the marketing department solely responsible for understanding customers. Many companies are forming cross-functional selling teams, which can consist of sales and marketing people, operations specialists, financial analysts, and more.
Outside the firm, the company may deal with distributors, retailers, and others. The supply chain stretches from raw materials to components to final products that are carried to final buyers.
Connections must also be made with the members of the supply chain.
Use Key Term Partnership Relationship Management here.
Use Discussing the Issues 5 here.
Capturing Value from Customers
In the last step in the marketing process, the company captures value from the customer.
Satisfied customers stay loyal and buy more, which means greater long-run returns for the company.
Creating Customer Loyalty and Retention
Completely satisfied customers are the most loyal, and even a slight drop in satisfaction can make a big difference in loyalty.
Customer lifetime value is an important concept that says that if you lose a customer, you don’t just lose one sale. You potentially lose thousands or even hundreds of thousands that a customer could spend over their lifetime.
As a marketer, you need to help customers form an emotional bond with your brand, rather than just making a rational choice.
Use Key Term Customer Lifetime Value here.
Use Chapter Objectives 4 here.
Use Discussing the Issues 6 here.
Use Application Questions 3 here.
Let’s Discuss This
Have the students discuss brands with which they have an emotional bond. For some students, this could be Abercrombie & Fitch. For others it could be a brand of beer. At a major University, it could be the University itself. Then ask them to discuss how they would react if another brand made them an interesting offer: would they be willing to switch brands under that circumstance? Why or why not?
Growing Share of Customer
Customer Relationship Management helps grow share of customer—the share the company gets of that customer’s total spending on the product or service type.
Companies can grow share of customer by offering greater variety to their current customers.
Cross-selling and up-selling are two other ways of increasing customer expenditures with the company.
Use Key Term Share of Customer here.
Building Customer Equity
Customer equity is the total combined lifetime values of all the company’s customers.
Customer equity forecasts the future, whereas sales and market share tell what happened in the past.
Companies can classify their customers as to whether they are profitable or not, and then manage the relationships accordingly.
Figure 1-5 shows one model of customer classification by profitability and projected loyalty.
A key learning is that different types of customers require different management strategies to maintain and increase profitability.
Use Key Term Customer Equity here.
Use Figure 1-5 here.
Use Speed Bump here.
The New Marketing Landscape
In this section, five trends are identified and discussed that show how rapidly the business world is changing.
The New Digital Age
Combined technology and information explosions have changed the way we relate to one another across the globe.
Technology has enabled companies to learn more about customers, to get their products out to a much larger, global audience, and to tailor their products to individual customer needs.
There are also many new ways to reach customers, including CD-ROMs, interactive TV, and other new technologies that let companies focus in on individual customer needs.
The Internet currently reaches 67% of the United States’ population, and globally it reaches 655 million people.
Business-to-business e-commerce was $ trillion last year and is expected to continue to grow rapidly.
Use Key Term Internet here.
Use Under the Hood/Focus on Technology here.
Rapid Globalization
Companies large and small are globalizing, if only because they are facing global competition themselves.
This has resulted in a much more complex marketing environment for all companies.
Companies are also buying more of their supplies outside their home country
Many companies form strategic alliances and joint ventures with foreign companies to build global networks.
Use Marketing at Work 1-3 here.
The Call for More Ethics and Social Responsibility
Companies are being asked today to look at what their impact is on their environment.
Those companies that look to the future are accepting their responsibilities in the areas of social and environmental impact.
Many companies, such as Ben & Jerry’s and others, practice “caring capitalism” by being civic-minded.
Use Focus on Ethics here.
The Growth of Not-for-Profit Marketing
Colleges, hospitals, museums, and other not-for-profit companies and associations are using the same marketing strategies as for-profit companies.
Government agencies are also utilizing marketing for both recruitment and social marketing campaigns.
The New World of Marketing Relationships
Old marketing saw the function as just selling and advertising, but new marketing sees it as building relationships.
Companies are forming direct relationships with customers and improving their customer knowledge.
So, What Is Marketing? Pull It All Together
Marketing is the process of building profitable customer relationships by creating value for customers and capturing value in return.
The first four steps are focused on creating value for the customer, while the last step returns value from the customer to the company.
After the marketing strategy is defined, the marketing program is developed, which consists of the four Ps.
When building value for customers, companies must utilize marketing technology, go global in both selling and sourcing, and act in an ethical and socially responsible way.
Figure shows a model of the marketing process, and the remainder of the text goes into detail on all of the concepts covered in this first chapter.
Use Chapter Objectives 5 here.
Use Table 1-1 here.
Use Figure 1-6 here.
Travel Log
Discussing the Issues
Why is understanding customer wants so critical for marketers? How are the concepts of value and satisfaction related to each other? Explain the difference between transactions and relationships.
Wants (., hamburger) are the form needs (., food) take when shaped by culture and personality. They are important because marketers sell to wants not to needs. Perceived value drives satisfaction. If the value is not up to the consumer’s expectations they will be dissatisfied. Transactions are one time, discrete exchanges, while relationships imply a series of relationships.
Why is target market selection important for a customer-driven marketing strategy? Discuss some of the negative consequences a company might incur from not paying enough attention to selecting its target market.
The company must first decide on the target market because different market segments may have different wants which would require different offerings. The biggest negative consequence is that a company will offer a product that does not fit the target market’s needs. Other issues students might discuss are that the market selected is small, inaccessible, or already served by many other companies.
Discuss the differences between the production, product, selling, marketing, and societal marketing concepts. Identify circumstances where each one may be appropriate.
The production concept holds that consumers will favor products that are available and highly affordable. Therefore, management should focus on improving production and distribution efficiency. The production concept is useful when demand for a product exceeds the supply. The selling concept holds that consumers will not buy enough of the firm’s products unless it undertakes a large-scale selling and promotion effort. Firms often practice the selling concept when they face overcapacity. The marketing concept holds that achieving organizational goals depends on knowing the needs and wants of target markets and delivering the desired satisfactions better than competitors do. This works best in competitive markets where companies are in tune with customer’s product requirements. The societal marketing concept holds that marketing strategy should deliver value to customers in a way that maintains or improves both the consumer’s and the society’s well being. This concept is used by firm’s wishing to take a long-term view of their operations.
What are the advantages for a company in building relationships with its customers? What are some ways in which a company can build customer relationships?
Customers who perceive a relationship exists with the firm are likely to be more loyal, spend more, and offer advice to the firm for improving its operations. An instructor could use the second part of this question to illustrate concepts such as database management, lifetime value of a customer, and one-to-one marketing.
Discuss the potential for technological advances and globalization to change the manner in which companies interact with their customers and business partners.
Students will come up with a variety of responses based on their reading of the chapter and their own experiences. The instructor could use this question to emphasize how markets, and the way they can be approached, are always changing. Also use this question to broaden the student’s thinking about the world market—both suppliers and customers.
Think of a company in your town with which you have a relationship. What value do you get from that relationship and how does that company capture value from you in return?
Student responses will vary because the question is based on their own experiences. Instructors can use this question to emphasize the concept of customer perceived value—the customer’s evaluation of the difference between all the benefits and all the costs of a marketing offer relative to those of competing offers. This question will also bring out how the company benefits from creating customer value: customer loyalty and retention, share of market and share of customer, and customer equity.
Application Questions
Human needs are a basic desire for things one does not have (., clothing). These needs are transformed into specific wants by one’s individual personality and the culture in which one lives. Consider the basic need of self-expression. This need can be transformed into a variety of “wants.” For example, clothing, hairstyles, tattoos, and body piercing could satisfy this need. Discuss the degree to which a company offering clothing should consider other companies offering hairstyles, tattoos, and body piercing as competitors for consumers motivated by self-expression.
Although not “direct” competitors, clothing, hairstyles, tattoos, and body-piercing all represent a way for an individual to express themselves. As such, they can be considered competitors on a “needs-based” level rather than competitors within a product category. Use this question to illustrate the value of looking at competitive forces outside of one’s product category.
Specific marketing tools to develop stronger bonds with consumers include financial benefits, social benefits, and structural ties. Identify three different companies you feel exemplify each of these tools. Explain how each company uses the tool to build customer relationships. Among the three companies you identified, consider if it would be advisable for those using the financial or social benefits approach to also include structural ties.
Student responses will vary to this question. It is may be useful to use this question to illustrate the importance of considering the cost of developing relationships (., adding the infrastructure associated with structural bonds) relative to the potential revenue increase resulting from this deeper relational bond.
Companies using the concept of customer lifetime value consider the potential profit from customers over their entire life with the company, not just their potential profit from a single transaction. When banks began tracking the profitability of individual customers, some found that a large percentage of their customers actually cost them more to do business with than the revenue they produced. Considering the lifetime value of a customer concept, should companies “fire” their unprofitable customers? What are the consequences of such an action? What factors should a company consider before taking steps to eliminate their unprofitable customers?
Students may be unwilling to consider firing customers, however profitability concerns may force the company to be more selective in whom it serves. An interesting side discussion to this question is how one would actually go about asking customers to not come back. Additionally, the instructor can use this question to get students to think about the long-run view of the customer. That is, an unprofitable customer today may become profitable later in their life as a customer (many of the students are probably not profitable to their banks now, but will be when they start taking out loans, buying securities, etc.). As such, it is important to look long term when assessing customer profitability.
Under the Hood/Focus on Technology
Although the Internet has provided a medium for companies to develop relationships with customers, it has also created a means by which customers can share consumption experiences with other customers. Some companies, such as , allow customers to post product reviews directly on the company’s website. In addition, dedicated consumer opinion websites (., , www ., and ) provide consumers with the opportunity to read other consumers’ consumption opinions and experiences, as well as to write their own on just about any product or service sold.
Visit the rating websites listed above and read some of the reviews for a product in one of the following categories: digital cameras, video game systems, or athletic shoes. Next respond to the following questions with this product in mind.
How much influence do you think consumer-to-consumer ratings have on the purchase decision for this product? What factors may make this influence stronger or weaker?
Student responses will vary. Factors impacting the influence might include the amount and quality of other sources of information, how much information the consumer already has, and their own level of experience with the product category.
Discuss whether the ability of a consumer to receive product performance information directly from other consumers helps or harms this company’s promotional efforts?
Instructors can use this question to discuss both positive and negative electronic word-of-mouth. One could also have students consider consumer “hate” sites on the Internet (., —a site criticizing United Airlines).
What might this company do to use consumer-rating websites to its advantage?
A variety of responses exist for this question. For example, the company could respond directly to those consumers dissatisfied with their products. Also the company could monitor the review websites to assess customer satisfaction for its products and develop new ideas for product improvement.
Focus on Ethics
The marketing concept focuses on satisfying customer’s needs, but what if doing so places the consumer at risk? A variety of legal products are sold that may have harmful effects on consumers. The health impact of tobacco and alcohol are well known. More recently, many individuals and the Food and Drug Administration have become concerned about the level of trans-fatty acids present in some food products. Companies such as McDonalds, Kraft Foods, and Frito-Lay have recently been re-evaluating their offerings and have begun to initiate changes to make their food healthier. For example, McDonalds will soon test a Happy Meal that will allow the option of replacing french fries with a bag of sliced fruit.
What ethical responsibility do companies producing products that have potentially adverse health effects have to consumers?
Given the nature of the question, there will be many valid opinions on this question. One way to approach this is to have students think about the question from different points of view (., consumers, government, shareholders, company management, etc.).
Are the goals of increasing profits and of the societal marketing concept at odds with one another?
The instructor can point out that taking a long-term view leads to short-run profit declines in some cases, but that profitability and social responsibility are not mutually exclusive goals.
Break into groups of four to six students. Within each group half of the students should consider reasons for why marketing potentially unhealthy products, like McDonalds french fries, is ethical. The other half of the group should consider reasons for why such actions are unethical. Debate the issue.
After the debate in small groups, the debate could be continued using the entire class. Have the students switch sides of the issue for the large class debate. Also have students debate as different stakeholders (., consumers, government, shareholders, company management, etc.).
What ethical concerns exist behind a McDonald’s order taker asking all customers if they want to supersize their meal? Is this giving consumers what they want, or is this inducing many overweight people to eat more than necessary? Debate the issue.
This question is likely to raise some heated debate regarding the purpose of the organization. At its core, the question gets at the idea of doing what the customer wants versus doing what is best for the customer. This question highlights that sometimes these may be different things.
Great Ideas
Barriers to Effective Learning
For most students, this will be their first introduction to marketing and all its ramifications. To most of them, marketing is nothing more than selling and/or advertising, and this gets reinforced daily when they see “marketing” job ads that are really sales positions. It helps to get students talking about what marketing is, and to give examples of what they think is really good marketing. Try to bring in contemporary examples that the students can relate to.
Building relationships can sometimes be easy to understand in a business-to-business transaction, but it can be much more difficult to comprehend in consumer businesses. Use examples such as that do a wonderful job of developing one-on-one relationships with millions of customers through their tracking of customer purchases and analysis of that to recommend additional items. Ask students to discuss how they feel about the companies they buy from. Have any developed relationships with them that have made them loyal to the brand or store?
Demarketing is always a problem for students. Most of them have not yet encountered anything like it. The light bulb seems to go on, though, when you talk about National Parks and how crowded they get, and efforts to get people to go see them in off-peak travel times. Again, having students come up with their own examples will increase the level of understanding.
Societal marketing is also something that can be a little unclear to students. Why should fast food chains, for instance, be responsible for the nation’s obesity (just one very topical discussion point)? Understanding how one should balance the need for profits with what some might consider to be “soft” issues can be difficult at times. And that can be made even more difficult among the politically-astute students, as they can easily lead the class into a left versus right discussion on individual versus corporate versus governmental responsibility. Try to not let that happen, instead focusing on how companies can actually increase their revenue and profits by showing that they care about their customers and their communities. Newman’s Own is a brand that could be discussed, as most profits are donated to charities, and they have moved strongly into ensuring a sustainable environment.
Traditional-age undergraduates have spent their entire lives with technology, and so some of them can actually snicker when the discussion turns to how technology has changed business in general and marketing more specifically. A discussion of the difficulties of connecting to consumers without the Internet is warranted. How would the students approach a one-on-one relationship with millions of customers if they didn’t have email or the Internet or blast faxes?
At this stage, students are very apprehensive about the course. When they walked into class, they thought they might learn about selling and advertising, and now they’ve discovered that there is much more to marketing than just those two subjects. Talking about how much fun it is to be the center of the company, knowing more about customers than any other functional area in the company, can sometimes ease their minds and make them look forward to learning more. And emphasizing that marketing combines both the analytical and the creative can also ease some tension—the accounting and finance majors will find that there is something in it to suit their more analytical frame of reference, and the artists and designers who hope to become fashion mavens can also rest assured that although they will need to understand the more logical areas of the subject, their intuition can still reign supreme.
Student Projects
Clip or photocopy three current print advertisements and identify the marketing orientation that, in your opinion, the companies appear to be following.
Develop a list—try for 10 each—of your needs and wants. How are they different? What appeals on the part of companies seem to get your interest and attention? What do you think would be the most successful way for a company to appeal to you if you were considering the purchase of (a) a computer; (b) a car; (c) a college education, and (d) a soft drink?
Find an article from a contemporary business publication that describes a company’s commitment to relationship marketing or connecting with consumers. Abstract the article and share your findings with the class.
Many years ago, American Airlines created a new business “must have” by offering frequent flier miles. All the airlines followed, and hotels weren’t far behind. Most of these programs only offer a tracking system and upgrades to their best customers, but Wyndham hotels are different. Go to the Wyndham website () and find the Wyndham ByRequest™ tab. Fill out the form for membership, and then discuss how Wyndham is creating a relationship with customers far and above what the typical hotel does in their frequency marketing program. Discuss how this could create increased customer equity.
Identify the major variables of the marketing mix. Discuss how they might differ between a for-profit business and a non-profit organization.
Classroom Exercise/Homework Assignment
If the classroom has Internet access, this is a good classroom exercise. Otherwise, it can be assigned as homework.
Sean “P. Diddy” Combs knows how to tap into a cultural phenomenon. Already a star in the world of Hip Hop, in 1998 he launched a line of sports clothing for men, women and children. He sells his clothes in virtually all markets—from stores located in inner cities to Bloomingdale’s. The website for Sean John clothing combines fashion with Hip Hop music, and appeals to those who enjoy urban culture with his tag line, “It’s not just a label, it’s a lifestyle.” Visit the website at for more information.
What is Sean John’s marketing offer, as exhibited on the website?
Sean John offers a bit of urban culture on the Internet. Featuring music from P. Diddy himself, as well as the stars of his BadBoy Entertainment label, the website evokes the inner city culture the clothing line represents. Thus, Sean John’s marketing offer contains both the product itself as well as the experience of being a “bad boy.”
There is also information about the company on the website, including a discussion of how vendors are selected and the company’s infrastructure. Finally, there is a store locator link, and if you can’t find anything close by, Sean John very helpfully sends you to the site where you can buy online.
So, the marketing offer includes the clothes themselves, popular music, and information about the company as well as stars of the music world.
What marketing management orientation does Sean John seem to be following?
Sean John appears to be utilizing the marketing concept. They have clearly tapped into a generational philosophy that wanted recognition in the broader culture.
There is one brief area where the societal marketing concept might come in to play, and this should not be ignored. On the website the company notes that their vendors are audited for health and safety standards as well as the quality of their work. The company says that it will not work with vendors that exploit their employees. Although the language of the hip hop music may argue against the societal marketing concept, some students may claim that the unwillingness to deal with vendors who abuse employees in any way shows that the company cares about society as a whole.
Suggest ways that Sean John might be able to build relationships with their final customers, because retail outlets are responsible for actually selling the clothes to those who will wear them.
Sean John easily relates to their final customers through the design of the website and the music that plays on it. But it doesn’t appear that they currently try to build relationships with their customers. There is virtually no information on how to contact the company, although there is a way to send in comments, and it requests the commenter’s email ID for response.
Sean John does have the opportunity to develop relationships with their customers, however. Suggestions from students could include allowing a greater level of contact with those who visit the website, allowing them, for instance, to record their likes and dislikes as they are viewing the clothing line. Information could also be collected regarding those who use the store locator link, and direct links could be made to address and phone number information of the stores, or to their websites. There could be a guest book for visitors to sign, and those who do sign in could be given the option of receiving emails when new collections are being launched. Suggestions also could include giving special discounts to those who visit the website, to see how many visitors are actually converted into buyers.
Classroom Management Strategies
The first chapter of this textbook sets the stage for the rest of the content. It outlines the major topics and principles that will be discussed in each of the following chapters, and gives the student a good grounding in what to expect in their journey into the world of marketing.
First classes are always difficult, both for the instructor and for the student. Therefore, using examples that students can relate to easily is always a good idea when starting out. The marketing application, Sean John clothing, attempts to do that, and can be scheduled for the end of the class, or given as an assignment for the next scheduled meeting.
In reviewing the material in class, a good way to break it down follows. This assumes a typical one-hour structure; if the class is longer, you can work through the Marketing Application in class. If shorter, you can either break the chapter over two sessions, or shorten each topic’s allotted discussion time.
Ten minutes should be spent on discussing what marketing really is. Many students will come into class thinking they are going to be learning all about advertising, or all about selling. Ask students to talk about what they think marketing is, and to use examples of what they’ve encountered in their own lives.
Ten minutes can also be spent on the second major topic of the chapter, understanding the marketplace and consumer needs. Discussing the differences of needs, wants, and demands, and how they relate to marketing, can greatly enhance the students’ understanding of the basis of marketing. Also included in this section are the notions of marketing offers, satisfaction, and relationships. You can discuss the various ways companies develop relationships with their customers. Using , the company discussed in the opening pages of the chapter, can really help the students understand that a company with millions of customers can still easily develop relationships with each and every one of them.
Another 10 minutes can be spent on designing customer-driven marketing strategies. Many students will still not understand how needs, wants, and demands can drive companies’ product development, but this section of the chapter will help them see it a little more clearly.
Preparing a marketing plan and program can be covered in 5 minutes. This section shows how everything they learn in marketing will be pulled together, but it is too soon in the semester to be spending a lot of time on the topic.
Customer relationships are the heart of the chapter and the entire text. Spend 15 minutes discussing this topic, and use examples that the students will appreciate. Discussing the difference in the relationships they have with their hairdresser or barber and that of or another one of the Internet merchants can drive home the importance of holding on to good customers. Students will also be well aware of frequency marketing programs, and examples of those will also be beneficial.
The final 10 minutes can be spent discussing the future of marketing and the development of customer relationships. The students will never have known an era without the Internet. Asking them how they would have developed relationships with their customers without the assistance of technology is a good way to get a discussion started on how marketing programs are developed. Then you can talk about how the advent of email and the Internet has opened the entire world for even a small retailer, as well as raised some ethical issues, such as the marketing of the American culture to the entire world, regardless of their societies’ mores and culture.
If time permits, revisit the question of “what is marketing?” The students should now have a greater appreciation of the science behind marketing, as well as the creativity necessary to develop successful marketing programs.
Chapter 2
Company and Marketing Strategy:
Partnering to Build Customer Relationships
Previewing the Concepts—Chapter Objectives
Explain companywide strategic planning and its four steps.
Discuss how to design business portfolios and develop growth strategies.
Explain marketing’s role under the strategic planning and how marketing works with its partners to create and deliver customer value.
Describe the elements of a customer-driven marketing strategy and mix, and the forces that influence it.
List the marketing management functions, including the elements of a marketing plan.
Just the Basics
Chapter Overview
This chapter looks at steps two and three of the marketing process—designing customer- driven marketing strategies and constructing marketing programs. It begins with a discussion of companywide strategic planning, something many students probably don’t know even exists. But, as the chapter points out, marketing plans and programs are not developed in a vacuum. They must be a part of and consistent with the broader, overall strategic plans.
The text delves into strategic planning, and then goes on to discuss how marketing partners with other internal departments to ensure success in the marketplace. It also discusses how the marketing mix is developed out of the marketing strategy, and how marketing departments today are organized to manage the marketing effort.
Chapter Outline
1. Introduction
Walt Disney has long been defined by their theme parks and animated films.
Their theme parks are world-renowned, but the Disney story is much larger than that.
Disney owns or has a major stake in major television and radio networks; cable networks; television and movie production studios; magazine publishing groups; music labels; Internet groups; stores; and cruise lines.
Managing this portfolio of businesses has proven challenging during the recent economic downturn and fears of terrorism.
Keeping this portfolio of businesses growing profitably will take masterful strategic planning.
2. Companywide Strategic Planning: Defining Marketing’s Role
Strategic planning is the process of developing and maintaining a strategic fit between the organization’s goals and capabilities and its changing marketing conditions.
Strategic planning is the basis for all of the rest of planning for the firm.
Companies typically develop several types of plans: annual, long-range, and strategic.
Annual and long-range plans focus on keeping their current businesses running.
Strategic plans focus on taking advantage of opportunities in the external environment, an environment that is constantly changing.
Applying the Concept
Have students break into groups of four to six to discuss what a likely strategy would be for attracting new students to their University. Have them develop a brief statement that describes the University’s fit between their goal of attracting the best students and their capabilities for then educating those students.
The company begins by defining its overall purpose and mission, which is outlined in Figure 2-1.
The mission is turned into objectives that should guide the entire company.
The best portfolio of businesses and products is defined based on the above.
Then each business develops its own plans in support of the corporate strategic plan.
Use Key Term Strategic Planning here.
Use Chapter Objectives 1 here.
Use Figure 2-1 here.
Defining a Market-Oriented Mission
Businesses may begin to drift as they grow larger. Management should ask the questions: What is our business? Who is the customer? Who do customers value? What should our business be?
These questions should be asked—and answered—frequently.
A mission statement is a statement of the organization’s purpose—what it wants to accomplish in the larger environment.
Mission statements should be market oriented, not focused on the product(s) the company produces.
This means that the mission should be defined in terms of satisfying basic human needs.
The mission should neither be too broad or too narrow; they should be realistic. They should fit the market environment. They should be based on distinctive competencies. They should be motivating.
Use Key Term Mission Statement here.
Use Table 2-1 here.
Use Under the Hood/Focus on Technology here.
Setting Company Objectives and Goals
The mission must then be developed into detailed objectives. Each manager should have objectives they are responsible for reaching.
Marketing strategies and programs are then developed to assist in meeting those objectives. The marketing strategies developed must be defined in greater detail, resulting in specific marketing programs.
Designing the Business Portfolio
A business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that matches the company’s strengths and weaknesses.
Business portfolios are planned in two steps:
The company analyzes their current businesses to decide which ones should receive more, less, or no investment.
Then the future portfolio is developed through strategies for growth and/or downsizing.
Use Key Term Business Portfolio here.
Use Chapter Objectives 2 here.
In portfolio analysis, each of the products and businesses making up the company is evaluated. Strong businesses and products should be supported, while weak ones should be phased down or dropped.
A strategic business unit (SBU) is a part of the company that can be planned independently from other company businesses.
The purpose of strategic planning is to find ways the company can match its strengths to opportunities in the environment.
The two most important portfolio analysis methods measure two dimensions—the attractiveness of the SBUs market or industry, and the strength of the SBUs position in that market or industry.
1. The Boston Consulting Group approach is the most well-known method of analysis.
a. In this method, the company’s businesses are defined according to a growth-share matrix (see Figure )
Use Key Terms Portfolio Analysis and Growth-Share Matrix here.
Use Figure 2-2 here.
Use Discussing the Issues 1 here.
b. The four types of SBUs are defined as follows:
Stars: high-growth, high-share businesses or products. These are expected to become Cash Cows.
Cash Cows: low growth, high-share businesses or products. They produce a lot of cash that the company uses to support SBUs that need investment.
Question Marks: low-share businesses in high-growth markets. They generally require a lot of cash, so management has to decide which ones to support and which should be shut down.
Dogs: low-growth, low-share businesses and products.
c. Once the SBUs are defined and classified in the matrix, the company has to decide what role each will play. There are four strategies that can be pursued:
The company can invest to build share.
The company can invest enough just to hold share.
The company can harvest, taking the cash for other uses.
The company can divest, or shut down the SBU.
d. SBUs and products can, and do, change their positions over time. The company must add new products and units all the time.
2. Matrix approaches have some limitations.
a. They are difficult and time-consuming. Defining and measuring market share and growth is especially difficult.
They also focus on what is happening today, rather than what should happen in the future.
They also can cause companies to go into areas unrelated to their strengths, simply because the market environment looks enticing.
3. Many companies today are decentralizing strategic planning, allowing cross-functional teams to do it.
In addition to analyzing current businesses, companies must focus on profitable growth through finding businesses and products the company should move into in the future.
Marketing is the function that identifies, evaluates and selects market opportunities, and develops strategies for going after them
A way of doing this is through the product/market expansion grid, shown in Figure 2-3.
1. Market penetration means making more sales to current customers, without changing your product(s).
2. Market development is identifying and developing new markets for current products.
3. Product development is when the company offers modified or new products to current markets.
4. Diversification means moving into both new markets and new products, perhaps by starting up or buying businesses.
Use Key Terms Product/Market Expansion Grid, Market Penetration, Market Development, Product Development and Diversification here.
Use Discussing the Issues 2 here.
Use Application Questions 1 here.
aa. Companies also need to be concerned with strategies for downsizing businesses.
1. Products can become unprofitable, or the firm could have moved into markets with which it is unfamiliar.
Use Key Term Downsizing here.
Use Figure 2-3 here.
Use Market at Work 2-1 here.
Strategic Planning and Small Business
bb. Not only large businesses benefit from strategic planning. Small businesses, especially start-ups, often ignore strategic planning once the business gets going.
cc. Strategic planning helps managers of small businesses anticipate changes in the internal or external environment, and then help prevent or handle them.
3. Planning Marketing: Partnering to Build Customer Relationships
a. Once strategic plans are in place, more detailed plans need to be developed.
b. Marketing is key to this additional planning activity:
It provides the guiding philosophy, which is the marketing concept.
It provides inputs to strategic planners in the areas of attractive market opportunities and analyzing the company’s capability for taking advantage of those opportunities.
3. Within the business units, marketing designs strategies for reaching each unit’s objectives.
c. Marketing must work with all internal departments and external partners to attract, keep, and grow customers.
d. Both customer relationship management and partner relationship management are important.
Use Key Term Partner Relationship Management here.
Use Chapter Objectives 3 here.
Partnering with Other Company Departments
e. Each company department is a link in the company’s value chain. That means that each department adds value in designing, producing, marketing, delivering, and supporting the company’s products.
Use Key Term Value Chain here.
Use Discussing the Issues 3 here.
f. Success depends on how well each department goes about adding value, and how well all the individual departments coordinate their work.
g. In reality, the myriad departments in a company can be in conflict.
1. Marketing takes the customer’s point of view, and works to increase customer satisfaction.
2. But that could cause other departments to do a poorer job, as they see their jobs to be defined.
3. Yet marketing is charged with getting everyone to “think customer.”
4. Therefore, each department needs to understand the others, so that everyone can work together to achieve the company’s objectives.
Partnering with Others in the Marketing System
h. The company should not solely focus on its own value chain; it needs to also partner with its suppliers, distributors, and customers.
i. Value-delivery networks are companies working together to improve their total performance.
j. Today, competition can largely take place between entire value-delivery networks, rather than individual competitors.
Use Key Term Value-Delivery Network here.
Use Speed Bump here.
Let’s Discuss This
Have the students describe the possible Value-Delivery Network for their favorite coffee shop or bar.
4. Marketing Strategy and the Marketing Mix
a. Figure 2-4 shows the major activities in managing marketing strategy and the marketing mix.
1. Consumers are in the center. Profitable customer relationships are the goal.
2. Marketing strategy is next—this is the broad logic under which the company attempts to develop profitable relationships.
3. Guided by the strategy, the company develops its marketing mix—product, price, place, and promotion.
Use Key Term Marketing Strategy here.
Use Figure 2-4 here.
Customer Centered Marketing Strategy
Marketing requires a deep understanding of customers.
There are many different kinds of consumers, and they exhibit many different kinds of needs. Companies cannot profitably serve them all.
To better define who they can serve, companies must divide up the total market. The three steps to do that are market segmentation, target marketing, and market positioning.
Market segmentation is the process of dividing a market into distinct groups of buyers with different needs, characteristics, or behavior who might require separate products or marketing programs.
A market segment is a group of consumers who respond in a similar way to a given set of marketing efforts.
Use Key Terms Market Segment, Market Segmentation, Target Marketing, and Market Positioning here.
Use Chapter Objectives 4 here.
Target marketing involves evaluating each market segment’s attractiveness, and then selecting one or more segments to enter.
A company should target those segments that will return the greatest profitability while generating the greatest customer value.
If there are limited resources, companies might want to pursue only one or a few special market niches.
Major competitors will oftentimes ignore or overlook small niches.
Other companies could serve related segments—these segments could have different kinds of customers but the customers have the same basic wants.
Large companies may go after all market segments with a broad range of products.
Let’s Discuss This
Briefly discuss how a new local Hip Hop radio station would develop a target market.
Market positioning is the development of a clear, distinctive and desirable place relative to competing products in the minds of consumers.
To develop a market position, the company must identify competitive advantages it has; that is, where they offer greater value than do their competitors.
Effective positioning requires the company to actually deliver what it says it is delivering, and it must communicate the fact that it is delivering it.
Developing the Marketing Mix
The marketing mix is the set of controllable, tactical marketing tools that the firm blends to produce the response it wants in the target market.
Use Key Term Marketing Mix here.
Use Figure 2-5 here.
The marketing mix is typically described as the “four Ps”: product, price, place, and promotion.
A product is the mixture of goods and services the company offers.
Price is what the consumer must pay for the product.
Place is the way the company makes the product available to customers.
Promotion is the set of activities that the company uses to communicate the value of their product to the marketplace and to persuade consumers to buy it.
Effective marketing programs combine all these elements in a way that allows the company to achieve its objectives by delivering value to consumers.
Use Discussing the Issues 4 here.
Use Application Questions 2 here.
However, the four Ps take an internal view, rather than looking externally, or viewing the company and its products from the buyer’s perspective.
From this perspective, the four Ps become the four Cs:
Product becomes Customer solution.
Price becomes Customer cost.
Place becomes Convenience.
Promotion becomes Communication.
Use Discussing the Issues 5 here.
5. Managing the Marketing Effort
a. Management of the marketing process is highly important.
b. Figure 2-6 shows the four important functions: analysis, planning, implementation, and control.
Marketing Analysis
c. Analysis should be performed to understand the markets and marketing environment the company faces; company strengths and weaknesses; and current and future marketing actions to understand which opportunities the company can pursue.
Marketing Planning
d. A detailed marketing plan has to be developed for each business, product or brand.
e. Table 2-2 shows the major sections of a marketing plan for a product or a brand.
Use Table 2-1 here.
Use Chapter Objectives 5 here.
Marketing Implementation
f. Marketing implementation turns plans into actions. It involves the activities that make the plans work.
g. Implementation requires the company to blend its people, organizational structure, decision and reward systems, and company culture in a way that supports its strategies.
Use Key Term Marketing Implementation here.
Use Figure 2-6 here.
Use Discussing the Issues 6 here.
Marketing Department Organization
The marketing organization must be designed such that it can carry out the strategies and plans that are developed.
In small companies, one person may perform all the marketing functions. In large companies, many specialists are found.
The functional organization is the most common form. This organizational form has the different activities headed by a functional specialist, such as sales, advertising, marketing research, etc.
A geographic organization might be utilized in a company that sells nationally or internationally.
A product management organization can be found in companies with many different products or brands.
A market or customer management organization is used in companies that sell one product to many different kinds of markets and customers.
Very large companies might utilize a combination of all these forms.
Marketing Control
Results of marketing strategies and plans need to be evaluated, and where necessary, corrective action should take place.
Use Key Term Marketing Control here.
Use Figure 2-7 here.
Use Application Questions 3 here.
Figure 2-7 outlines the control process, which includes the following:
Operating control checks the ongoing performance of the marketing programs against the annual plan.
If necessary, corrective action is taken.
The purpose is to ensure that the company sales, profits, and other goals are being met.
Strategic control looks at whether the company’s basic strategies are matched to its opportunities.
A major tool to use here is a marketing audit, which is a comprehensive examination of a company’s environment, objectives, strategies, and activities.
It covers all major marketing areas of a company, not just the problem areas.
Use Key Term Marketing Audit here.
Use Focus on Ethics here.
The Marketing Environment
Companies face a complex environment and uncontrollable forces in its marketing environment.
The environment contains both threats and opportunities.
The marketing environment includes internal company departments, as well as channel members, suppliers, competitors and publics.
It also includes macro forces such as demographic and economic, political and legal, technological and ecological, and social and cultural.
Travel Log
Discussing the Issues
Four steps are identified in the strategic planning process. Why are they arranged in this order? What consequences might a company experience if one of the steps was performed out of order? What should be the role of marketing in the strategic planning process?
The steps in the strategic planning process are (1) defining the company’s mission, (2) setting objectives and goals, (3) designing a business portfolio, and (4) developing functional plans. They are arranged in this order because one step leads to the next. For example, the mission provides guidance for the objectives. If done out of order, the potential exists for a lack of consistency to exist in the planning process. One of marketing’s roles in the planning process is to represent the voice of the customer in terms of their needs.
How can the BCG growth-share matrix be used to assess both the current product portfolio and plan for the future? What limitations does portfolio analysis have? Discuss how a product/market expansion grid can aid companies in identifying profitable growth opportunities.
Portfolios allow for managers to examine their current situation and then project the probability for the various SBUs to move to different quadrants of the portfolio. In this way the future of the organization can be examined. However, these portfolios are typically used more for understanding the current situation. In terms of limitations, portfolios can be difficult, time-consuming, and costly to implement. Also, management may find it difficult to define SBUs and measure market share and growth. Future growth opportunities are understood as managers look to assign a role to each SBU in the classification matrix.
Discuss the concept of the value chain. Is it true that the value chain is only as strong as its weakest link? Explain why or why not. How can partnering with other organizations to form a value-delivery network further strengthen a firm’s performance?
Each department in an organization carries out value-creating activities to design, produce, market, deliver, and support the firm’s products. The sum of these departments is the value chain. The firm's success depends not only on how well each department performs its work but also on how well the activities of various departments are coordinated. Thus, it is only as strong as its weakest link. At times, outside organizations may be able to form a stronger link in the chain than an internal department. Activities outsourced to these organizations can strengthen the chain.
Discuss the differences between the following terms: market segmentation, target marketing, and market positioning.
The process of dividing a market into distinct groups of buyers with different needs, characteristics, or behavior who might require separate products or marketing programs is called market segmentation. Target marketing involves evaluating each market segment’s attractiveness and selecting one or more segments to enter. After a company has decided which market segments to enter, it must decide what positions it wants to occupy in those segments. A product’s position is the place the product occupies relative to competitors in consumers’ minds.
Discuss the various activities encompassed by each of the four Ps. What insight might a firm develop by considering the four Cs, instead of the four Ps?
Figure 2-5 provides guidance for the first part of this question. Customer solution, Customer cost, Convenience, Communication are the four Cs. They provide a customer oriented view of marketing activities. The four Ps can then be used to satisfy the four Cs.
What role does analysis, planning, implementation, and control have in managing the marketing process? How are these four marketing management functions related to one another?
The company first develops companywide strategic plans, then translates them into marketing and other plans for each division, product, and brand. Through implementation, the company turns the plans into actions. Control consists of measuring and evaluating the results of marketing activities and taking corrective action where needed. Finally, marketing analysis provides information and evaluations needed for all of the other marketing activities.
Application Questions
The product/market expansion grid can be useful in identifying growth opportunities for companies through market penetration, product development, market development, and diversification. Consider a food retailer like Subway, which makes sandwiches and offers chips and drinks. Think creatively to describe four growth opportunities for Subway that fit into each of the four product/market expansion grid cells.
Responses to this question will vary for students. Instructors can use this question to illustrate the use of the product/market expansion grid for identifying company growth opportunities.
Propel is a new lightly flavored, vitamin enhanced “fitness” water from the maker of Gatorade. It comes in flavors such as berry, black cherry, and kiwi-strawberry. Describe the likely target market for this beverage. How should this beverage be positioned relative to competitive products such as sports drinks, bottled water, orange juice, and milk?
Student responses will vary. This question is useful for understanding target market selection and how the positioning of the brand must fit with the selected target market.
Nike has recently entered the golf market with a line of clubs, balls, bags, footwear, and clothing. Most visibly, Nike has enlisted the services of Tiger Woods to promote its golf products. Discuss the four step marketing control process as it would apply to Nike’s evaluation of Tiger Woods as its celebrity endorser.
The control process consists of setting goals, measuring performance against those goals, evaluating performance, and taking corrective action if needed. It is interesting to get students to think about what types of goals Nike may have for this celebrity endorser. Further, once students come up with some goals, it is instrumental for students to consider how they will know if the goal is achieved (., what kind of data will they review and where will that data come from).
Under the Hood/Focus on Technology
In order to improve 911 emergency services, the FCC has put forth guidelines that require cell phone carriers to be able to establish subscribers’ locations within 100 meters by the end of 2005. Two different approaches are being considered by wireless carriers. One uses phones with built-in GPS chips, while the other uses triangulation between three or more cell towers to pinpoint a caller’s location. This technology, already in use in Hong Kong, Tokyo, and Helsinki, has drawn the interest of marketers who envision other uses such as sending promotional offers to customers as they walk past their store. In the beginning, the technology will likely be used to give subscribers directions to particular stores.
In a small group, brainstorm potential marketing uses for this technology other than those discussed above.
Responses will vary to this question. Instructors should encourage the students to be creative and think beyond current technological limitations.
Assume you are a member of a cell phone carrier’s marketing team selling this technology to retailers. Develop both a product-oriented and a market-oriented mission statement for the company.
Responses will vary.
What limitations does the product-oriented mission statement have that the market-oriented statement overcomes?
Use this question to highlight the benefits of a market-oriented mission statement.
Focus on Ethics
High profile scandals involving companies such as Enron and WorldCom have renewed interest in understanding how such debacles might be avoided. Corporate accountability is the new theme for concerned investors and politicians. Many agree that the culture of an organization influences the ethical and socially responsible behavior of its employees.
Discuss the role that a company’s mission statement can have in encouraging ethical corporate behavior.
Instructors might discuss how a mission statement can be used to set the tone for the entire organization, in terms of acceptable employee behavior.
As more firms partner with suppliers, distributors, and even customers to improve their value delivery network, what challenges exist for monitoring and encouraging responsible decision making among the entire value delivery network? What can be done to address these challenges?
Use the four step control process as a way to illustrate how goals associated with partnering firms can be evaluated just like internal goals.
What function does a marketing audit play in avoiding scandals?
A thorough and timely audit can discourage unethical behavior by making it more likely that those performing unethical activities will be discovered. In this way it acts as a deterrent. Also, the audit can uncover misdeeds early and then steps can be taken to mitigate the damage before it gets to big.
Great Ideas
Barriers to Effective Learning
Students will largely be unfamiliar with strategic planning and its concepts and objectives. Making this come alive with the examples in the textbook, or your own examples from your own experience, will help them deal with the complex issues in this section.
Working through a mission statement for the marketing department of your University, or for the business college within which it exists, may give the students a greater appreciation for the difficulty and importance of defining a mission that lives and breathes life into the objectives that follow.
The Boston Consulting Group’s portfolio analysis tool can also be difficult to understand. Again, working through examples with companies the students should be familiar with will aid understanding.
University business courses rarely talk about cross-functional team work, so this may come as a surprise to students. If they have worked in internships with large companies, they may well have seen functional silos at work, and their coursework only serves to reinforce that mentality. Examples of companies failing because of a lack of team work—which can happen frequently at small companies in particular—will open many students’ eyes to the importance of ensuring that all functions work in concert to make the company a success.
Value chains and supply chains are important concepts that also are typically not discussed in other courses. Getting students to understand these concepts is important for their understanding of the remainder of the course. Showing how sloppy quality in a component purchased from a vendor ultimately affects customer satisfaction will help.
Market segmentation and targeting is universally a new concept to students, unless they happen to have a parent who works in marketing. Although this is discussed in detail in a future chapter, showing how a large, amorphous market can be broken down in more and more detailed groups of buyers will help. Drawing Venn diagrams, or a large box turned into a matrix of buying groups is a good visual way of doing this.
Market positioning can be difficult to understand as well. Students will normally think of a product in terms of its features, and although positioning includes the features, it also spans the concepts of benefits and perceptions. Using examples of brands at opposite ends of a price continuum, such as Rolex versus Timex watches, helps drive home what positioning means.
The section “Managing the Marketing Effort” will appeal to students who are more analytical; they will find this easy to understand. The more creative types in class will yawn their way through this section, but it is critical that they understand that marketing is not all about creative ideas. Implementation, control and measurement are just as important as the “big idea.” And without it, there is no way to know if the “big idea” is big at all.
Student Projects
Many companies are spending time reviewing their mission statements. Discuss the major reasons for this increased concern with the mission for the corporation.
What is the relationship between the corporate strategy and the strategies for the businesses that comprise the corporate portfolio?
Develop an outline of how you would explain marketing strategy to an entrepreneur who is starting a new business.
Classroom Exercise/Homework Assignment
is a highly successful Internet-based company that is described at the beginning of Chapter 1. According to the FAQs on its website, Amazon’s mission is as follows: “Our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.” In class or as a homework assignment, have the students discuss what this mission/vision statement means in terms of its business portfolio, marketing strategy, and marketing mix.
How has the mission and vision statement been implemented as a marketing strategy?
Anyone who has ever purchased anything from will know about its “recommendations” section, in which Amazon utilizes technology to determine what further products each individual customer might like, based on past purchases. This serves to increase “share of customer,” and can make the customer feel as if s/he is special to Amazon; these qualities pretty much define “customer centric.”
In addition, Amazon continues to add products to its mix. Although not always successful, it shows that the company is clearly focused on helping their customers “find and discover anything they want.”
How might Amazon describe their marketing mix?
Clearly, Amazon wants its “product” to be just about everything anyone could ever want to buy. The “price” tends to be lower than many stores. The “place” is the most convenient there is—the customer’s living room, or wherever their computer resides. As far as “promotion” is concerned, Amazon used to advertise, but now they seem to be relying on “word of mouth.” Their “recommendations” for existing customers can also be considered part of their promotion, because it is communication directly with each individual customer, and keeps them coming back for more.
How might Amazon control their marketing programs and analyze results?
Some of the primary measures Amazon might look at would be average customer purchase; the mix of products customers purchase; the amount of time between purchases; as well as the normal measures of total sales and profit growth. The measures utilized should be based on the company’s mission statement of being customer centered and allowing customers to “find anything they want.”
Classroom Management Strategies
This chapter starts outlining some fairly difficult subjects for students. Strategic planning, growth-share matrices, and even the development of the marketing mix are relatively tough concepts for a second chapter in a beginning marketing text. Therefore, when planning how to present the material, be sure to leave plenty of time to go through at least some of the Applying the Concepts, as well as defining what the Key Terms really mean in the workaday world. Several of the concepts presented in this chapter become important later in the text, and if the students come away understanding this chapter, they will have an easier time later in the semester.
Companywide Strategic Planning can be covered in about 15 minutes. Focus on the “thread” that ties together the corporate strategic plan, corporate and business unit objectives, and the business or product portfolio. This last topic should be prominent in the discussion, as it sets the stage for later discussions of new product development.
The second major section of the chapter, Planning Marketing, can be covered in 5 minutes. Although important, and it will also inform later topics in the text, it does not need to have the same level of focus as the other topics in this chapter.
The next section, Marketing Strategy, is extremely important; 20 minutes should be devoted to this topic. In particular, ensuring the students understand the true meaning of developing an intelligent marketing mix will set the stage for such later topics as integrated marketing communications, because they will already have thought about how different components of a plan should work together.
Finally, 20 minutes should also be devoted to Managing the Marketing Effort. This section should really drive home the notion that marketing isn’t just a creative endeavor. For instance, under marketing analysis as well as understanding the marketing environment, you can point out how these topics are a big part of what market research is all about.
Chapter 3
The Marketing Environment
Previewing the Concepts—Chapter Objectives
Describe the environmental forces that affect the company’s ability to serve its customers.
Explain how changes in the demographic and economic environments affect marketing decisions.
Identify the major trends in the firm’s natural and technological environments.
Explain the key changes in the political and cultural environments.
Discuss how companies can react to the marketing environment.
Just the Basics
Chapter Overview
Although the first two chapters of the text provide an overview of all of the important topics in marketing and sets the stage for the remainder of the topics covered, this third chapter starts going into detail on the first step of the marketing process—understanding the environment in which the company operates.
The chapter describes the major micro- and macroenvironments in which the company operates. The microenvironments dealt with will build on the customer and partner relationships developed in prior chapters; they include the other company departments, as well those companies in the supply chain, the value chain, and the customers themselves. Interested publics are also discussed.
The macroenvironment includes demographic changes, and the economic, natural, technological, political, and cultural environment. All of these forces need to be studied continuously to ensure that the company’s business and product portfolios are still meeting the needs of its customer base.
Chapter Outline
Introduction
Millennial fever is an environmental factor affecting the baby-boom generation. It is defined as a “yearning to turn back the clock” to “simpler times.”
This nostalgia is causing companies to develop and market retro products that will appeal to those caught up in this “fever.”
Volkswagen has attained great success by tapping into the force and re-introducing the car that helped define the baby-boom generation, the Beetle.
A company’s marketing environment consists of the actors and forces outside marketing that affect marketing management’s ability to build and maintain successful relationships with target customers.
Use Key Term Marketing Environment here.
Use Chapter Objectives 1 here.
There are both opportunities and threats in the marketing environment.
The microenvironment consists of the actors close to the company that affect its ability to service its customers.
The macroenvironment consists of the larger societal forces that affect the microenvironment.
Use Key Terms Microenvironment and Macroenvironment here.
The Company’s Microenvironment
Figure 3-1 shows all of the players affecting the company from a micro point of view.
Relationships with all these actors must be developed so that marketing management can successfully create customer value and satisfaction.
Use Figure 3-1 here.
The Company
All the interrelated functional groups within the company form the internal environment.
Marketing management must take these other groups into account:
Top management sets the mission, objectives, broad strategies, and policies.
Finance finds the money to carry out the marketing plans.
R&D designs safe and attractive products.
Purchasing gets the supplies and materials needed.
Operations’ produces and distributes the product.
Accounting measures revenues and costs, and helps marketing understand how well it is achieving objectives.
All these departments must work in concert and according to the “marketing concept” to “think consumer.”
Suppliers
Suppliers are an important link in the company’s value delivery system.
Marketing managers must pay attention to the availability of supplies, because shortages, delays, and strikes could damage customer satisfaction.
Suppliers today are frequently treated as partners in creating and delivering value to customers.
Marketing Intermediaries
Marketing intermediaries help companies promote, sell, and distribute goods to final buyers.
Use Key Term Marketing Intermediaries here.
They include resellers, physical distribution firms, marketing services agencies, and financial intermediaries.
Resellers are distribution channel firms that help the company find customers or make sales to them. They include wholesalers and retailers, who buy and resell merchandise.
Physical distribution firms assist the company in stocking and moving goods from their points of origin to their destinations.
Marketing services agencies perform some of the marketing functions such as market research, advertising, and media selection and placement.
Financial intermediaries include banks, credit companies, insurance companies and others that help finance transactions or insure against risks.
Marketing intermediaries are also important links in the value delivery system.
Customers
There are five types of customer markets that must be studied.
Consumer markets are made up of individuals and households that buy goods and services for personal consumption.
Business markets buy the goods and services for further processing or for use in their production process.
Reseller markets buy goods and services to resell at a profit.
Government markets consist of government agencies that buy goods and services to produce public services, or transfer the goods to others who need them.
International markets are made up of and of the above types of customers in other countries.
Competitors
Marketers must know their competitors’ strengths so that they can develop positioning strategies that differentiate their own products against the competitors’.
No single competitive strategy will work for all companies.
Publics
A public is any group that has an actual or potential interest in or impact on an organization. There are seven types of publics:
Use Key Term Public here.
Use Discussing the Issues1 here.
Financial publics influence the company’s ability to obtain funds.
Media publics carry news, features, and editorial opinions.
Government publics may develop and enforce regulations on product safety, truth in advertising and other matters.
Citizen-action publics are consumer organizations, environmental groups, minority groups, etc. that may question a company’s decisions.
Local publics include neighborhood residents and community organizations.
General publics may be concerned about a company’s products and activities.
Internal publics include workers, managers, etc. who need to feel good about their company.
Applying the Concept
Describe the microenvironment for the School of Business at your University. What internal departments must the school interact with? Who are the customers and competitors? Do you know if there are any marketing intermediaries? What publics might be interested in what the School of Business is doing?
The Company’s Macroenvironment
Figure 3-2 shows the macroenvironmental forces that affect a company in the way of shaping opportunities and posing threats.
Use Figure 3-2 here.
Demographic Environment
Demography is the study of human populations in terms of size, density, location, age, gender, race, occupation, and other statistics.
Use Key Term Demography here.
Use Chapter Objectives 2 here.
Use Discussing the Issues 2 here.
This is interesting to marketers because it involves people; it is people that make up markets.
The world population is now greater than 6 billion, and will pass 8 billion people by the year 2030.
A growing population means growing human needs to satisfy. Market opportunities could also be growing if purchasing power is growing as well.
Marketers track changing age and family structures, geographic population shifts, educational characteristics, and population diversity.
In the United States, the single most important demographic trend is the changing age structure of the population.
The baby boomers were born between 1946 and 1964, and number 78 million. They have become one of the most powerful forces shaping the . marketing environment.
Generation X is a “birth dearth” generation, numbering 45 million people born between 1965 and 1976. They tend to be cautious in their economic outlook because they grew up in a time of recession and corporate downsizing.
Generation Y’s members were born between 1977 and 1994, and number about 72 million. This generation is still developing their buying preferences and behaviors.
Use Key Terms Baby Boomers, Generation X, and Generation Y here.
Use Figure 3-3 here.
Use Marketing at Work 3-1 here.
Marketers must decide whether to develop marketing plans and strategies based on generational differences.
The traditional family is being redefined.
Married couples with children now make up only about 34% of the . households; married couples and people living with other relatives are 22%; single parents, 12%; 32% are nonfamily households.
The number of working women has increased greatly from 1950 when it was about 30% of the . workforce to just over 60% today.
Let’s Discuss This
Most of the students’ parents will be from the Baby Boom generation. Discuss how the students’ upbringing and daily lives may have differed from what their parents experienced in their own upbringing, and what those differences mean for marketers.
There are also great geographic shifts in populations, both between and within countries.
In the United States, there has been a shift toward the Sunbelt states over the last two decades.
Marketers are interested in these kinds of shifts because people in different regions buy differently.
The shift in where people live has also shifted where they work.
The . population is becoming better educated.
In 2002, 84% of the population over age 25 had completed high school, and 27% completed college, up from 69% and 17% in 1980.
The rising number of educated people will increase demand for quality products, books, magazines, travel, personal computers, and Internet services.
There are also more white-collar workers in the United States.
Ethnic and racial make up varies among countries.
Japan is at one extreme with the United States at the other.
The . population is 71% white, 12% African American and Hispanic, 4% Asian; the remaining 1% is made up of American Indian, Eskimo and Aleut peoples.
Many companies design products and promotions to appeal to the diverse ethnic and racial groups.
The gay and lesbian markets are also being recognized as important to marketers.
Another attractive market segment is that of the 54 million people with disabilities.
As the population grows more diverse, marketers will continue to diversify their marketing programs to take advantage of that diversity.
Use Speed Bump here.
Use Application Questions 1 here.
Economic Environment
The economic environment consists of factors that affect consumer purchasing power and spending patterns.
Use Key Term Economic Environment here.
Nations vary greatly in their levels and distribution of income.
Subsistence economies consume most of their own agricultural and industries output. They represent few marketing opportunities.
Industrial economies are at the other extreme, and represent rich markets for many kinds of goods.
Incomes change all the time, and marketers need to track those changes.
The 1980s saw a consumption frenzy fueled by income growth, federal tax reductions, rapid increases in housing values, and a boom in borrowing.
The 1990s saw a recession hit, and consumers started to spend more carefully.
In the early 2000s, consumers are still spending carefully.
Marketers also need to pay attention to income distribution
At the top of income distribution in the United States are the upper-class consumers, who are generally not affected by current economic events.
The middle class is comfortable, but is somewhat careful in their spending.
The members of the working class stick to the basics of food, clothing, and shelter.
The underclass members are those on welfare and many retirees who must count pennies to make even the most basic purchases.
Ernst Engel, over a century ago, noted that people shifted their spending as their income rose. This is now known as Engel’s laws and is noted in Table 3-1.
Use Key Term Engel’s Laws here.
Use Table 3-1 here.
Use Discussing the Issues 3 here.
Changes in major economic variables have a large impact on the marketplace.
With adequate warning, companies can take advantage of changes in this environment.
Natural environment
The natural environment involves the natural resources that are needed as inputs by marketers, or that are affected by marketing activities.
Use Key Term Natural Environment here.
Use Chapter Objectives 3 here.
Use Focus on Ethics here.
Environmental concerns have grown over the last three decades. There are several trends that should be tracked:
Shortages of raw materials: both renewable (forests, food) and nonrenewable (oil, coal, minerals) resources pose serious problems.
Increased pollution is a problem worldwide.
Increased government intervention in management of natural resources varies by country.
Companies are developing environmentally sustainable strategies and practices in an effort to develop an economy that can be supported indefinitely.
Technological Environment
The technological environment is a dramatic force in the marketplace today creating new markets and opportunities.
Use Key Term Technological Environment here.
Use Marketing at Work 3-2 here.
The United States leads the world in research and development spending.
Many companies are adding marketing people to R&D teams to obtain a stronger marketing orientation.
Safety is an increasing concern as technology becomes more complex.
The . Food and Drug Administration (FDA) have regulations to test new drugs.
The Consumer Product Safety Commission sets safety standards for products.
Marketing must be aware of and adhere to regulations that affect developing new products.
Political Environment
The political environment consists of laws, government agencies and pressure groups that influence or limit various organizations and individuals in a given society.
Use Key Term Political Environment here.
Use Chapter Objectives 4 here.
Regulation can encourage competition and ensure fair markets.
Governments develop public policy to help guide markets.
Legislation affecting business has been increasing.
The United States has laws covering competition, fair trade practices, environmental protection, product safety, truth in advertising, consumer privacy, packaging and labeling, pricing, and other issues. Table 3-2 lists many of the most important laws.
The European Commission is also establishing a framework of laws covering many of these same issues.
Business legislation is enacted to protect companies from each other; to protect consumers from unfair business practices; and to protect the interests of society.
Government agencies have discretion in how they enforce the laws that are passed.
Marketers need to track laws at the local, state, national, and international levels.
Enlightened companies ask their managers to be socially responsible over and above existing laws.
E-commerce has created an entirely new set of legal and ethical issues. Online privacy issues are a great concern.
Many companies are exercising social responsibility through cause-related marketing.
Use Table 3-2 here.
Use Discussing the Issues 4 here.
Cultural Environment
The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences, and behaviors.
Use Key Term Cultural Environment here.
People are affected by the worldview that defines their relationships with others that their society adheres to.
Cultural values are persistent; these beliefs shape specific attitudes and behaviors.
Core beliefs and values are passed on from parents to children.
Secondary beliefs are more open to change.
Cultural swings do take place. Marketers want to predict these shifts in order to react to both opportunities and threats.
The major cultural values of a society are expressed in the following views:
People’s views of themselves.
People’s views of others.
People’s views of organizations.
People’s views of society.
People’s views of nature.
People’s views of the universe.
Use Speed Bump here.
Use Application Questions 2 here.
Let’s Discuss This
How does the view you hold about yourself affect what and how you buy your clothing?
Responding to the Marketing Environment
Many companies think the marketing environment is an uncontrollable element they have to adapt to.
Other companies take an environmental management perspective to affect the publics and forces in their environment.
Marketing managers should take a proactive rather than reactive approach to the marketing environment.
Use Key Term Environmental Management Perspective here.
Use Chapter Objectives 5 here.
Use Marketing at Work 3-3 here.
Use Discussing the Issues 5 here.
Use Application Questions 3 here.
Use Under the Hood/Focus on Technology here.
Travel Log
Discussing the Issues
The microenvironment includes a variety of publics that have an interest in the company or can impact its operations. Discuss how the goals of some of these publics may be opposed to one another. How would opposing goals among a company’s relevant publics impact its strategy?
Responses will vary to this question. One example is that government publics and citizen action publics may find some activities (., logging) undesirable, but others like the general public or the financial publics may consider the activity as a natural part of doing business. Thus, their objectives and interests are different. This has an impact on how a company plans its activities as it often cannot afford to alienate certain groups and therefore must make some concessions in the course of planning its activities.
The changing structure of the American family was identified as an important demographic force shaping the opportunities and threats to the company. Explain how a grocery store could change its positioning to appeal to each of the following segments: married couples with children, single parents, and adults living alone.
Students should discuss generally how the store would be positioned for each group. Then, in a more specific way, they should identify what this positioning means in terms of the marketing mix variables. That is, how will elements of the four Ps be altered to accomplish each positioning goal?
Value marketing—the right combination of product quality and good service at a fair price—has increased in popularity. Pick an industry and identify two competing companies, one that is good at value marketing and one that is poor at value marketing. For the company that is poor at value marketing, discuss why consumers purchase from that company. What need is it fulfilling better than the firm that is good at value marketing?
Responses will vary based on the industry and firms selected by the students. It is instructive to emphasize in class that even those firms identified as poor at value marketing are selling some product. Therefore, the question should be posed who is buying the product and why? It may be that a particular niche is actually being served well by the “poor value” company.
The 2002 Sarbanes-Oxley Act, among other things, has made high level corporate executives personably accountable for the accuracy of their company’s earnings statements, requires public companies to improve their financial control systems, and calls for some board members to be from outside the company. What impact might this legislation have on business operations?
Instructors can use this question when they wish to bring out examples of the political environment’s impact on business.
An environmental management perspective advocates taking a proactive, rather than reactive, approach to dealing with the marketing environment. Identify a company you feel characterizes this approach. What specific actions do they take to proactively influence their environment?
Individual student responses will vary based upon the specific company selected. Instructors can use this question to highlight the concept of proactive environmental management.
Application Questions
For educational institutions, the number, quality, and characteristics of its student body are heavily impacted by changes in the size and structure of the general population. Discuss how your school is likely to be impacted by the following trends: an aging population, a growing population, a changing definition of the family, geographic shifts in population, a more white-collar workforce, and increasing ethnic and cultural diversity. For those trends that have a negative impact, what strategy would you recommend for mitigating the negative influence?
This question emphasizes the impact of the demographic environment on business operations. The context of a university should be familiar to students and allow for a variety of informed opinions regarding the likely impact of these demographic forces. Students will likely come up with issues regarding the number of faculty needed, the infrastructure changes required (., parking, buildings, food service, recreation, etc.). Instructors may want to encourage students to think about how those challenges will be met both financially and from an implementation standpoint.
The text argues that major cultural values in society are defined by individual’s views of themselves and others, as well as their views of organizations, society, nature, and the universe. Break into groups of four to five students, with each group focusing on one of these six views. Noting the shift discussed in the text for your groups assigned area, identify a company that has benefited from the shift and one whose position has worsened. For those organizations that have not fared as well under the shift, what must they do to better adjust to this trend?
Student responses will vary based on the companies they select. An instructor can use this question to highlight the impact of culture on marketing operations. Instructors may choose to limit the student teams to a particular industry. This will make this assignment a bit more difficult, but may add some interesting insights into how cultural values interact with each other.
The Federal Trade Commission estimates that its national do-not-call registry will contain more than 60 million phone numbers by July 2004. In response, a telemarketing trade association has challenged the legality of this consumer telemarketing call blocking service in federal court. Describe what activities might have been engaged in if the telemarketing industry had taken a more proactive environmental management perspective toward this issue. What is your opinion on balancing the privacy of consumers with the rights of legitimate telemarketing firms to conduct business?
Instructors can use this application question to show how the government is able to step in and make changes when companies perform acts that are unwelcome by consumers. Having students think back to how this situation could have been avoided is instructive in helping them to realize that a company or industry can often self-regulate themselves and avoid unwanted governmental action.
Under the Hood/Focus on Technology
Customer loyalty for online travel companies is low, with the average consumer checking three travel websites for the best price on airlines, hotels, and rental cars. Today, approximately 15% of all travel is purchased online, with airline ticket sales accounting for about half of that amount. Three online travel companies, Expedia (36% of the market), Travelocity (24%), and Orbitz (13%) account for the majority of online travel sales. Although consumers have been focused on where to get the best deals, many online travel companies have been investing in new technology that will allow them to differentiate themselves on the services they provide rather than the prices they offer.
What macroenvironmental forces do you feel will have the largest positive and largest negative impact on online travel companies? Why?
Technological forces (in terms of the ability to interact with consumers), economic (in terms of consumers spending patterns and level of discretionary income for travel), and demographic (in terms of the number of retired individuals engaging in more travel activity) will likely all have an impact.
Discuss how online travel companies should address these negative impacts.
Responses will vary depending upon the particular negative impact identified by the students.
What do you think is the long run future of the online travel industry?
It may be interesting to have students consider this question creatively and think in terms of 5 years and 25 years away. Instruct them to address this question in terms of not only the sales transaction, but also other issues such as how travel destinations will be marketed or how safety concerns in travel might be addressed in an online environment.
What do you feel are the most significant environmental issues facing the online travel industry in the next five years?
The economic situation and technological advances will likely have the greatest short-term impact.
Focus on Ethics
How many times have you or your parents purchased a new computer in the past 5 years? As computers become more and more powerful, regular updating of computer equipment has become common. Have you ever wondered where all of the old computers and monitors go? Are they sitting in your house somewhere, in the garage maybe?
Concerns over decreasing raw materials, increasing pollution levels, and global warming have gained momentum over the last several years. Although many companies have been accused of polluting the environment, some have used society’s concern over the natural environment to differentiate themselves from competitors. One such company is Dell Computer, who recently initiated a recycling program for businesses and consumers that includes computers, monitors, keyboards, and, mice—all those items that may be hanging around in your house.
How does this work? You pay a fee of $ per 50 pounds of weight, and Dell has someone pick up your computers and monitors. The average computer and monitor weigh over 50 pounds but less than 100 pounds, so the cost is likely to be $ to the customer. Dell then will either recycle or resell the old computer equipment, thus sparing landfills from the hazardous materials contained in much of today’s existing computer equipment.
Assume that the price paid by the owners of the old computer equipment does not cover Dell’s cost of recycling. What benefits might Dell gain that would be worth this expense?
Benefits such as consumer goodwill and improved corporate image might make the added expense worth the cost.
What actions might government take if it became concerned about the disposal of unwanted computer equipment? How can Dell’s recycling efforts be considered similar to an environmental management perspective?
Have students think about this from both a local level (., the local waste disposal services provided by their city) and the federal or state level (which have the potential to pass legislation governing how computers are disposed).
Might Dell’s computer recycling program help to differentiate it from other computer manufacturers? How much influence would a recycling program like the one described above for Dell Computer have on your decision to buy a computer from a particular company?
Student responses will vary based on their own level of concern in this issue. Encourage students to think about the sustainability of this program as a strategic advantage. How easy would it be for others to emulate Dell’s practice?
Great Ideas
Barriers to Effective Learning
This is an intense chapter, and presents a whole lot of information that might make some students’ heads swim. If it hasn’t happened before, this is where students really begin to get the picture that marketing managers need to be very analytical. Presenting the in-depth discussion of current macro trends as something that needs to be understood but not memorized helps.
Students will also be anxious about how a marketing manager successfully tracks these kinds of forces. Explaining the use of purchased marketing and economic reports, and what market researchers do for a living, helps relieve that anxiety.
As usual, examples of companies who successfully adapt to changing forces and factors will help students internalize the messages in this chapter.
Student Projects
List two examples of how the technological environment has helped marketers.
Should the United States regulate advertising for things that are purported to be bad for you, such as cigarettes and alcohol? How about for fast food?
Find an example of a company that you believe has an environmental management perspective. What is it doing to be proactive toward its environment? Describe the process you went through to discover the company’s perspective.
After reading the material in the chapter on the demographic environment and projected trends, pick a company or industry of your choice and cite what you believe to be the five most important demographic trends that will impact the company’s or the industry’s future. Explain why you picked the trends that you did.
Classroom Exercise/Homework Assignment
Nokia has been an extremely successful company, launching new cell phone technology usually well ahead of its competition. It’s hit some bumps recently as the economic environment has stagnated, but overall, this is a company that knows how to develop and sell technology. Visit the Nokia website at and review the material there.
Look at the ads on the homepage and the information about Club Nokia. What generation is Nokia targeting?
Clearly, Nokia knows that its growth is going to be coming from Gen Y. Its ads on its homepage show young people, and images young people would relate to. Although Club Nokia is not yet active in the United States, again, it is targeted at the young. It offers games, cartoons, movies and alternate tones and graphics, something the Baby Boom generation, for example, is not going to be that interested in.
Nokia seems to be interested in preserving their natural environment. Why?
Although Nokia may well be interested in preserving nature, one of their first FAQs answers says that their recycling efforts are managed on a national level, because “legislation and recycling efforts vary by country.” Plus, they bury this information several levels down. You have to go to “Investor Information,” then “2002,” and only then can you find their environmental efforts. It appears that their interest in the natural environment may be purely based on the political environment(s) they face.
How has the economic environment impacted Nokia?
Nokia’s sales really took off in 2000, but since then the company has had a tough time managing any growth at all. Clearly, the overall economic climate has been a drag on the company, as, most likely, has the huge penetration, almost saturation, of cell phones in markets around the world. Nokia barely managed to eke out any growth at all in 2001, and 2002 actually saw a dip in net sales. They appear to be growing again in the first half of 2003, as this is written. Nokia’s strategy of constantly launching new models (35 planned for 2003) and new technologies will most likely keep them in the market share leadership position, and will stand it in good stead as the economic recovery strengthens.
Classroom Management Strategies
This will be the first time students will have thought about the marketing environment and what it means to companies in their marketing efforts. The concept of understanding consumer needs and wants will be totally foreign to them at worst, and at best a novel concept. Once the students begin to see the complexity of the marketing environment, however, there will be a tendency for their eyes to glaze over. As usual, working through several examples for each concept will help tremendously.
College is a place to break things down into their component parts to study them in isolation. The section on the company’s microenvironment may well be the first time the students will have looked at marketing as needing to pay attention to anything other than marketing concepts. At least 15 minutes should be devoted to this topic in class. The difficult concepts will most likely be in the areas of marketing intermediaries and publics; spending sufficient time on these two topics will make the follow-on chapters that much easier.
The majority of the class time, 30 to 40 minutes, should be spent on the macroenvironment. There is a tremendous amount of information in this section, particularly in the section describing the demographic environment. It’s helpful here to link some of these concepts back to what they learned in sociology courses, or, if the students have not taken any of the social sciences, you can point out how they interact with business. The next most intense part of this section is the political environment and the sheer number of laws passed that affect marketers. The cultural environment section is a good time to tie in principles of psychology.
Finally, the last part of the class will be spent on Responding to the Marketing Environment. You can have some fun with the Marketing at Work “” while at the same time having a serious discussion about the concepts of managing your environment, rather than reacting to it.
Chapter 4
Managing Marketing Information
Previewing the Concepts—Chapter Objectives
Explain the importance of information to the company and its understanding of the marketplace.
Define the marketing information system and discuss its parts.
Outline the steps in the marketing research process.
Explain how companies analyze and distribute marketing information.
Discuss the special issues some marketing researchers face, including public policy and ethics issues.
Just the Basics
Chapter Overview
As the textbook points out, to be successful, marketing managers must on a daily basis deal with mountains of marketing information. They need to understand what they need to know, when they need to know it, and how to find the information they need. And they must do all this cost-effectively.
This chapter reviews marketing information systems that work to get the right information, in the right form, at the right time to marketing managers so that they can make effective decisions. The marketing research process is also considered and outlined, as well as the use of marketing intelligence and internal data. Finally, other marketing information considerations are discussed. These include how small business and non-profit organizations use market research, the special problems encountered in performing international marketing research, and public policy and ethical considerations that need to be considered in marketing research.
Chapter Outline
Introduction
In 1985, Coca-Cola made a major marketing blunder by dropping Classic Coke after creating New Coke.
Coke learned very quickly that you don’t mess with a winning formula—they received sacks of mail and more than 1,500 calls per day from angry customers.
Classic Coke was brought back after only 3 months and regained its leading position in the marketplace.
Experts blame poor marketing research for Coke’s blunder. Although Coke was leading in the market, Pepsi was gaining ground.
Coke performed a massive marketing research effort, conducting 200,000 taste tests before finalizing the new formula. In blind tests, 60% of consumers had chosen New Coke over Classic Coke, and 52% chose New Coke over Pepsi.
The problem was in the definition of the market research—it did not take into account any of the intangibles, such as Coke’s name, history, packaging, cultural heritage, and image.
As this story illustrates, successful products and marketing programs begin with good information, a thorough understanding of consumer wants and needs.
Information is rapidly becoming the primary competitive weapon. Products, processes, and equipment can be duplicated, but information and intellectual capital often cannot.
Yet brand managers can be bombarded by anywhere from 1 million to 1 billion new numbers every week because of all the information available. Data overload can be a big problem.
A marketing information system (MIS) consists of people, equipment, and procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and accurate information to marketing decision makers. An MIS begins and ends with information users, as exhibited in Figure 4-1.
Use Key Term Marketing Information System here.
Use Chapter Objectives 1 and 2 here.
Use Figure 4-1 here.
The MIS interacts with information users to assess information needs. Next, it develops needed information from internal databases, marketing intelligence activities, and marketing research. Then it helps analyze information to put it in the right form, and finally it distributes the information and helps managers use it to make good decisions.
Assessing Marketing Information Needs
A good marketing information system must balance what users would like to have against what they really need and what is feasible to offer.
This process begins by asking information users what they want. The MIS monitors the marketing environment so that it can provide decision makers with information they should have to make key decisions.
Sometimes the information wanted cannot be provided, either because it is simply not available or because the MIS has limitations.
Companies must monitor what it costs to obtain, process, store, and deliver information, because these costs can be quite high. The company must decide what the benefits are of obtaining additional information.
Developing Marketing Information
There are several sources of marketing information; these include internal data, marketing intelligence, and marketing research.
Internal Data
Internal databases are electronic collections of information from data sources within the company. Marketing managers can readily access this information to identify marketing opportunities and problems, and to plan programs and evaluate performance.
Use Key Term Internal Database here.
There are many sources of internal data.
The accounting department keeps records of sales, costs, and cash flows.
The operations department has information on production schedules, shipments, and inventories.
The marketing department may have information about customer demographics, psychographics, and buying behavior.
The customer service department keeps records of customer satisfaction or service problems.
Internal data is usually easy to get access to, but has limitations. It was collected for other uses, so it may be incomplete or not in the form needed.
Let’s Discuss This
How might a marketing manager combine data on sales from the accounting department with information about service problems and returns from customer service to increase sales?
Marketing Intelligence
Marketing intelligence is the systematic collection and analysis of publicly available information about competitors and developments in the market place.
Use Key Term Marketing Intelligence here.
The goal of marketing intelligence is to improve decision making, assess and track competitors’ actions, and provide early warning of opportunities and threats.
You can gather intelligence by talking to your own company employees, benchmarking competitors’ products, researching the Internet, walking around trade show floors, and going through rivals’ trash.
Companies can also get marketing intelligence from their suppliers, resellers, and key customers.
Companies can buy competitive products, monitor their sales, keep an eye out for new patents, and examine other physical evidence.
Reading competitors’ annual reports and other SEC filings can provide a lot of information, as do business publications, trade show exhibits, press releases, advertisements, and web pages.
Online databases, many of which are free, are also a good source of information. The SEC website has all public company filings available, and the Patent Office has all patents and patent applications available online.
Use Key Term Online Databases here.
Applying the Concept
Why might a manufacturer of snowboards want to track any patents filed with the . Patent and Trademark Office?
Subscription-based databases include Dialog, DataStar, LEXIS-NEXIS, Dow Jones News Retrieval, UMI ProQuest, and Dun & Bradstreet’s Online Access.
Many companies are providing competitive intelligence training to their employees to prevent the release of information.
Ethical questions come into play in gathering marketing intelligence. There is much available publicly, so there are no reasons today to “snoop.” No one needs to break the law or the accepted code of ethics.
Marketing Research
Marketing research is the systematic design, collection, analysis, and reporting of data relevant to a specific marketing situation facing an organization.
Use Key Term Marketing Research here.
Use Chapter Objectives 3 here.
Marketing research can be used to understand customer satisfaction and purchase behavior, assess market potential and market share, or to measure effectiveness of pricing, product, distribution, and promotional activities.
The marketing research process has four steps: defining the problem and research objectives; developing the research plan; implementing the research plan; and interpreting and reporting the findings.
Use Figure 4-2 here.
Use Discussing the Issues 1 here.
Defining the Problem and Research Objectives
This is often the hardest step in the research process. The problem must not be defined too narrowly, as was the case with New Coke, or too broadly.
The objectives of the research are defined next. The three types of research objectives include exploratory research, which gathers preliminary information that helps define the problem and suggests hypotheses; descriptive research, which, simply, describes things such as market potential for a product, or demographics of the customer base; and causal research, to test hypotheses about cause-and-effect relationships.
Use Key Terms Exploratory Research, Descriptive Research, and Causal Research here.
Use Discussing the Concepts 2 here.
The statement of the research problem and objectives guides the entire research process.
Developing the Research Plan
Researchers now must define the exact information needed, develop the plan for gathering it, and present the plan to management.
The research plan outlines sources of existing data, and then spells out the specific research approaches, contact methods, sampling plans, and instruments that will be used. This plan should be in the form of a written proposal. It can call for gathering secondary data, primary data, or both.
Gathering Secondary Data
Gathering secondary data should start with the company’s internal data. There are also data reports that can be purchased (see Table 4-1) and commercial online databases.
Use Key Term Secondary Data here.
Use Table 4-1 here.
Use Application Questions 3 here.
Secondary data can be obtained quickly and at lower cost than primary data. Some data available from secondary sources would not be available to or would be too expensive to collect for a single company.
There are problems with secondary data. The data needed may not exist, or it may not be usable. The researcher must make certain that it is relevant, accurate, current, and impartial.
Primary Data Collection
Primary data must often be collected. The same concerns about relevancy, accurateness, currency, and impartiality exist.
Use Key Term Primary Data here.
Use Table 4-2 here.
Use Discussing the Issues 5 here.
Table 4-2 summarizes research approaches, contact methods, sampling plans, and research instruments that are available.
Research approaches include observational research, which involves gathering primary data by observing people, actions, and situations, as well as ethnographic research, which observes people in the natural environment. Observational research can use mechanical methods of observation, such as Neilsen’s people meters and checkout scanners.
Use Key Term Observational Research here.
Use Marketing at Work 4-1 here.
Use Discussing the Issues 6 here.
Survey research is the most widely used method for primary data collection and is the best approach for descriptive research. Single-source data systems start with surveys of consumer panels and continue with electronically monitoring their purchases and exposure to various marketing activities.
Use Key Terms Survey Research and Single-Source Data Systems here.
Survey research is very flexible but also presents problems. People may be unwilling or unable to answer questions for a variety of reasons; they may answer even if they don’t know an answer to appear smart; or they may try to give pleasing answers.
Experimental research is suited for gathering causal information. Experiments involve selecting matched groups of subjects, giving them different treatments, controlling unrelated factors, and checking for differences in responses.
Use Key Term Experimental Research here.
Use Application Questions 1 here.
There are many methods of contacting respondents to gather information. Mail questionnaires are used to gather large amounts of data. They are not very flexible, they may take longer to complete, and the response rate is usually low. On the other hand, respondents may give more honest answers, and no interviewers are present to potentially bias answers.
Use Table 4-3 here.
Telephone interviewing is a very good method of gathering information quickly and is more flexible than mail questionnaires. Response rates tend to be higher. But the cost per respondent is very high, and people may not want to discuss personal questions with an interviewer. There is also the potential for interviewer bias. Interviewers could also record responses differently.
Personal interviewing can be done individually or in groups. Individual interviewing can be very flexible, but can cost three to four times as much as telephone interviews. Group interviewing is also called focus group interviewing. This involves inviting six to ten people to talk with a trained moderator. It has become one of the major methods of research, but it is hard to generalize from the results. The potential for interviewer bias is also big.
Use Key Terms Focus Group Interviewing and Online (Internet) Marketing Research here.
Use Marketing at Work 4-2 here.
Use Application Questions 2 here.
Focus groups can be held via teleconferencing, or even online.
Let’s Discuss This
When is it appropriate to use a survey? A personal interview? A focus group? What are the considerations that must be taken into account to make that decision?
A sample is a segment of the population selected to represent the population as a whole. The sample should be representative of the entire population so that the researcher can make accurate estimates of the thoughts and behaviors of the larger population.
Use Key Term Sample here.
Designing the sample involves three decisions: Who is to be surveyed? (called the sampling unit); how many people should be surveyed? (the sample size); and how should the people in the sample be chosen? (sampling procedure). Table 4-4 describes the different kinds of samples, which are probability sample and nonprobability samples.
Use Table 4-4 here.
There are two main research instruments—the questionnaire and mechanical devices.
The questionnaire is the most common instrument used; it can be administered in person, by phone, or online.
Closed-end questions include all possible answers from which subjects have to choose their response. Open-end questions allow respondents to answer in their own words.
Researchers need to be careful of the wording and ordering of questions. Simple, direct, and unbiased wording should be used, and questions should be in a logical order. Table 4-5 shows the many errors that can crop up.
Use Table 4-5 here.
Mechanical instruments include supermarket scanners and people meters. Other mechanical instruments measure physical responses of subjects.
Implementing the Research Plan
Implementing the plan involves collecting, processing, and analyzing the information.
The data collection phase of marketing research is usually the most expensive and most subject to error of any of the phases.
Researchers need to process the data to isolate important information. Data needs to be checked for accuracy and completeness. Results are tabulated and statistical measures are developed.
Interpreting the Research Findings
The findings need to be interpreted, conclusions drawn, and reports made to management. Researchers should present findings that are useful in making decisions rather than focusing on raw data or statistical techniques.
Managers and researchers should work together to interpret research results.
Analyzing Marketing Information
Information analysis might involve analytical methods that will help marketers make decisions.
These models will help answer the questions of “what if” and “which is best.”
Use Chapter Objectives 4 here.
Customer Relationship Management (CRM)
Smart companies collect information at every customer touch point. These touch points include customer purchases, sales force contacts, service and support calls, website visits, satisfaction surveys, credit and payment interactions, market research studies—every time a customer and the company are in contact.
Customer Relationship Management consists of sophisticated software and analytical techniques that integrate customer information from all sources, analyze it in depth, and apply the results to build stronger customer relationships.
Use Key Term Customer Relationship Management (CRM) here.
CRM analysts develop data warehouses and use data mining techniques. A data warehouse is a companywide electronic storehouse of customer information. The purpose of a data warehouse is to integrate information the company already has. Data mining techniques are used to sift through the data to dig out interesting relationships and findings about customers.
Companies can use CRM to understand customers better, provide higher levels of customer service, and develop deeper customer relationships. They can also use it to note high-value customers, target them more effectively, cross-sell the company’s products, and create offers tailored to specific customer requirements.
CRM systems can be very expensive to implement—. companies will spend from $10 billion to $20 billion on software alone, yet more than half the CRM efforts fail to meet objectives. Most commonly, the failure occurs because companies see this as just a software or technology issue.
When it works, CRM benefits far outweigh the risks and costs.
Use Under the Hood / Focus on Technology here.
Distributing and Using Marketing Information
The marketing information system must make the information available to managers and others who make marketing decisions or deal with customers.
Many companies use an intranet to facilitate information distribution. The intranet provides ready access to data, stored reports, and so forth.
Companies are increasingly allowing key customers and value-network members to access account and product information, along with other information. The systems that do this are called extranets.
Applying the Concept
Many auto companies have extranets with their suppliers; they also can include their dealerships, which are their product delivery channels. What kind of information might be shared among suppliers, the manufacturer, and the dealer? Why is it important that they share this information?
Other Marketing Information Considerations
This section looks at marketing research in small businesses and non-profits, international marketing research, and public policy and ethics issues in marketing research.
Use Chapter Objectives 5 here.
Marketing Research in Small Businesses and Non-profit Organizations
Small organizations have the same information needs as larger firms. Start-up businesses need information about their markets, their industries, competitors, potential customers, and reactions to new offers. Existing small businesses need to track customer needs and wants, reactions to new products, and changes in the competitive environment.
Many marketing research techniques can be used in a less-formalized manner and at little or no expense.
Small businesses can gather good information by observing what is around them. Retailers can watch vehicle and pedestrian traffic to find areas in which to locate; companies can watch for competitor ads in local media; companies can visit competitor locations.
Small companies can conduct surveys using convenience samples; for instance, companies can invite small groups to lunch to discuss topics of interest. Retail salespeople can talk to customers in stores.
Small companies and non-profits can also perform simple experiments by changing themes in mailings and watching results.
Most of the secondary information available to large companies is also available to small companies and non-profits. Many associations publish data, and the . Small Business Administration publishes a large number of reports.
Use Discussing the Issues 3 here.
International Marketing Research
International researchers follow the same steps as domestic researchers, but they face more and different problems. International researchers have to deal with differing markets in different countries.
Secondary data is often difficult to obtain. Most research firms that do international research operate in only a few countries.
When collecting primary data, it may be difficult to develop good samples outside the . Data, and lists such as telephone directories, census information, and other data may be lacking in other countries.
Reaching respondents in other parts of the world can also be difficult. In some countries, few people have telephones; in others, the mail system is unreliable. Poor roads and transportation systems can make people difficult to reach, and few people in developing countries can access the Internet.
Cultural differences, such as language, can be problematic. Translating questionnaires is difficult. Questionnaires should be re-translated back to English before being administered to be sure idioms, phrases, and statements don’t take on unintended meanings.
Consumers also differ in their attitudes toward marketing research. Some countries’ customs prohibit talking to strangers; in others, research questions can be considered too personal.
There can also be high illiteracy rates that keep people from responding.
Use Discussing the Issues 4 here.
Public Policy and Ethics in Marketing Research
Most research benefits both companies and consumers. However, the misuse of marketing data can harm or annoy consumers.
Intrusions on Consumer Privacy
Most consumers feel positively about market research, but others resent it or even mistrust it.
Sometimes consumers are “taken in” by market research that turns out to be attempts to sell them something. Other consumers confuse market research with telemarketing and say “no” before the interviewer can get started.
A recent poll showed that 82% of Americans worry about losing control over how businesses use their information, and 41% said that businesses had invaded their privacy. These concerns have led to lower response rates.
The research industry is attempting to educate consumers about the benefits of marketing research and has adopted broad standards outlining researchers’ responsibilities to respondents and the general public.
Some companies are appointing a “Chief Privacy Officer” to safeguard privacy of consumers.
Misuse of Research Findings
In some cases, research surveys appear to be designed to produce the wanted effect. Most of this seems to be unintended rather than blatant misrepresentation. Researchers’ choice of wording can have an effect on survey outcomes and conclusions.
In other cases, supposedly independent research turns out to have been paid for by companies with an interest in the outcome.
Each company must be responsible for policing their conduct and reporting of marketing research.
Use Focus on Ethics here.
Travel Log
Discussing the Issues
Distinguish between internal databases, marketing intelligence, and marketing research as methods for developing marketing information. How does each of these three sources assist an organization differently in meeting its information needs?
Internal databases are electronic collections of information obtained from data sources within the company. Marketing intelligence is the systematic collection and analysis of publicly available information about competitors and developments in the marketplace. Marketing research is the systematic design, collection, analysis, and reporting of data relevant to a specific marketing situation facing an organization.
Taking the role of a brand manager for Hawaiian Tropic suntan lotion, create an exploratory research objective, a descriptive research objective, and a causal research objective. How does the nature of each research objective guide data collection?
Student responses will vary for this question. Instructors can use this question to assist students in understanding how the company’s information objective and the method of data collection are intricately linked together. For example, exploratory research might be accomplished through focus groups, but a focus group would be inappropriate for casual objectives.
Small businesses face budget constraints that can limit the type and scope of research conducted. In a small group, brainstorm what a small furniture retailer might be able to do to gain competitor and consumer information on a limited budget.
Instructors can use this question to get students to think about research on different levels. Many research project examples that students are aware of focus on large companies and massive studies (both in time and money). Small businesses can creatively uncover the information they need. Much of the same methods large companies use, such as observation, surveys, and experiments, can be performed on a smaller scale.
Discuss some of the unique challenges . researchers may encounter in conducting research in other countries. How might these obstacles be overcome?
Some of the challenges include the difficulty in dealing with differing market conditions in different countries (their levels of economic development, cultures and customs, and buying patterns), difficulty in finding good secondary data, difficulty in developing good samples, difficulty in reaching respondents, and difficulty due to language issues.
What advantages do secondary data have over primary data? What advantages do primary data have over secondary data? Why is secondary data typically the starting point for marketing researchers?
Secondary data can usually be obtained more quickly and at a lower cost than primary data. However, the needed information may not exist (researchers can rarely obtain all the data they need from secondary sources). Even when data can be found, they might not be very usable (wrong format, inaccurate, out of date, etc.). Primary data often has the advantage of more specifically being able to address the company’s research needs, but firms still need to be make sure that primary data is relevant, accurate, current, and unbiased.
How might observational research be used to understand a consumer’s decision process in selecting greeting cards? What other information that is not observable might you want to know about a consumer’s greeting card choices and how would you get it?
Companies could have individuals or cameras in place to monitor consumers as they browse the racks in a greeting card store. Examples of information that could be gathered include what they look at first, how many cards they read before selecting one, what areas they avoid, how long they spend searching. What observational methods do not get at is the decision-making process going on inside a consumer’s head. For example, why was one particular card selected over other alternatives?
Application Questions
It has been reported that more than 7 million people have discontinued their regular home phone line in favor of using a cell phone at home to place and receive calls. Assume you work for one of the land-based telephone companies that is losing customers to cell phones. Describe both an experiment and a survey that would aid your company in understanding how to reverse this trend. Which approach makes the most sense for this research question?
Student responses will vary for this question. Instructors can use this question to highlight the idea that multiple research approaches can be taken to provide relevant information for a given question. However, one approach may be more appropriate from a cost, time, or validity standpoint.
You and three other students work for United Airlines and serve on a committee making decisions about an upcoming customer satisfaction questionnaire. Each team member is to be an advocate for one of the following contact methods: mail, telephone, personal, and online. Debate the pros and cons of the different contact methods and then have the group vote for using one of the four methods.
Instructors should encourage the students to be strong advocates for their position, but to not let that bias their vote in the final selection. This assignment will bring out the strengths and weaknesses of different data collection alternatives and help students understand how the context of the study and the specific question being asked will influence the selection of the data collection method.
Browse through the list of external information sources provided in Table 4-1. Pick one website to visit from the business data section, government data section, and Internet data section of Table 4-1. What type of data can be found that would be useful to a Toyota car dealer interested in finding a location for a new dealership?
Student responses will vary depending on the websites they select. Instructors may wish to point out that a variety of data would be useful for addressing this research question including population data, income data, car ownership data, and competitive data.
Under the Hood / Focus on Technology
SAP is the leading enterprise software company claiming the majority of Fortune 500 companies among its clients. Its products are used to manage sales and distribution, production, inventory, and accounting, among other things. One of its products is a customer relationship management module that is designed to help companies manage the vast amounts of data associated with individual customers. Visit the SAP website () and read about the customer relationship management tools under the solutions link.
Based on information available at the SAP website, describe some of the capabilities of CRM.
Capabilities include personalization of product offers, sales lead generation, customer self-help capabilities, and information sharing among partners.
If you were creating a customer database to use individual customer data for CRM in a hotel chain, what type of information would you capture about the customer?
Relevant information to capture would include basic demographic information, spending levels, frequency of stays, personal preferences with regard to amenities and room attributes, and financial data.
How would you collect information about the hotel customer and how could a marketing manager use it to improve the relationship with that customer?
Hotels could capture some of this information without the customer even realizing it through the hotel check-in procedures. Other information could be captured from guest surveys or information asked during the application for affinity programs.
Focus on Ethics
Survey research, either by phone or on the Internet, has become more difficult because even legitimate survey efforts are often viewed as thinly veiled sales calls by suspicious consumers who have been burned once too often. Furthermore, consumers are concerned with privacy and do not want their personal information misused. In addition, given the volume of unsolicited email (SPAM) received (some estimates suggest that SPAM will account for more than half of all email in the near future), many people don’t have time to try to separate legitimate research requests from unsolicited product advertisements, and end up deleting them all.
What ways might legitimate survey researchers overcome growing public resistance to online surveys and telephone surveys?
Promotional campaigns by the research industry highlighting the benefits consumers receive from survey data (., products and services designed more in line with their preferences) would be one way to address this issue.
How have you responded in the past when asked to participate in a survey on the phone or Internet? Did you participate? Why or why not?
Student responses will vary based on their experience. It may be interesting to ask what a researcher would have to do (., monetary offer) to get them to participate.
What methods might a company conducting an online survey use to distinguish its email from SPAM?
Some online advertisers are now using the “ADV:” prefix in the subject line of messages. Discuss the potential for a subject line designation that researchers might use.
Great Ideas
Barriers to Effective Learning
While today’s students have grown up with computers, the idea of an “information system” may be very new to them. They typically will not have had to do any research, and any jobs they’ve held to this point in their lives will most likely have entailed very basic, entry-level type work. To get them past this, you could talk about the type of information the university will hold on each student—their major, the courses they’ve taken, the grades they’ve gotten, their current address, their home address, their parents’ names, whether they are paying full tuition or are on any kind of scholarship, what high school they attended and their grade point average there, what sports they play or activities they participate in, and so forth. Then talk about how the university might use that information to understand their current student population to help them figure out how to target future students while they are still in high school. This should help them grasp how data gets turned into information, and from that point to knowledge.
Virtually no one in class will be at all familiar with the market research process. They have not had to worry about collecting information in any large-scale process, although they might have been involved with collecting information from members of a student organization as to what activities the members would like to participate in. One effective way of discussing this issue is to talk about the course evaluations that are completed at the end of the semester. Explaining that this is not to rate the instructors but to provide valuable feedback to the university, the department and the instructor on course offerings, content within the courses, and only lastly to get an idea of the competence of instructors should help. Also, give examples of poorly designed surveys and show how they lead the respondent to answer in a given way. Especially helpful are questionnaires that use leading or loaded questions, or double-barreled questions that are difficult to answer.
A final barrier is the lack of understanding of commercial and/or online databases. Showing a database in class, such as the . Census data or state information, both of which are available for free, will help them see the amount of data that is available. If possible, it would then be helpful to “find the story” in the data—that is, to apply the data to a small problem, such as where to locate a new Starbucks outlet. Using the data to show population clusters of mid- to upper-level income areas, the kind of consumer most likely to pay a premium for coffee, will help them internalize the power of using effective and relevant data in marketing decision making.
Student Projects
Go to the library and do a search of the Wall Street Journal, BusinessWeek, and Fortune for information regarding one selected company. Show how using this kind of marketing intelligence would help a company keep abreast of their competitors.
Describe how uses customer relationship management to retain their customers and increase their purchases.
Describe a small research project that could be instituted to increase membership in a selected student organization.
Classroom Exercise/Homework Assignment
NPD Group is a research company that provides both consumer panel information as well as retail sales tracking services to a wide range of companies. Go to their website at to review their products and services, as well as their client list.
How might a retail clothing company use the data that NPD has already collected? What sort of ad-hoc or customized research could NPD perform for such a company?
NPD has some basic research results available free online in the form of trend reports. A retailer could use these to inform their ordering for the upcoming season as well as to develop effective ads that will reach their target customers. Given that NPD also offers retail sales tracking services, a clothing store or chain could track their own sales versus their competitors and see how the trend forecasting from NPD stacks up against results at the end of the season. Finally, customized research from NPD could be used to decide whether to bring in a new clothing line, for instance a line with a more inner-city or ethnic slant, by using NPD’s online panels to find out preferences and intentions to buy this type of clothing.
NPD claims to have a total of million panelists, with 600,000 forming a core that are chosen to respond to surveys. Why is it important to have such a large base of consumers, when for instance, political surveys discussed on TV news will talk about the fact that about 500 people were interviewed regarding a candidate or political issue?
There are many issues involved here. One of the first is that to draw a representative sample for a national consumer brand, the more people who are available to respond to a questionnaire, the more likely the results will be representative of the population as a whole. Also, with such a large number of people willing to participate, there is a much greater chance that NPD can reach the exact demographic and psychographic profile for a survey that is required or desired. Finally, even though all million people have volunteered to be part of the NPD panel, only a small percentage of people who receive a survey will actually fill it out. To keep response rates in absolute numbers high, then, a very large number of questionnaires will need to be sent out.
In looking at the list of clients, virtually all of them are retail companies. International Flavors and Fragrances is one of the few business-to-business marketers on the list. Why would a company that sells to other businesses be interested in what consumers have to say?
Many more companies in the business market should care about what consumers are thinking and buying, because their demand is derived from consumer demand. But most companies in this market depend on their own customers to tell them what consumers will be doing and buying, without worrying about understanding the ultimate customer themselves. This may or may not be a smart thing to do; the farther away a company is from the end consumer, the less likely they will have the capability to understand consumer buying behavior and demand. But ignoring the consumer market can be detrimental to business marketers, because it will leave them at the mercy of their customers’ forecasting and knowledge, which could leave them unprepared for shifts in consumer tastes.
If you look at the International Flavors and Fragrances website (), you will see that they seem to very closely track consumer tastes and preferences. It may be worthwhile to go to the website during class or have students do it on their own, because very few, if any, of them will have heard of this company. Yet they have probably used their products, and it may be interesting for them to review what this company does and how it can market something so esoteric as an aroma.
Classroom Management Strategies
This chapter will be a first introduction into managing any kind of information for most students. It is also a very brief introduction to marketing research. Figure 4-1 should figure prominently in the discussion about this chapter so that students don’t lose track of all the varying sources of information marketers need.
Only 5 minutes should be spent on Assessing Marketing Information Needs. This is an introductory segment, and it also represents a topic that is necessarily company-driven rather than generic.
The majority of the class, probably 40 minutes, should be spent on Developing Marketing Information. This is the meat of the chapter, and not only covers information sources such as internal data and marketing intelligence, it goes into some detail on performing marketing research. Most of the key terms from marketing research are defined and explained in this section.
The time remaining can be used to cover the last three sections of this chapter: Analyzing Marketing Information; Distributing and Using Marketing Information; and Other Marketing Information Considerations. Customer Relationship Management is covered in the first of these sections. Of the topics listed here, that will be the most important for students to comprehend.
Chapter 5
Consumer and Business Buyer Behavior
Previewing the Concepts—Chapter Objectives
Understand the consumer market and the major factors that influence buyer behavior.
Identify and discuss the stages in the buyer decision process.
Describe the adoption and diffusion process for new products.
Define the business market and identify the major factors that influence business buyer behavior.
List and define the steps in the business buying decision process.
Just the Basics
Chapter Overview
Buying behavior is at the core of marketing: The knowledge and understanding of why we buy and how we buy should be the bedrock of every marketing program. This chapter covers both consumer and business buying behavior.
Consumer behavior incorporates concepts from both sociology and psychology. To understand consumers and their buying processes, therefore, is to understand the myriad influences encountered day in and day out. Cultural, social, personal, and psychological factors affecting buying behavior are explained. These factors clarify the why of buying.
The chapter also details the how of buying, by covering the consumer buying process. This process includes the stages of need recognition, information search, evaluation of alternatives, purchase decision, and post-purchase behavior. The chapter also details the buyer decision process for new products as well as providing information on consumer behavior internationally.
Business markets are also defined and analyzed. The differences between the consumer buying process and the business buying process are highlighted, as is the nature of the buying unit in business markets. Also discussed is business buying on the Internet.
Chapter Outline
Introduction
Buyers of Harley-Davidson motorcycles are intensely loyal and devoted to the brand. Because of this, Harley-Davidson is at the top of the heavyweight motorcycle market.
Harley-Davidson’s marketing managers spend a lot of time studying their buyers—they want to know who their customers are, what they think, how they feel, and why they buy a Harley rather than another brand.
The research revealed seven core types: adventure-loving traditionalists, sensitive pragmatists, stylish status seekers, laid-back campers, classy capitalists, cool-headed loners, and cocky misfits. Yet all Harley owners appreciated their bikes for the same basic reasons—independence, freedom, and power.
The example of Harley-Davidson shows that there are many factors that affect consumer buying behavior.
Consumer Markets and Consumer Buying Behavior
Consumer buying behavior refers to the buying behavior of final consumers—individual and households who buy goods and services for their own consumption. All of these consumers make up the consumer market.
The American consumer market consists of more than 290 million people who consume trillions of dollars’ worth of goods and services each year. The global market consists of almost billion people.
Use Key Terms Consumer Market, Consumer Buyer Behavior here.
Use Chapter Objectives 1 here.
Model of Consumer Behavior
Most large companies research consumer buying decisions in great detail to answer questions about what consumers buy, where they buy, how and how much they buy, as well as when and why they buy.
Learning what, where, when, and how and how much they buy is easy, but understanding the why of buying is very difficult, because those reasons are usually locked deep inside the consumer’s mind.
Understanding how consumers respond to varying marketing messages starts with the stimulus-response model of buyer behavior found in Figure 5-1.
Use Figure 5-1 here.
Marketing stimuli consist of the four Ps of product, place, price, and promotion.
Other stimuli include major forces and events in the buyer’s environment: economic, technological, political, and cultural.
All these inputs enter the consumer’s black box and are then turned into responses such as product choice, brand choice, dealer choice, purchase timing and purchase amount.
The buyer’s characteristics influence how he or she perceives and reacts to the stimuli, and the buyer’s decision process itself affects the buyer’s behavior.
Characteristics Affecting Consumer Behavior
Figure 5-2 shows the factors influencing consumer purchases. For the most part, marketers cannot control these factors, but they must always keep them in mind.
Cultural factors exert a broad and deep influence. Roles are played by the buyer’s culture, subculture, and social class.
Culture is the most basic cause of a person’s wants and behaviors. This behavior is largely learned from families and other important institutions.
Use Key Term Culture here.
Use Figure 5-2 here.
A child born in the United States generally learns the values of achievement and success; activity and involvement; efficiency and practicality; progress; material comfort; individualism; freedom; humanitarianism; youthfulness; and fitness and health.
Marketers try to spot cultural shifts so that they can discover new wants and desires, and then develop new products to meet the new wants and desires. An example is the shift toward health and fitness, which created a huge industry.
Subcultures are groups of people with shared value systems based on common life experiences and situations. They include nationalities, religions, racial groups, and geographic regions. Four important subculture groups in the United States include Hispanics, African Americans, Asians, and mature consumers.
Use Key Term Subculture here.
The . Hispanic market, which includes Americans of Cuban, Mexican, Central American, South American, and Puerto Rican descent, numbers 35 million consumers who bought more than $425 billion worth of goods and services. This group is expected to double in size in the next 20 years. They tend to buy more branded, higher-quality products, and are extremely brand loyal.
African Americans number 35 million with a buying power of $646 billion. This population is growing in affluence and sophistication. They can be more price-conscious than other groups, but they are motivated by quality and selection. Black consumers are also the most fashion-conscious of the ethnic groups.
Asian Americans are the fastest growing and most affluent segment in the Untied States. They number 12 million and have a disposable income of $296 billion annually. The largest group consists of the Chinese Americans, followed by Filipinos, Japanese Americans, Asian Indians, and Korean Americans. Asian Americans are the most tech-savvy segment, and they shop frequently and are the most brand-conscious of all the ethnic groups. But they are also the least brand loyal.
Mature consumers number 75 million, and this group will more than double in size in the next 25 years. Mature consumers are better off financially than are the younger consumer groups.
Social classes are society’s relatively permanent and ordered divisions whose members share similar values, interests, and behaviors. There are seven American social classes, and they are outlined in Figure 5-3.
Use Key Term Social Class here.
Use Figure 5-3 here.
Use Discussing the Issues 1 here.
Social class is not determined by a single factor; rather, it is measured by a combination of occupation, income, education, wealth, and other variables.
Marketers are interested in social class because people within a given class can exhibit similar buying behavior. Social classes have distinct product and brand preferences in areas such as clothing, home furnishings, leisure activity, and cars.
Social Factors
A consumer’s behavior is affected by social factors such as small groups, family, and social roles and status.
Behavior can be influenced by small groups. These groups include membership groups, to which a person belongs; reference groups, which are indirect points of comparison or reference; and aspirational groups, to which an individual would like to belong. These reference groups expose a person to new behaviors and lifestyles, influence the person’s attitudes and self-concept, and create pressures to conform that may affect a person’s product and brand choices.
Use Key Term Groups here.
Use Discussing the Issues 2 here.
Opinion leaders are those people within a reference group who exert influence on others. Buzz marketing is used by enlisting or even creating opinion leaders to spread the word about specific brands.
Use Key Term Opinion Leaders here.
Family members can influence buyer behavior. It is the most important consumer buying organization in society, and marketers study the roles of husbands, wives, and even children on the purchases of different products and services.
Women make almost 85% of all purchases, totaling $6 trillion each year. Children also can have strong influence on family buying decisions.
A person’s position in each group can be defined in terms of role and status. A role consists of the activities people are expected to perform according to the persons around them. Each role carries a status reflecting the general esteem given to it by society. People often choose products that show their status in society.
Personal Factors
Personal characteristics that affect what a consumer buys include age and life-cycle stage, occupation, economic situation, lifestyle, and personality and self-concept.
People change the goods and services they buy over their lifetimes. The family life cycle consists of the stages through which families might pass as they mature over time. Traditional family life cycle stages include young singles and married couples with children. Other alternative stages include unmarried couples, singles marrying later in life, childless couples, same-sex couples, single parents, those recently divorced, and extended parents (those with young adult children returning home).
Use Marketing at Work 5-1 here.
A person’s occupation can also affect what he or she buys, as will his or her economic situation.
A person’s lifestyle is his or her pattern of living as expressed in his or her psychographics. It involves measuring consumers’ major AIO dimensions—activities, interests, and opinions. Lifestyle profiles a person’s whole pattern of acting and interacting with the world.
Use Key Term Lifestyle here.
There are lifestyle classifications, the most popular of which was developed by SRI Consulting. It is called the Values and Lifestyles (VALS) typology. It classifies people according to how they spend their time and their money. It divides people up into eight groups based on two major dimensions: primary motivation and resources. Primary moti-vations include ideals, achievement, and self-expression. Resources are classified as either high or low, and include income, education, health, self-confidence, energy, and other factors.
Use Application Questions 1 here.
Forrester research has also developed a “technographics” scheme, which segments con-sumers according to their motivation, desire, and ability to invest in technology.
Personality refers to the unique psychological characteristics that lead to relatively consistent and lasting response to one’s own environment. Personality generally covers such traits as self-confidence, dominance, sociability, autonomy, defensiveness, adaptability, and aggressiveness. Personality influences buying behavior.
It is posited that brands also have personalities, and consumers will buy brands whose personality matches their own. A brand personality is the specific mix of human traits that may be attributed to a particular brand.
Use Key Term Personality here.
Psychological Factors
There are four psychological factors that could influence buyer behavior. They are motivation, perception, learning, and beliefs and attitudes.
A motive or drive is a need that is sufficiently pressing to direct the person to seek satisfaction. A person has many needs; some are biological, such as hunger and thirst; some are psychological, such as the need for recognition and esteem.
Use Key Term Motive (or Drive) here.
Use Marketing at Work 5-2 here.
There are several theories of human motivation, but two of the most popular were developed by Sigmund Freud and Abraham Maslow.
Freud assumed that people are unconscious about the real psychological forces shaping their behavior, and that a person does not really understand his or her motivation.
Maslow believed that people are driven by particular needs at particular times, and that needs are arranged in a hierarchy (see Figure 5-4). These needs include physiological needs, safety needs, social needs, esteem needs, and self-actualization needs. A person focuses on his or her most important needs, and as each level of needs ceases to be a motivator, he or she moves up the hierarchy.
Use Figure 5-4 here.
Perception is the process by which people select, organize, and interpret information to form a meaningful picture of the world. How a person acts, or buys, is influenced by his or her perception of the situation. There are three perceptual processes through which people can form different perceptions of the same stimulus:
Use Key Term Perception here.
Selective attention is the tendency for people to screen out most of the information to which they are exposed.
Selective distortion describes the tendency of people to interpret information in a way that will support what they already believe.
Selective retention shows that people tend to retain only information that supports their attitudes and beliefs.
Learning describes changes in an individual’s behavior arising from experience. It occurs through the interplay of drives, stimuli, cues, responses, and reinforcement.
Use Key Term Learning here.
Use Discussing the Issues 3 here.
Applying the Concept
Video rentals generally include previews of movies that have not yet been released in theaters. How does this apply to the effect of the learning concept just reviewed on your own buyer decision process?
A belief is a descriptive thought that a person has about something. An attitude describes a person’s relatively consistent evaluations, feelings, and tendencies toward an object or an idea. Attitudes put people into a frame of mind of liking or disliking things, and of moving toward or away from them. Attitudes are difficult to change.
Use Key Terms Belief, Attitude here.
The Buyer Decision Process
There are five stages in the buyer decision process (see Figure 5-5): need recognition, information search, evaluation of alternatives, purchase decision, and post-purchase behavior. In more routine purchases, consumers can skip or even reverse some of these stages.
Use Chapter Objectives 2 here.
Use Figure 5-5 here.
Need recognition is the start of the decision process. The buyer recognizes that he or she has a problem or need.
The need can come from external stimuli, such as advertising, or internal stimuli, such as hunger or thirst.
Information search may or may not take place. If it does, consumers can get their information from many sources.
Personal sources include family, friends, neighbors, and so forth.
Commercial sources are advertising, salespeople, packaging, and so forth.
Public sources include the media and consumer-rating organizations.
Experiential sources include the consumer handling or examining the product itself.
The relative importance of each of these sources varies by consumer. The most effective sources tend to be personal; commercial sources tend to inform the consumer, but personal sources can legitimize the products.
Use Discussing the Issues 4 here.
Evaluation of alternatives depends on the individual consumer and the buying situation. In some case, consumers can evaluate product alternatives very carefully, using careful calculations and logical thinking. At other times, very little consideration of alternatives is done—impulse buying and relying on intuition rule.
The purchase decision entails forming the purchase intention. Typically, consumers will now buy what they have decided on. However, two factors can come between the purchase intention and purchase decision.
First, attitudes of others can intervene. If someone close to the consumer casts doubt on the decision made, the purchase might not take place.
Second, there could be unexpected situational factors. A consumer could see a drop in income, or a competitor could drop their prices.
Post-purchase behavior is also considered part of the buying process. The difference between the consumer’s expectations and the perceived performance of the good purchased determines how satisfied the consumer is. If the product falls short of expectations, the consumer is disappointed; if it meets expectations, the consumer is satisfied; if it exceeds expectations, the consumer is said to be delighted.
Cognitive dissonance generally results from every major purchase. This is the discomfort caused by post-purchase conflict. Every purchase involves compromise, through forgoing benefits of other products.
Use Key Term Cognitive Dissonance here.
It always costs more to gain new customers than to retain existing customers, and the best way to retain those you already have is to satisfy them. Bad word of mouth travels far more quickly than good.
Let’s Discuss This
Think of the last time you were unhappy with a purchase or with a company. How many people did you tell? Did you let the company know about it? Why or why not? Have you ever returned to that store or brand?
The Buyer Decision Process for New Products
A new product is a good, service, or idea that is perceived by some potential customers as new.
Use Key Term New Product here.
Use Chapter Objectives 3 here.
The adoption process is the mental process through which an individual passes from first learning about an innovation to final adoption, and adoption itself is defined as the decision by a consumer to become a regular user of the product.
Use Key Term Adoption Process here.
There are five stages in adopting a new product.
Awareness is when the consumer becomes aware of a new product, but still lacks information about it.
Interest occurs as the consumer seeks information.
Evaluation is the process through which the consumer considers whether trying the new product makes sense.
Trial of the new product on a small scale improves his or her estimate of its value.
Adoption occurs when the consumer decides to make full and regular use of the new product.
Use Figure 5-6 here.
Use Discussing the Issues 5 here.
There are adopter categories into which consumers fall. See Figure 5-6.
Innovators tend to be adventuresome. They will try new ideas at some risk.
Early adopters are typically guided by respect. They are opinion leaders and adopt new ideas carefully, although early.
The early majority are rarely leaders, but they do adopt new ideas before the average person.
The late majority are skeptical; they wait for a majority of people to adopt something new before they do.
Laggards are tradition-bound. They can be suspicious of changes and adopt “new” ideas only when they’ve become somewhat of a tradition themselves.
Use Application Questions 2 here.
The characteristics of a new product affect its rate of adoption. Five characteristics are especially important in an innovation’s rate of adoption.
Does it have a relative advantage over existing products?
Compatibility with the values and experiences of potential customers is important.
The degree of complexity is also considered. That is, how difficult is it to understand or use the product?
Divisibility speaks to how easily the innovation may be tried on a limited basis.
Communicability is the degree to which the results of using the innovation can be observed or described to others.
Other characteristics that influence adoption of new products are the initial and ongoing costs, the risk and uncertainty involved, and the level of social approval.
Consumer Behavior Across International Borders
Understanding the needs of consumers across borders is a daunting task. Consumers in other countries may have many of the same things, but their values, attitudes, and behaviors often vary greatly.
Marketers must decide the degree to which they will adapt their products and marketing programs to meet unique cultures and needs in various markets. Standardizing offerings simplifies operations and allows companies to take advantage of cost economies. But adapting marketing efforts within each country results in products and programs that better satisfy the needs of local consumers.
Use Speed Bump: Linking the Concepts here.
Business Markets and Business Buyer Behavior
Most large companies sell to other organizations. Even large consumer-products companies must first sell their products to other businesses before consumers can buy them.
Business buyer behavior refers to the buying behavior of the organizations that buy goods and services for use in the production of other products and services that are sold, rented, or supplied to others. It includes the behavior of retailing and wholesaling firms that acquire goods for the purpose of reselling or renting them to others at a profit.
Use Key Term Business Buyer Behavior here.
Use Chapter Objectives 4 here.
Use Figure 5-7 here.
Use Discussing the Issues 6 here.
In the business buying process, business buyers determine which products and services their organizations need to purchase, and then find, evaluate, and choose among alternative suppliers and brands.
Business Markets
The business market is huge. Business markets involve more dollars and items than do consumer markets. There are many sets of business purchases for each set of consumer purchases.
Business markets differ in many ways from consumer markets. The main differences are in market structure and demand; the nature of the buying unit; and the types of decisions and the decision process involved.
Market structure and demand
The business marketer generally deals with far fewer but far larger buyers than the consumer marketer does. Even in large business markets, a few buyers often account for most of the purchasing.
Business markets are more geographically concentrated. Eight states account for more than half the nation’s business buyers: California, New York, Ohio, Illinois, Michigan, Texas, Pennsylvania, and New Jersey.
Business demand is derived demand—it ultimately derives from the demand for consumer goods. Because of this, business marketers may promote their products directly to final consumers to increase business demand.
Use Key Term Derived Demand here.
Use Focus on Ethics here.
Nature of the buying unit
A business purchase usually involves more decision participants and a more professional purchasing effort. Business buying is often done by professional purchasing agents.
The more complex the purchase, the more likely that several people will participate in the process. Buying committees made up of technical experts and top management are common in buying major goods.
Types of decisions and the decision process
Purchases often involve large sums of money, complex technical and economic considerations, and interactions among many people at many levels of the buyer’s organization. Because of the complexity, business buying decisions can take longer than consumer decisions.
The business buying process is generally more formalized than the consumer process. Detailed product specifications, written purchase orders, careful supplier searches, and formal approval are usually required.
In business buying situations, buyer and seller are often much more dependent on one another. They may work closely together, partnering to jointly create solutions to the customer’s problems.
Use Application Questions 3 here.
Business Buyer Behavior
The business buyer behavior model, shown in Figure 5-7, shows how marketing and other stimuli affect the buying organization and produce certain buyer responses. As in consumer buying, the marketing stimuli for business consists of the four Ps: product, price, place, and promotion. Other stimuli include environmental forces such as economic, technological, political, cultural, and competitive forces. The stimuli are turned into buyer responses, such as product or service choice, supplier choice, order quantities, and delivery, service, and payment terms.
There are three major types of buying situations.
In a straight rebuy, the buyer reorders something without any modifications. It is generally handled on a routine basis by the purchasing department.
In a modified rebuy, the buyer wants to modify product specifications, prices, terms, or suppliers. The modified rebuy usually involves more decision participants than does the straight rebuy.
A new task situation is encountered when a company is buying a product or service for the first time.
The buyer makes the fewest decisions in the straight rebuy and the most in the new task situation.
Use Key Terms Straight Rebuy, Modified Rebuy, New Task here.
Systems selling is often a key business marketing strategy because many business buyers prefer to buy a packaged solution to a problem from a single seller. In this situation, a buyer may ask sellers to supply the components and assemble the package or system.
Use Key Term Systems Selling here.
The decision-making unit of a buying organization is called the buying center. It is comprised of all the individuals and units that participate in the process. It is not a fixed and formally identified unit within the buying organization. Different people assume different roles for different purchases. For some purchases, only one person will participate; for more complex purchases, the buying center could include 20 or 30 people.
Use Key Term Buying Center here.
Business buyers are subject to many influences when they make their buying decisions. They respond to both economic and personal factors.
The various influences on buyers are shown in Figure 5-8. They include environmental, organizational, interpersonal, and individual influences.
Use Figure 5-8 here.
Use Marketing at Work 5-3 here.
Environmental factors can include the current and expected economic environment, as well as shortages of key materials. Technological, political, and competitive developments can also affect business buyers. Culture and customs can also influence buyer reactions to the marketer’s behavior and strategies.
Organizational factors are important because each buying organization has its own objectives, policies, procedures, structure, and systems.
Interpersonal factors also influence the business buying process. These can be very difficult to ascertain.
Individual factors are involved as well. Each participant in the business buying process brings in personal motives, perceptions, and preferences. These are, in turn, influenced by personal characteristics such as age, income, education, professional identification, personality, and attitudes toward risk.
Let’s Discuss This
Business people are supposed to make decisions on a rational basis, using the facts of the situation to make a final determination. That’s where environmental and organizational factors come into play. What about interpersonal and individual factors? Why are these important in a business buying process? How does a marketer take these factors into account when developing marketing messages for business audiences?
There are eight stages to the business buying process, which are shown in Figure 5-9. Buyers who are facing a new-task situation will usually go through all stages of the buying process. Those going through modified or straight rebuys may skip some of the stages.
Use Chapter Objectives 5 here.
Use Figure 5-9 here.
Problem recognition: The buying process begins when someone in the company recognizes a problem or need that can be met by acquiring a specific product or service.
A general need description is generated to describe the characteristics and quantity needed of an item. For complex items, buyers may need to work with others, such as engineers, users, and consultants, to define the item.
The product specification includes the technical product specifications. Value analysis is an approach to cost reduction in which components are studied carefully to determine if they can be redesigned, standardized, or made by less costly methods of production.
Use Key Term Value Analysis here.
A supplier search is conducted to find the best vendors. The newer the buying task, and the more complex and costly the item, the greater the amount of time the buyer will spend searching for suppliers.
The proposal solicitation is the stage in which the buyer invites qualified suppliers to submit proposals. When the item is complex or expensive, the buyer will usually require detailed written proposals or formal presentations from each potential supplier.
Supplier selection occurs after the buying center reviews the proposals. During the selection process, the buying center may draw up a list of desired supplier attributes and their relative importance. Buyers may also attempt to negotiate with preferred suppliers for better prices and terms before making final selections.
An order-routine specification is now prepared that includes the final order with the chosen supplier or suppliers. It lists items such as technical specifications, quantity needed, expected time of delivery, return policies, and warranties. Buyers may use blanket contracts for routine items; this creates a long-term relationship in which the supplier promises to resupply the buyer as needed at agreed prices for a set period of time.
Finally, buyers conduct a performance review. In this stage, the buyer may contact users and ask them to rate their satisfaction. This review may lead the buyer to continue, modify, or drop the arrangement with the seller.
Use Under the Hood/Focus on Technology here.
Business Buying on the Internet
Online purchase, sometimes called e-procurement, is growing rapidly. In recent surveys, almost 75% of business buyers said they use the Internet to make at least some purchases, and e-procurement accounts for 14% of the average company’s spending.
Use Key Term e-Procurement here.
Most products bought online are MRO materials—maintenance, repair, and operating items. MRO materials account for up to 80% of all business orders, and the transaction costs for order processing are very high.
Online procurement in the business-to-business environment shaves transaction costs and results in more efficient purchasing for both buyers and suppliers. On average, companies can trim the costs of purchased goods alone by 15 to 20%.
There are some problems with e-procurement, however. For instance, it can erode decades-old customer-supplier relationships. There is also the potential for security disasters; the secure environment that businesses need to carry out confidential interactions is still lacking.
Travel Log
Discussing the Issues
Describe how the subculture individuals belong to and their social class can influence their choice of an automobile. Which of these two influences is likely to have the largest influence?
Subcultures, based on nationalities, religions, racial groups, and geographic regions, may have established norms for what constitutes an appropriate vehicle to own (and what is not appropriate). Also, to the degree that individuals wish to conform to a particular subculture, car purchases may reflect the types of autos typically owned by members of the subculture. Social class has implications for affordability (due to income) and for the required car attributes (due to occupation).
Reference groups that an individual desires to become associated with are called aspirational groups. What is one of your aspirational groups? What types of products could marketers effectively sell using the aspirational group you selected?
Student responses will vary to this question. Instructors may wish to have students think more deeply by discussing why a particular aspirational group consumes certain goods.
Learning is described as changes in an individual’s behavior arising from experience. In what ways do marketers attempt to get consumers to experience their products in order to influence their buying behavior?
Some examples would include test drives for automobiles, free samples in the mail, and the testing of fragrances at department store cosmetics counters. This question can be expanded by having students discuss how learning has impacted their own purchasing decisions.
Sometimes a consumer’s information searching is elaborate and other times very minimal. What factors might influence how much information searching a consumer does?
The amount of searching will depend on the strength of the drive to own, the amount of information started with, the ease of obtaining more information, the value placed on additional information, and the satisfaction derived from searching.
Think about a new type of product you have recently purchased. Discuss how you proceeded through the five stages of the product adoption process. Did you skip any stages? Were any of the stages in a different order from that presented in the text?
Student responses will vary depending upon the product purchased. Instructors may want to encourage students to think about why stages may have been skipped in the product adoption process. Product involvement level is often a factor in the steps experienced in the decision process.
Discuss how business buyer behavior is different from consumer buyer behavior. What does this mean for a company attempting to sell goods to other organizations?
The main differences between the two are in market structure and demand (with business markets having fewer but larger buyers that are geographically concentrated), the nature of the buying unit (with businesses involving more decision participants and a more professional purchasing effort), and the types of decisions and the decision process involved (with business market decisions being more complex, formal, and dependent).
Application Questions
Go to SRI Consulting’s website, ( and complete the VALS survey online. How accurately are you described by your primary and secondary VALS types? Do you think you will be in a different VALS category in 5 to 10 years? Discuss how Kraft food marketers might use this information to sell Velveeta cheese.
Instructors may desire to have students take the survey outside of clas,s and then in class group students together with similar VALS types. In these groups they can discuss the remaining questions. This assignment allows students to consider the nature of psychographic data and how it can be used to round out a company’s profile of their target market beyond just demographic information.
Examine the five adopter categories and how they differ from one another. Pick a recent technologically oriented product such as a PDA or DVD player and discuss how such a product should be positioned differently to appeal to each of the five adopter categories. Which group do you feel would be easiest to sell to? Which group might be the most profitable?
The product selected will guide the responses obtained to this question. The ease of selling to the different adopter categories is dependent upon when you assume the product is being sold (., at product introduction versus later in the product life cycle). Students might be encouraged to consider multiple points in time in responding to the question. Profitability has to do with the size of the market, production costs, and the selling price. Have students consider each of these elements when considering which group will be most profitable to sell to.
Relationships between the seller and buyer are often mentioned as being more critical in business-to-business transactions than in business-to-consumer transactions. Do you agree or disagree with this? What type of activities might a firm use to develop closer relations with another organization?
Students should consider this statement in light of the growing trend in developing relationships in business-to-consumer transactions, which would suggest that relationships are important in both contexts. Organizations do not have relationships—people in the organizations do. This question can be expanded by having students consider what is important in keeping these organizational relationships strong.
Under the Hood / Focus on Technology
This chapter discusses how consumer and business markets differ from one another. How do you think the company website of a company selling directly to consumers will compare with one selling directly to other businesses? Visit and investigate the corporate websites for Dow Chemical () and for Kellogg’s ().
How are the websites different?
Both will contain similar types of information (., product specifications, company information, contact information), but each will be geared toward their own constituencies.
Who is each website designed for?
Have students consider all of the different groups of people that might want to find information about the firms on the websites (., consumers, business partners, students, shareholders, government regulators, competitors, etc.).
What types of information are present on both websites?
Information will include product specifications, company information, contact information, financial information, and press releases.
How well does each website communicate with its intended audience?
Responses to this question will vary by student. Encourage students to consider ways to improve communication on the website.
Focus on Ethics
As pointed out in the chapter, mature consumers are an attractive market due to their growing ranks, financial stability, and increasing free time. Health-related products are often pitched toward these markets in an effort to help them look as young as they feel and combat the effects of aging.
Traditionally, prescription drug advertising has been aimed directly at physicians. Recently, there has been a rise in prescription drug advertising aimed directly at the consumer, particularly the mature consumer. The goal is clear: If a patient is aware of new drugs that supposedly help combat aging, the patient will ask the physician to prescribe them. The expected result?—an increase in sales for the advertised drug.
Drug manufacturers have increased the amount of direct-to-consumer advertising, from $800 million in 1996 to $ billion in 2001. While a better-educated consumer is a laudable goal, critics suggest that direct-to-consumer advertising partly fuels the escalating cost of prescription drugs, which are rising at an average of 17% per year. The advertising appears to be working. From 1990 to 2000, the volume prescribed of the 50 most advertised drugs increased by %, compared to only % for all other prescription drugs. Perhaps most disturbingly, a study in the Journal of Family Practice reported that 71% of family physicians felt direct-to-consumer advertising pressured them to prescribe medication they wouldn’t otherwise prescribe.
How do you feel about the rise in direct-to-consumer advertising for prescription drugs? What do you feel are some of the pros and cons of such advertising?
Responses will vary based on students’ attitudes toward this practice. Many students may discuss the advantages of a more-informed consumer versus the disadvantage of inappropriate prescriptions being issued.
What actions, if any, should drug manufacturers take to be socially responsible in the creation of consumer advertising?
Possible action would include adequate warnings regarding side effects and who the drug is appropriate for in the advertisements (beyond what is required by law). Instructors may wish to have students discuss the effectiveness of these warnings of side effects in their current form. In this case, it may be useful to show some of the direct-to-consumer advertisements in the class before discussion.
Does direct-to-consumer advertising in the drug industry have any negative consequences for pharmaceutical companies?
Potential negative consequences include unfavorable publicity from consumer advocate organizations, increased costs, and the potential for unfavorable governmental regulation on their advertising practices.
Great Ideas
Barriers to Effective Learning
By and large, students have not been exposed to the consumer behavior concepts in this chapter before. If they have taken a sociology or human behavior course, chances are very high that the concepts were not presented in a way that allowed the students to understand them as they apply to business in general and marketing in particular. After presenting the concepts of consumer behavior, have the students discuss the concepts in terms of their own buying habits, their backgrounds, and how they differ from others in the class.
There is a lot of material in this chapter; although it hits only the high points of consumer behavior, the authors have done a good job of summarizing the constructs in a way that allows students to comprehend, albeit in a basic way, why these concepts are important to marketing managers. Explaining that consumer behavior is usually offered as a course unto itself can actually relieve some of their anxiety. Also helpful is continually reminding them of how they can apply this material to more fully appreciating their own motivations for their purchases. This can then lead them to understand how a marketer could approach understanding consumers’ motives in general.
Understanding business buyer behavior and the business buying process can be especially difficult for students. Very few have ever had any experience with business purchasing decisions. This requires thorough explanation; the strategic use of personal experience in this regard is particularly helpful. If the instructor has no personal experience in business buying situations, it could be very helpful to bring in a guest speaker for this topic.
Business buying centers can be a very nebulous topic for students, and most particularly, their dynamic nature. Business students typically learn about “the real world” in courses that present topics in a more-siloed nature than even the most functionally organized business are run. Discussing the importance and uses of inter-departmental teamwork in this section can be highly enlightening. This can then lead to a discussion of the different types of influencers, users, and so forth that could be found in a business buying center, and what their functions could be in the buying decision–making process.
Students may actually be surprised that business buying on the Internet is a separate topic in the text. Explaining the history and use (and expense) of EDI could be helpful, as well as the security concerns when posting critical technical specifications on the Internet. A discussion of the complex nature of many business purchases also helps students to understand why the majority of online business buying still centers around MRO items.
Student Projects
Pick five products of your choice and show how culture, subculture, social class, and lifestyle might alter the way that you should market the product. Be sure to detail which groups or specific segments you are discussing. Write up your findings, ideas, and differences.
Assume you need an airline ticket to go to Boston on the 18th of next month. Go to a travel website, such as , and specify your travel requirements, initiate the search for your options, and print out the search results. Use those results to list your criteria for your evaluation of alternatives. Then identify the option you would choose if you did, in fact, need this airline ticket. Finally, summarize how you felt about using an explicit purchase process for this exercise.
Investigate the qualifications needed to be a purchasing manager for your university. Discuss these qualifications in class. What general statements can you make?
Classroom Exercise/Homework Assignment
Mattel, Inc. is best known for its Barbie® dolls. Developed in the 1950s, Barbie has been extremely successful and extremely long-lived. She has evolved over the decades to reflect the changing American culture, yet she is still an icon of the dominant American culture, that of Caucasians. Mattel has not, however, forgotten that there are other cultures and subcultures in the United States. Go to the Mattel website, , and browse through the site before answering the following questions:
How has Barbie evolved over the last five decades?
While the vast majority of Barbie dolls still reflect white culture, the dolls have evolved to show other cultures. In looking at the Barbie Collectibles pages, for example, you will immediately see an Asian Barbie, and you will see a section entitled “World Culture” that highlights Barbies from around the world.
Barbie has also evolved over the years to hold many occupations, reflecting the fact that American women now work in all fields, including those once considered “for men only.”
Barbie does, then, show that cultures, subcultures, and lifestyles do change over the years, and marketers are wise to follow those changes.
What has Mattel done to try to expand its marketing to subcultures that might not appreciate the value of Barbie?
Mattel has developed “Flavas,” a hip-hop-themed fashion-doll brand that “celebrates today’s teen culture through authentic style, attitude, and value.” First, by targeting teens, Mattel is marketing to an age group that in the past was not noted for wanting dolls. And by adding in a hip-hop flavor (or flava, in teen lexicon), they are reaching out for girls who might have felt disenfranchised by their previous offerings. In their marketing of the new line, they use terms such as attitude, fearless self-expression, personality, and mood. This is clearly aimed at reaching teen girls’ deepest motivations as reflected in their purchasing.
Mattel also lists their toys in the categories of “Infants and Preschool,” “Girls,” “Boys,” and “Grown-ups and Parents.” This listing can be seen as just a simplified tool for searching for your desired product, but it can also be seen as appealing to age and lifestyle differences.
Classroom Management Strategies
This chapter has a tremendous amount of material. The consumer buying behavior, in particular, presents an incredible amount of information. And all of this information is key to understanding marketing. As in Chapter 3, it is helpful to tie in both sociological and psychological principles in discussing this chapter.
More than half the class should be spent on Consumer Markets and Consumer Buyer Behavior. A thorough understanding of this section will make the business part of this chapter that much easier to comprehend. It is divided up into first the “why” of buying and second the “how” of buying. The former is guaranteed to never have crossed the students’ mind prior to this, so lots of examples will help drive home the importance of understanding why people buy what they do. Using their own buying history helps, particularly when really drilling down into why they really choose the school they are attending, the clothes they are wearing, etc. The actual buying process can be illustrated through examples of buying something very complex, such as a computer or a car, and then something very simple, such as salt. The new product buying decision process is also covered, and several minutes should be spent on this topic.
The remaining third or so of this class will then be spent on Business Markets and Business Buyer Behavior. Again, the section is divided into the “why” of buying, and then the “how”. There is also a discussion of the different market structure and demand characteristics of business markets. The terminology of the business buying is different, and you should be certain the students understand the differences between straight rebuy, modified rebuy and new tasks. Also, the buying process is more complex and more likely to be followed in practice, particularly for very expensive or very large purchases. Students will need to be aware of the eight steps in the business buying process as well as all of the participants in this process and the roles they play.
Chapter 6
Segmentation, Targeting, and Positioning:
Building the Right Relationships with the Right Customers
Previewing the Concepts—Chapter Objectives
Define the three steps of target marketing: market segmentation, market targeting, and market positioning.
List and discuss the major bases for segmenting consumer and business markets.
Explain how companies identify attractive market segments and choose a target marketing strategy.
Discuss how companies position their products for maximum competitive advantage in the marketplace.
Just the Basics
Chapter Overview
Market segmentation and target marketing are detailed in this chapter. An overview of consumer segmentation variables, including geographic, demographic, psychographic and behavioral characteristics, is explained, as is the use of multiple segmentation bases. Business market segmentation and international market segmentation are also described. The importance and reasons for segmentation are portrayed through several examples of companies who do it well, most notably Proctor & Gamble.
Segmentation outlines the company’s opportunities, but target marketing is where the marketing manager makes his or her money. Turning the segmentation opportunities into real markets is the focus of this part of the chapter. Methods of evaluating the market segments are discussed, as are the various levels of targeting: undifferentiated or mass marketing; differentiated marketing; concentrated marketing; and micromarketing.
Choosing the target marketing strategy is described as dependent on many variables, such as company resources, how variable the product is, and the stage of the product life cycle. But while a company is targeting important segments, it must take care not to cause any controversy or concern. For instance, companies that have targeted their premium cereals primarily to children have been called to task for their practices, as have cigarette companies that seem to have targeted the youth market in their chosen advertising vehicles.
Finally, a company has to figure out the best way to position for competitive advantage. Positioning involves implanting the brand’s unique benefits and differentiation in customers’ minds. But how does the company do that effectively? This section of the chapter goes through the process of developing a positioning concept and statement, and describes the various ways to decide how to correctly position your product in the marketplace.
Chapter Outline
Introduction
Proctor & Gamble is one of the world’s premier consumer goods companies. They provide a good example of how smart marketers use segmentation, targeting, and positioning.
Proctor & Gamble sells eight brands of laundry detergent in the United States, six brands of hand soap, five brands of shampoo, four brands of dishwashing detergent, three brands of tissues and towels and deodorant, and two brands each of fabric softener, cosmetics, skin care potions, and disposable diapers.
The reason they do this is because different people want different mixes of benefits from the products they buy. There are groups—or segments—or laundry detergent buyers, for example, and each segment seeks a special combination of benefits.
By segmenting the market and having several different brands in each category, P&G has an attractive offering for consumers in all important preference groups.
Companies recognize that they cannot appeal to all buyers in the marketplace, or at least not to all buyers in the same way. So they must design strategies to build the right relationships with the right customers.
Most companies are being more choosy about the customers with whom they wish to build relationships. They have moved away from mass marketing and toward market segmentation and targeting—identifying market segments, selecting one or more of them, and developing products and marketing programs tailored to each.
The three steps in target marketing are shown in Figure 6-1. They are market segmentation, target marketing, and market positioning.
Use Key Term Target Market here.
Use Chapter Objectives 1 here.
Use Figure 6-1 here.
Market Segmentation
Markets consist of buyers. These buyers may differ in their wants, resources, locations, buying attitudes, and buying practices. Through market segmentation, companies divide large, heterogeneous markets into smaller segments that can be reached more effectively with products and services that match their unique needs.
Use Key Term Market Segmentation here.
Use Chapter Objectives 2 here.
Segmenting Consumer Markets
There is no single way to segment a market. Marketers must try different segmentation variables, alone and in combination, to find the best way to view the market structure.
Geographic segmentation divides the market into different geo-graphical units, such as nations, regions, states, counties, cities, or even neighborhoods. A company may operate in one or a few geographic areas, or it may operate in all areas but pay attention to geographical differences in wants and needs.
Use Key Term Geographic Segmentation here.
Use Table 6-1 here. Use Discussing the Issues 2 here.
Demographic segmentation divides the market into groups based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation, and nationality. Consumer wants, needs, and usage rates often vary with demographic variables. Demographic variables are also easier to measure than other variables.
Use Key Term Demographic Segmentation here.
Some companies use age and life-cycle segmentation because consumer needs and wants change with age. But marketers must be careful to guard against stereotypes when using this form of segmentation.
Gender segmentation has long been used in clothing, cosmetics, toiletries, and magazines.
Income segmentation has been used by marketers for selling automobiles, boats, clothing, cosmetics, financial services, and travel. Many companies target affluent consumers with luxury goods. But other companies target lower-income consumers. Others still develop different products and sell them in different outlets based on income segmentation.
Psychographic segmentation divides buyers into different groups based on social class, lifestyle, or personality characteristics. People in the same demographic group can have very different psychographic makeups, and marketers often segment by common lifestyles.
Use Key Terms Age and Life-Cycle Segmentation, Gender Segmentation, Income Segmentation, Psychographic Segmentation here.
Use Marketing at Work 6-1 here.
Applying the concept
How might Ford utilize psychographic segmentation for its various automobile brands, such as Mustang, Explorer, and the luxury car Jaguar?
Behavioral segmentation divides buyers based on their knowledge, attitudes, uses, or responses to a product.
Occasion segmentation groups buyers according to occasions when they get the idea to buy, actually make the purchase, or use the purchased item.
Benefit segmentation requires finding the major benefits people look for in the product class, the kinds of people who look for each benefit, and the major brands that deliver each benefit.
Use Key Terms Benefit Segmentation, Occasion Segmentation here.
User status groups buyers according to whether they are nonusers, ex-users, potential users, first-time users, or regular users of the product.
Markets can also be segmented according to usage rate—light, medium, and heavy product users.
Loyalty status looks at the level of loyalty to brands, stores, and companies.
Use Key Term Behavioral Segmentation here.
Marketers rarely limit their segmentation to only one or a few variables. They are increasingly using multiple segmentation bases in an effort to identify smaller, better-defined target groups.
Geodemographic segmentation helps marketers link . Census data with lifestyle patterns to better segment their markets down to zip codes, neighborhoods, and even city blocks.
Use Under the Hood/Focus on Technology here.
Segmenting Business Markets
Business marketers use many of the same variables to segment their markets. Business buyers can be segmented geographically, demo-graphically (industry, company size), or by benefits sought, user status, usage rate, and loyalty status.
Other characteristics are also used, however, including operating characteristics, purchasing approaches, situational factors, and personal characteristics.
Within a given target industry and customer size, the company can segment by purchase approaches and criteria. Many marketers believe that buying behavior and benefits provide the best basis for segmenting business markets, just as in consumer markets.
Let’s Discuss This
The Body Shop is a company that prides itself on buying basic ingredients from only companies that utilize sustainable technologies. Is that a purchasing approach, a situation factor, a personal characteristic, or a combination of all of them?
Segmenting International Markets
Different countries can vary greatly in their economic, cultural, and political makeup. International firms need to group their world markets into segments with distinct buying needs and behaviors.
Companies can segment international markets using one or a combination of several variables. They can segment by geographic location. This assumes that countries close to one another will have many common traits and behaviors.
World markets can also be grouped on the basis of economic factors, such as population income levels or by their overall level of economic development.
Countries can also be segmented by political and legal factors, such as the type and stability of government, receptivity to foreign firms, monetary regulations, and the amount of bureaucracy.
Cultural factors can also be used, grouping markets according to common languages, religions, values and attitudes, customs, and behavioral patterns.
Many companies use an approach called intermarket segmentation. Using this approach, they form segments of consumers who have similar needs and buying behavior even though they are located in different countries.
Use Key Term Intermarket Segmentation here.
Requirements for Effective Segmentation
Not all segmentations are effective. To be useful, segments must meet five criteria.
It must be measurable: The size, purchasing power, and profiles of the segments can be measured.
It must be accessible: The market segments can be effectively reached and served.
It must be substantial: The segments are large or profitable enough to serve. A segment should be the largest possible homogenous group worth pursuing with a tailored marketing strategy.
It must be differentiable: The segments are conceptually dis-tinguishable and respond differently to different marketing mix elements and programs.
It must be actionable: Effective programs can be designed for attracting and serving the segments.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 3 here.
Target Marketing
Segmentation reveals only the firm’s opportunities. The firm now has to evaluate the various segments and decide how many and which segments it can best serve.
Use Key Term Target Marketing here.
Evaluating Market Segments
A firm must look at three factors to evaluate market segments: segment size and growth; segment structural attractiveness; and company objectives and resources
Use Chapter Objectives 3 here. Use Discussing the Issues 4 here.
The company must first collect and analyze data on current segment sales, growth rates, and expected profitability for various segments. It will be interested in segments that have the right size and growth characteristics. But “right size and growth” is a relative matter.
There are several structural characteristics that affect long-run segment attractiveness.
The segment is less attractive if there are several strong, aggressive competitors.
The existence of many actual or potential substitute products may limit prices and the profits that can be earned.
The relative power of buyers also affects segment attractiveness.
A segment may be less attractive if it contains powerful suppliers who can control prices or reduce the quality or quantity of ordered goods and services.
The company must take into account its own objectives and resources in relation to the segment. If a segment does not mesh with the company’s long-run objectives, it can be dismissed. The company must take into consideration whether it has the skills and resources needed to succeed in the market. The company should enter only segments in which it can offer superior value and gain advantage over competitors.
Applying the Concept
A start-up company has a product that it developed for the luxury hotel and resort market. Business development is not going as well as they had hoped. Should they change focus and market it to discount motel chains?
Selecting Target Market Segments
A target market consists of a set of buyers who share common needs or characteristics that the company decides to serve.
Target marketing can be carried out at several different levels. Figure 6-2 shows that companies can target very broadly, through undifferentiated marketing; very narrowly, in micromarketing; or somewhere in between, which is differentiated or concentrated marketing.
In undifferentiated marketing, also called mass marketing, a firm might decide to ignore market segment differences and target the whole market with one offer. This strategy focuses on what is common in the needs of consumers, rather than on what is different.
Using differentiated, or segmented, marketing, a firm decides to target several market segments and designs separate offers for each. Companies hope for higher sales and a stronger position within each market segment. This could yield more total sales than undifferentiated marketing across all segments. Differentiated marketing can also increase costs, however. So companies must weigh increased sales against increased costs when deciding on a differentiated marketing strategy.
Concentrated or niche marketing is especially appealing when a company has limited resources. Instead of going after a small share of a large market, the firm goes after a large share of one or a few segments or niches. Niches are smaller than segments and may attract only one or a few competitors. A company can market more effectively by fine-tuning its products, prices, and programs to the needs of carefully defined segments.
Use Key Terms Undifferentiated (or Mass) Marketing, Differentiated (or Segmented) Marketing, Concentrated (or Niche) Marketing here.
Use Figure 6-2 here.
Use Discussing the Issues 1 here.
Micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. It includes local marketing and individual marketing.
Local marketing entails tailoring brands and promotions to the needs and wants of local customer groups—cities, neighborhoods, and even specific stores. The drawbacks include that it can drive up manufacturing and marketing costs, and create logistics problems as companies try to meet the varied requirements of the different markets. A brand’s image may also be diluted and the message could vary too much. But local market does help a company market more effectively to different segments.
Micromarketing becomes individual marketing in the extreme—tailoring products and marketing programs to the needs and preferences of individual customers. Mass customization is the process through which firms interact one-on-one with masses of customers to design products and services made specifically to individual needs.
Use Key Terms Micromarketing, Local Marketing, Individual Marketing here.
Use Marketing at Work 6-2 here. Use Application Questions 1 here.
Which strategy to employee depends on company resources.
When the firm’s resources are limited, concentrated marketing makes sense.
Undifferentiated marketing makes sense when product variability is low, such as in steel.
The product’s life-cycle stage must also be considered. When a product is new, undifferentiated marketing might be best. In the mature stage, differentiated marketing could work better.
Product variability needs to be considered, as should competitors’ strategies.
Socially Responsible Target Marketing
Target marketing sometimes generates controversy and concern. Issues usually involve the targeting of vulnerable or disadvantaged consumers with controversial or potentially harmful products. Problems arise when marketing adult products to kids, whether intentionally or unintentionally.
The growth of the Internet and other carefully targeted direct media has raised concerns about potential targeting abuses.
The issue is not so much who is targeted, but how and for what. Controversies arise when marketers attempt to profit when they unfairly target vulnerable segments or target them with questionable products or tactics.
Socially responsible marketing calls for segmentation and targeting that serve not just the interests of the company, but also the interests of those targeted.
Use Speed Bump: Linking the Concepts here.
Use Focus on Ethics here.
Positioning for Competitive Advantage
A product’s position is the way the product is defined by the consumers on important attributes; it is the place the product occupies in consumers’ minds relative to competing products. It involves implanting the brand’s unique benefits and differentiation in customers’ minds.
To simplify the buying process, consumers organize products, services, and companies into categories and “position” them in their minds. A product’s position is a complex set of perceptions, impressions, and feelings that consumers have for the product compared with competing products.
Consumers will position products with or without the help of marketers. So marketers must plan positions that will give their products the greatest advantage in selected target markets, and then must design marketing mixes to create these planned positions.
Use Key Terms Competitive Advantage, Market Positioning here.
Use Chapter Objectives 4 here.
Positioning Maps
Perceptual positioning maps show consumer perceptions of their brands versus competing products on important buying dimensions. Figure 6-3 shows a positioning map for the . large luxury sport utility vehicle market.
Use Figure 6-3 here.
Choosing a Positioning Strategy
Each firm must differentiate its offer by building a unique bundle of benefits that appeals to a substantial group within the segment.
The positioning task has three steps: identifying a set of possible competitive advantages; choosing the right competitive advantages; and selecting an overall positioning strategy. The company then needs to communicate and deliver the chosen position to the market.
Positioning begins with actually differentiating the company’s marketing offer so that it will give consumers more value than competitors’ offers do. A company or market offer can be differ-entiated by product, services, channels, people, or image.
Product differentiation takes place along a continuum. At one extreme are products that vary little, while at the other extreme they are highly differentiated on features, per-formance, or style and design.
Services differentiation can be done through speedy, convenient, or careful delivery. Installation can also differentiate a company, as can repair services. Other possibilities include training service or consulting services.
Channel differentiation can help a company gain com-petitive advantage through coverage, expertise, and per-formance.
A company can differentiate on people—hiring and training people better than their competitors do.
A company can also differentiate on image. The chosen symbols, characters, and other image elements must be communicated through advertising that conveys the com-pany’s or brand’s personality.
Use Discussing the Issues 5 here.
Let’s Discuss This
What sort of differentiation does Jiffy Lube use? A major accounting firm, such as Ernst & Young?
The company must decide how many differences to promote and which ones.
Some marketers believe that the best strategy is to promote only one unique advantage, which can be called the unique selling proposition.
Other marketers believe that companies should position themselves on more than one attribute, particularly if one or more companies are claiming to be best on the same attribute.
Not all brand preferences are meaningful or worthwhile. The company must carefully select which differences are worth promoting.
It should be important and deliver a highly valued benefit to target buyers.
It should be distinctive such that competitors do not offer the difference.
It should be superior, so that consumers cannot obtain the benefit elsewhere.
It should be communicable and visible to buyers.
It should be preemptive, so that competitors cannot easily copy it.
It should be affordable.
It should be profitable.
Consumers typically choose products and services that give them the greatest value. The full positioning of a brand is called the brand’s value proposition—the full mix of benefits upon which the brand is positioned.
Use Key Terms Value Proposition, Product Position here.
Use Application Questions 2 and 3 here.
Figure 6-4 shows possible value propositions with which a company might position its products.
“More for more” positioning involves providing the most upscale product or service and charging a higher price to cover the higher costs.
“More for the same” positioning introduces a brand offering comparable quality but at a lower price.
“The same for less” offers good deals to customers.
“Less for much less” positioning involves meeting consumers’ lower performance or quality require-ments at a much lower price.
“More for less” is often claimed by companies, and in the short run, companies can often make this work. But in the long run, offering more usually costs more, so it is difficult to deliver on this promise.
Use Figure 6-4 here.
Use Marketing at Work 6-3 here. Use Discussing the Issues 6 here.
Company and brand positioning should be summed up in a positioning statement. This statement should follow the form of “To (target segment and need) our (brand) is (concept) that (point of difference).” The statement first puts the product in a category and then shows the point of difference from other members in the category.
Use Key Term Positioning Statement here.
Communicating and Delivering the Chosen Position
When a company has chosen a position, it must take strong steps to deliver and communicate the desired position to target consumers.
All the company’s marketing mix efforts must support the positioning strategy.
Designing the marketing mix—product, place, price, and promotion—involves working out the tactical details of the positioning strategy.
Companies often find it easier to come up with a good positioning strategy than to implement it. Establishing a position or changing one usually takes a long time. However, positions that took years to build can be lost easily. A company must take care to maintain the position through consistent performance and communication.
Travel Log
Discussing the Issues
What are the differences between mass marketing, segment marketing, niche marketing, and micromarketing? Discuss actual products that use each of these market segmentation levels.
In mass marketing, a firm ignores market segment differences and targets the whole market with one offer. In segmented marketing, a firm targets several market segments and designs separate offers for each. In niche marketing, instead of going after a small share of a large market, the firm goes after a large share of one or a few segments or niches. Niches are smaller and may attract only one or a few competitors. Micromarketing is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations.
For each of these three products—DVD player, shoes, and salsa—consider each of the segmentation variables listed in Table 6-1 and assess the degree to which it is useful to segment the market for the product based on that variable.
Student responses will vary for this question. Instructors can use this question as an opportunity to highlight the large number of ways a market can be segmented, as well as how some segmentation variables make more sense than others depending upon the product being sold.
Describe the student market segments for your university. To what extent are these segments measurable, accessible, substantial, differentiable, and actionable?
Students may come up with a variety of responses based on class rank (freshman, sophomore, etc.), housing status (on-campus, off-campus, fraternity house, etc.), nationality, race, and gender. This question can also be extended to have students think about potential students for their school (., promoting the school to those graduating from high school and other less traditional students).
The George Foreman Grill is a compact cooking appliance with a double-sided cooking surface that is angled to allow fat to drip off the food and out of the grill. Describe a likely target market for this product. How does this target market rate with respect to size, growth, and structural attractiveness.
Student responses will vary but may include markets described in terms of segmentation variables linked to a desire for convenience and more healthy food. Students may be reluctant to estimate the size and other characteristics of the market. As such, instructors may choose to have them discuss how they would acquire such information instead.
Discuss how Mountain Dew has differentiated itself from other soft drink brands on the basis of product, services, channels, people, and image differentiation.
Student responses to this question will vary. Instructors can use this question to highlight points of differentiation through the customer’s entire experience with the company’s product or service. Extend this question by having students consider the sustainability of each point of differentiation.
Study Figure 6-4. Give examples of a hotel chain that falls into each of the five value propositions. What does each hotel you selected do on the benefits dimension to offer more, the same, or less than competitors?
Instructors may choose to build on this question by having students consider the market each hotel chain is targeting with its offer and what a hotel would need to do in terms of the marketing mix variables in order to change to a new position on the figure.
Application Questions
One direction Levi’s has gone in personalizing the shopping experience is to allow the use of a virtual model to try on clothing at the company’s website (). Visitors can even customize the model to look more like themselves (or what they wish they looked like) and save this representation for future visits. Visit the company website and virtually try on some of the clothing in the “fitting room.” What do you think of this experience? How does this feature fit with the notion of individual marketing? Do you feel that the virtual fitting room differentiates the Levi brand from other clothing companies?
Student responses will vary based on their own attitudes toward this feature. Instructors can use this variability to set up a debate about why this is a good tool for Levi versus why it is not important. Instructors might have students consider the factors that make some people like this and others dislike it or be ambivalent toward it.
Pick five different brands of deodorant. Based on your own perception, rate each one on the attributes of scent, price, and odor protection (use a 1 to 10 scale with 1 being low and 10 being high). Pick two of the attributes and plot your ratings of each brand. How are the brands different and similar to each other? Are there any areas on the graph that are void of competitors? Do these represent an opportunity for a deodorant manufacturer?
Instructors may desire to provide an example of a two-dimensional product positioning map prior to this question being assigned. Voids on the map can indicate market opportunities, but also areas where no consumer demand exists or areas that are not technologically feasible.
Cable television news organizations have become more popular in recent years as consumers have started to expect and demand news coverage 24 hours a day, seven days a week. Spend some time watching CNN, MSNBC, and Fox News. List the ways each news program tries to differentiate itself from the others. Evaluate the worthiness of their differentiation strategies using the following criteria: important, distinctive, communicable, preemptive, affordable, and profitable.
This project can make an interesting group exercise where groups perform the task and then present it to the class. Each group will be responsible for the same task, yet their insights and the things they pick up on as differentiating features will vary. Discussion can then occur in class as to how the points of differentiation should be rated on the criteria.
Under the Hood/Focus on Technology
Birds of a feather flock together. This is the philosophy behind Claritas’s Prizm lifestyle segmentation system. Operating under the presumption that people with similar lifestyles tend to live near each other, Claritas has classified neighborhoods into one of 62 categories based on census data, consumer surveys, and other public and private sources of demographic and consumer information. Companies use this geodemographic infor-mation to understand and target customers better, to develop the content for adver-tisements, to decide the specific media in which to place ads, to help decide where to put new stores, and to decide what kind of merchandise should go in those stores.
Claritas offers a limited version of the Prizm segmentation on their website at . Visit this website and respond to the following questions.
Enter your zip code into the Prizm website and read about the descriptions of the different customer segments. Do you think it accurately describes your area?
Responses will vary for this question. Students might also be asked to assess the category they belong to.
What are some products that might be successfully targeted at the most popular market segment in your area?
This question encourages students to think practically about the uses companies might have for geodemographic information. Students can be asked what other information they would want before proceeding to target particular segments.
How might a business selling Caribbean cruises be able to use the Claritas PRIZM segmentation tool?
A business might develop a profile of cruisers and then use PRIZM to send promotional material to the geographic areas that have heavy concentrations of people with that profile. Alternatively, they may have a particular geographic area in mind and use PRIZM to understand the types of consumers in the area and design promotional materials appropriate for those groups.
Focus on Ethics
Many companies consider children an attractive market segment due to their spending power. A strategy in some middle schools and high schools is to develop exclusive “pouring rights” contracts with soft drink companies, which allow the company to be the exclusive soft drink sold on campus in exchange for payments equaling hundreds of thousands of dollars. Pepsi and Coca-Cola have led this charge in recent years, encouraged by school districts in desperate need of additional funding. However, some parents feel that soft drinks are an unhealthy beverage alternative and have lobbied to have soft drinks removed from campuses. Indeed, the nation’s two largest school districts—New York and Los Angeles—have banned soft-drink sales.
Why do you think soft drink companies would pay such large sums for exclusive access to middle school and high school campuses? How might the controversy damage the image of the soft drink manufacturers?
Student opinions will vary on this issue. Negative media coverage over pouring right controversies may damage the image of soft drink manufacturers.
In your mind, are there any ethical issues associated with this practice?
Students should be encouraged to think about other products (., candy, potato chips, etc.) that might also be sold exclusively on high school campuses and where they would draw the line on the selling of such products.
What sort of compromise might be worked out between supporters and opponents to this practice?
Currently, some soft drink machines are available only limited hours on campuses. In others, a certain number of “slots” are reserved for juice and water products (to offer a healthier alternative to soda).
Great Ideas
Barriers to Effective Learning
Understanding the concept of a market segment can be very difficult for students. Working through breaking down a market, such as for their own university, into separate groups can help tremendously, as can drawing a big box on the board, and then breaking the box down into separate sections to represent pieces of a larger market.
Also difficult to understand is the concept that there is no one, single way to segment a market. Students will often point out that companies segment on a single variable frequently, not understanding that the concept is much broader than that. Using a simple pen as an example, you can point out the various segmentation variables, such as income, occasion (such as graduations), and lifestyle that a pen manufacturer could study to determine effective segments. While Mont Blanc might segment based on income and occasion factors, Bic could very well look at lifestyle or even age.
Segmenting business markets could also pose some problems, particularly in the discussion of operating characteristics and purchasing styles. Contrasting large corporations with small, local enterprises could help here, as can asking the students about their parents’ business lives and any responsibility they might have in purchasing goods and services for the firms they work for.
If anyone knows anything about target marketing before coming to class, they will think of it as simply selling to one type of customer. But most students will never have heard this concept, either. Use the “box” principle in #1 on the previous page; showing how a company could choose one or more of the sections to address will help in students’ understanding. This can also be expanded to show how companies might move from focusing on one target segment to moving along to another when penetration of the first has been accomplished, even though this goes beyond the scope of this textbook.
Development of a positioning statement is also a difficult concept. It requires students to boil down a company’s strategy into one sentence, which can be quite tricky. Going through the examples in the book, and then applying them to something within the students’ sphere of knowledge (books, soft drinks, breakfast foods, coffee, etc.) can enrich the explanations in the text.
Student Projects
There are many ways to segment a market. Using the four segmentation variables shown in Table 6-1, discuss which variables would be most important for segmenting (a) Internet users, (b) drivers of a proposed new sports car, and (c) the adult student who returns to college to get an undergraduate degree. Explain your choices.
Collect advertisements that demonstrate the positioning of different automobile brands. Sort the various brands into categories of brands with similar positions.
How might a medium-sized bank determine the major market targets it serves?
Develop a positioning statement for your university.
Classroom Exercise/Homework Assignment
Need help with your financial planning? Software maker Intuit (see ) probably has a product just for you. The company’s Quicken (financial planning software) and TurboTax (the number-one income tax preparation software) have given Intuit a strong position in the rapidly growing financial planning and services market. Assuming that the company would like to expand, which of the market-coverage strategies shown in Figure 6-2 would you suggest? Explain how the strategy you’ve chosen would help the company to meet strong competitive challenges from Microsoft and other software makers.
The three market coverage strategies described in the text are undifferentiated marketing, differentiated marketing, and concentrated marketing. This question is designed to get the student to apply information provided by the text. Students should be encouraged to examine contemporary business magazines for illus-trations of how these strategies may or may not be applied to Intuit or other competitive organizations.
Because this is an action-oriented project, students may pursue any one of the three market-coverage strategies. However, some prompting by the instructor is encouraged. If the instructor believes this project to be too lengthy, but still wants to examine the three market-coverage strategies, try using any of the other examples provided. Note, most students will probably pick the concentrated strategy form, however, with probing, the other two may also be applicable.
An additional example to use for the undifferentiated marketing strategy might be Morton’s Salt. Examples in this category are difficult to find because few firms use this strategy alone. The best examples that students will probably find are something close—like Morton’s Salt or Hershey’s (even though they do not exactly fit).
Examples of companies that follow the differentiated marketing strategy abound. Most students can refer to athletic shoe companies, jeans companies, computer companies, or automobile companies. Be sure to ask them how they differentiate their products. It might also be a useful exercise to have the students go to their selected companies’ websites and explore the differentiation that might be present on these sites.
Examples of companies that follow the concentrated marketing strategy are also common. Most students can refer to fast-food businesses, certain breweries, wine producers, and cosmetic companies. Be sure to ask students how they can determine whether a company is using the concentrated versus the differentiated approach. Ask students to bring advertisements to class that would demonstrate these directions and differences.
Classroom Management Strategies
Most students will still be thinking, even at this point in the semester, that marketing is all about getting everyone to buy your product. This chapter will set them straight. It uses three sections to discuss the three important topics of segmentation, targeting, and positioning.
Divide this chapter up equally. Spend about 20 minutes on market segmentation, with the majority of that time spent on segmenting consumer markets. Students will understand geographic and demographic segmentation fairly quickly, but benefit and occasion segmentation will take a little more time. Business and international markets can be covered fairly quickly.
Target marketing should also take about 20 minutes. It is important for the students to grasp that once they’ve divided the market, they then need to decide which of those segments to address. Evaluating and selecting segments to target should be the primary topics in this section.
Finally, positioning should take the remainder of the class. Discussing a brand you are especially loyal to, and so can speak about it emotionally, often helps the students realize the importance of positioning, and also how dependent positioning is on the responses of the consumer to the product itself as well as the messaging about the product.
Chapter 7
Product, Services, and Branding Strategy
Previewing the Concepts—Chapter Objectives
Define product and the major classifications of products and services.
Describe the roles of product and service branding, packaging, labeling, and product support services.
Explain the decisions companies make when developing product lines and mixes.
Identify the four characteristics that affect the marketing of a service.
Discuss the additional marketing considerations that services require.
Just the Basics
Chapter Overview
In many ways, this chapter provides the information required to truly understand marketing. It focuses on the definition of what products and services are, and it provides details about branding.
After defining what a product is, the chapter goes on to detail the necessary attributes of products and services, as well as the branding, packaging, labeling, and product support decisions that marketers must make. There is information regarding product line and product mix decisions, and how to effectively manage both.
The section on branding provides a description of brand equity and the steps a company can take to build strong brands. Brand decisions such as positioning, name selection, sponsorship, and brand development are illustrated through use of examples.
Services marketing is differentiated from product marketing in that services are intangible, inseparable from the provider, highly variable, and perishable. Because of this, services marketers face additional challenges that product marketers do not. The service-profit chain, which links service firm profits with employee and customer satisfaction, has five key links that include internal service quality; satisfied and productive service employees; greater service value; satisfied and loyal customers; and healthy service profits and growth.
Finally, the social issues that affect product decisions are detailed, as well as the requirements for international product and services marketing.
Chapter Outline
Introduction
Cosmetics companies sell billions of dollars’ worth of potions, lotions, and fragrances to consumers around the world. In one sense, these products are no more than mixtures of oils and chemicals, but cosmetics companies know they sell much more than a mixture of ingredients—they sell promises to the people who use them.
The success of cosmetics brands affirms that products really are more than physical items. The cosmetic’s image, promises and positioning, ingre-dients, name and package, the company that makes it, the stores that sell it —all become part of the total product.
This chapter looks at the question What is a product? and then classifies products into consumer and business markets.
Use Key Terms Product, Brand here.
Use Chapter Objectives 1 here.
What is a product?
A product is defined as anything that can be offered to a market for attention, acquisition, use, or consumption that might satisfy a need or a want. Broadly defined, products include physical objects, services, events, persons, places, organizations, ideas, or mixes of these entities.
Services are a form of product that consist of activities, benefits, or satisfactions offered for sale that are essentially intangible and do not result in the ownership of anything.
Use Key Term Service here.
Products, Services, and Experiences
Product is a key element in the market offering. Marketing-mix planning begins with formulating an offering that brings value to target customers and satisfies their needs.
A company’s marketing offer can provide both tangible goods and services. At one extreme, the offer may consist of a pure tangible good, while at the other extreme are pure services. Many goods and services combinations are available between these two extremes.
Let’s Discuss This
Soap is an example of a pure tangible good; no soap manufacturer offers any services to go along with hand soap. A doctor’s visit is a pure service. Discuss several offers that are a combination of products and services.
Many companies are looking to deliver memorable experiences to differentiate their products and services. Whereas products and services are external, experiences are personal and take place in the minds of individual consumers. Companies that market experiences realize that consumers are really buying what the offers will do for them, not just the products and services themselves.
Use Marketing at Work 7-1 here.
Levels of Products and Services
Products and services should be thought of on three levels (see Figure 7-1). Each level adds more customer value.
The most basic level is the core benefit, which addresses what the consumer is really buying. It defines the core, problem-solving benefits or services that consumers seek.
The second level is where the core benefit is turned into an actual product. The product’s actual features, design, quality level, brand name, and packaging are developed.
The third level is the augmented product, which brings in additional consumer services and benefits around the core benefits and actual product.
Use Figure 7-1 here.
Product and Service Classifications
Products and services fall into two broad classes based on the types of consumers that use them: consumer products and industrial products.
Consumer products are bought by final consumers for personal con-sumption; they are generally classified by how consumers go about buying them.
Convenience products are consumer products and services that the customer usually buys frequently, immediately, and with a mini-mum of comparison and buying effort. Convenience products are generally low priced, and marketers place them in many locations to make them readily available when customers need them.
Shopping products are less frequently purchased. Customers carefully compare them on suitability, quality, price, and style. Consumers spend much more time and effort in gathering information and making comparisons. Shopping products are usually distributed through fewer outlets, but marketers provide deeper sales support to help customers in their comparison efforts.
Specialty products have unique characteristics or brand iden-tification for which a significant group of buyers is willing to make a special purchase effort. Buyers do not normally compare specialty products. They invest the time needed to reach dealers carrying these products, but no more.
Unsought products are consumer products that the consumer does not know about or knows about but does not normally think of buying. Most major innovations are unsought until the consumer becomes aware of them, but the classic example of this type of product is insurance. Unsought products require a lot of adver-tising, personal selling, and other marketing efforts.
Use Key Terms Consumer Product, Convenience Product, Shopping Product, Specialty Product, and Unsought Product here.
Use Table 7-1 here.
Industrial products are those purchased for further processing or for use in conducting a business. There are three groups of industrial products and services.
Materials and parts include raw materials and manufactured materials and parts.
Capital items are industrial products that aid in a buyer’s production or operations, including installations and accessory equipment.
Supplies and services include operating supplies and repair and maintenance items. These are generally considered the conve-nience products of the industrial field.
Use Key Term Industrial Product here.
Organizations also carry out activities to sell the organization itself. Organization marketing consists of activities undertaken to create, maintain, or change the attitudes and behavior of target consumers toward an organization. Both profit and not-for-profit organizations market them-selves. Corporate image advertising is a major tool companies use to market themselves to various publics.
Person marketing consists of activities undertaken to create, maintain, or change attitudes or behavior toward particular people.
Place marketing involves activities undertaken to create, maintain, or change attitudes or behavior toward particular places.
Ideas can also be marketed. This area has been called social marketing, which is defined as the use of commercial marketing concepts and tools in programs designed to influence individuals’ behavior to improve their well-being and that of society.
Use Key Term Social Marketing here.
Use Marketing at Work 7-2 here.
Product and Service Decisions
There are three levels of decision making for products and services: individual decisions, product line decisions, and product mix decisions.
Individual Product and Service Decisions
Product benefits are communicated and delivered by product attributes such as quality, features, and style and design.
Use Figure 7-2 here.
Product quality is one of the marketer’s major positioning tools. In the narrowest sense, quality can be defined as “freedom from defects,” but most companies define quality in terms of customer satisfaction.
Total quality management (TQM) is an approach in which all the company’s people are involved in constantly improving the quality of products, services, and business processes. This approach has recently drawn some criticism, because too many companies viewed TQM as a cure-all and created token total quality programs that applied the principles superficially.
Today, many companies are using a “return on quality” approach, viewing quality as an investment and holding quality efforts accountable for bottom-line results.
Product quality has two dimensions: level and consistency. The quality level means performance quality or the ability of a product to perform its functions. Quality consistency means freedom from defects and consistency in delivering a targeted level of performance.
Use Key Term Product Quality here.
A product can be offered with varying features. Features are a competitive tool for differentiating the company’s product from competitors’ products.
The company should periodically survey buyers who have used the product to ask How do you like the product? Which specific features of the product do you like most? Which features could we add to improve the product? The company can then assess each feature’s value to customers versus its cost to the company.
A way to add value is through distinctive product style and design.
Style describes the appearance of a product.
Design goes to the heart of a product. Good design contributes to a product’s usefulness as well as its looks.
Good style and design can attract attention, improve product performance, cut production costs, and give the product a strong competitive advantage.
Applying the Concept
Over the last several years, cell phones have evolved from being quite large and clunky to being extremely small. Discuss how these style and design changes have benefited consumers. Do you think the penetration of this kind of technology was accelerated because of these changes?
A brand is a name, term, sign, symbol, or design, or a combination of these, that identifies the maker or seller of a product or service. Consumers view brands as an important part of the product.
Branding helps buyers by identifying products that might help them, and it also tells them something about product quality.
Branding helps sellers also. The brand name becomes the basis on which a whole story can be built about a product’s special qualities. The brand name and trademark can provide legal protection for unique product features that otherwise might be copied by competitors.
Packaging involves designing and producing the container or wrapper for a product. The package includes a product’s primary container, and may include a secondary package that is thrown away when the product is about to be used. There can also be a shipping package, and labeling is also part of packaging.
Many factors have made packaging an important marketing tool. Clutter on retail shelves means that packages must now perform sales tasks such as attracting attention, describing the product, and making the sale.
Poorly designed packages can create problems for consumers and lost sales for the company.
The packaging concept states what the package should be or do for the product. Then decisions need to be made on specific elements of the package, such as size, shape, materials, color, text, and brand mark.
Product safety has also become a major packaging concern. Many companies have also reduced their packaging and begun using environmentally responsible materials.
Use Key Term Packaging here.
Use Marketing at Work 7-3 here.
Use Discussing the Issues 2 here.
Labels can range from simple tags to complex graphics that are part of the package. Labels identify the product or brand; they could describe several things about the product; and they might promote the product through attractive graphics.
Several federal and state laws regulate labeling. One act requires that labels include unit pricing, open dating, and nutritional labeling. Others set mandatory labeling requirements and allow federal agencies to set packaging regulations in specific industries.
Customer service is another element of product strategy. A company usually includes some support services in its offer.
Again, the first step is to survey customers periodically to assess the value of current services and to obtain ideas for new ones.
The company then has to assess the cost of providing these services.
Many companies are using a mix of phone, email, fax, Internet, and interactive voice and data technologies to provide support services.
Use Chapter Objectives 2 here.
Product Line Decisions
A product line is a group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges.
Use Key Term Product Line here.
The major product line decisions involve product line length, which is the number of items in the product line.
The line is too short if the manager can increase profits by adding items. The line is too long if the manager can increase profits by dropping items.
The length of the product line is influenced by the company’s objectives and resources.
A company can lengthen its product line by either line stretching or by line filling.
Line stretching occurs when a company lengthens its product line beyond its current range. The line can be stretched downward, upward, or both ways.
Product line filling is the process of adding more items within the present range of the line.
Product Mix Decisions
A product mix (or product assortment) consists of all the product lines and items that a particular seller offers for sale.
Use Key Term Product Mix (or Product Assortment) here.
Use Chapter Objectives 3 here.
A company’s product mix has four important dimensions: width, length, depth, and consistency.
Product mix width refers to the number of different product lines the company carries.
Product mix length refers to the total number of items the company carries within its product lines.
Product mix depth refers to the number of versions offered of each product in the line.
Product mix consistency refers to how closely related the various product lines are in end use, production requirements, distribution channels, or some other way.
The company can increase its business in four ways. It can add new product lines, widening its product mix. It can lengthen its existing product lines to become a more full-line company. It can add more versions of each product and deepen its product mix. Or it can pursue more product line consistency—or less—depending on whether it wants to have a strong reputation in a single field or in several fields.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 3 here.
Use Under the Hood/Focus on Technology here.
Branding Strategy: Building Strong Brands
Some analysts see branding as the major enduring asset of a company, outlasting the company’s specific products and facilities. Thus, brands are powerful assets that must be carefully developed and managed.
Brand Equity
Brands represent consumers’ perceptions and feelings about a product and its performance—everything that the product or service means to consumers. Brands exist in the minds of consumers.
Brand equity is the positive differential effect that knowing the brand name has on customer response to a product or service. A measure of a brand’s equity is the extent to which customers are willing to pay more for the brand.
Use Key Term Brand Equity here.
Use Discussing the Issues 1 here.
A brand with strong brand equity is a valuable asset. Brand valuation is the process of estimating the total financial value of a brand. Measuring value is difficult.
A powerful brand enjoys a high level of consumer brand awareness and loyalty. Because consumers expect stores to carry the brand, the company has more leverage in bargaining with resellers.
A powerful brand forms the basis for building strong and profitable customer relationships. The fundamental asset underlying brand equity is customer equity—the value of the customer relationships that the brand creates. What a powerful brand represents is a set of loyal customers.
Building Strong Brands
Figure 7-3 shows that the major brand strategy decisions involve brand positioning, brand name selection, brand sponsorship, and brand development.
Use Figure 7-3 here.
Marketers need to position their brands clearly in target customers’ minds. You can position brands at any of three levels.
The lowest level is positioning the brand on product attributes. But competitors can easily copy attributes, and customers aren’t interested in attributes as such; they are interested in what the attributes will do for them.
A brand can be positioned by associating its name with a desirable benefit.
The strongest brands are positioned on strong beliefs and values. These brands pack an emotional wallop.
Use Discussing the Issues 4 here.
When positioning a brand, the marketer should establish a mission for the brand and a vision of what that brand must be and do. A brand is the company’s promise to deliver a specific set of features, benefits, services, and experiences consistently to the buyers.
A good brand name adds greatly to a product’s success. Desirable qualities for a brand name include the following:
It should suggest something about the product’s benefits and qualities.
It should be easy to pronounce, recognize, and remember.
It should be distinctive.
It should be extendable.
It should translate easily into foreign languages.
It should be capable of registration and legal protection.
Use Application Questions 2 here.
A manufacturer has four sponsorship options, including: launching a manufacturer’s or national brand; selling to a reseller who gives it a private brand (also called store brand or distributor brand); licensing a brand; or joining forces with another company and co-brand.
Manufacturer’s brands have long dominated in retail, but an increasing number of retailers and wholesalers have created their own private brands.
Private brands can be hard to establish and costly to stock and promote, however they also yield higher profit margins for the retailer.
Let’s Discuss This
How many different brands is Sears known for? Name as many private brands that Sears uses as you can.
Most retailers charge manufacturers’ slotting fees, which are payments demanded by retailers before they will accept new products and find “slots” for them on the shelves.
Taken as a single brand, private-label products are the number one, two, or three brand in more than 40% of all grocery product categories. They capture more than a 20% share of sales in . supermarkets, drug chains, and mass merchandise stores. Private-label apparel captures a 35% share of all . apparel sales.
Use Key Term Private Brand (or Store Brand) here.
Use Discussing the Issues 5 here.
Some companies license names or symbols previously created by other manufacturers, names of well-known celebrities, or char-acters from popular movies and books.
Name and character licensing has grown rapidly. Annual retail sales of licensed products in the United States and Canada have grown from only $4 billion in 1977 to $55 billion in 1987 and more than $71 billion today.
Co-branding occurs when two established brands of different companies are used on the same product. In most co-branding situations, one company licenses another company’s well-known brand to use in combination with its own.
Co-branding has many advantages. The combined brands create broader consumer appeal and greater brand equity. Co-branding allows a company to expand its existing brand into a category it might otherwise have difficulty entering alone.
Co-branding also has limitations, which usually involve complex legal contracts and licenses. Co-branding partners must carefully coordinate their advertising, sales promo-tion, and other marketing efforts. Each partner must trust the other will take good care of its brand.
Use Key Term Co-branding here.
A company has four choices when it comes to developing brands (see Figure 7-4). It can introduce line extensions, brand extensions, multibrands, or new brands.
Use Figure 7-4 here.
Line extensions occur when a company introduces additional items in a given product category under the same brand name, such as new flavors, forms, colors, ingre-dients, or package sizes.
The vast majority of all new-product activity consists of line extensions.
A company could introduce line extensions as a low-cost, low-risk way to introduce new products. Or it might want to meet consumer needs for variety, to use excess capacity, or simply to command more shelf space from resellers.
Line extensions involve some risks. An over-extended brand name might lose its specific meaning, or heavily extended brands can cause customer confusion or frustration. Sales of an extension could come at the expense of other items in the line.
A brand extension involves the use of a successful brand name to launch new or modified products in a new category.
A brand extension gives a new product instant recognition and faster acceptance.
But the extension may confuse the image of the main brand. If a brand extension fails, it may harm attitudes toward the other products carrying the same brand name.
Use Application Questions 1 here.
Multibranding offers a way to establish different features and appeal to different buying motives.
A major drawback of multibranding is that each brand might obtain only a small market share, and none may be very profitable. The company may end up spreading its resources over many brands instead of building a few brands to a highly profitable level.
New brands can be created when a company believes that the power of its existing brand name is waning, thus a new one is needed. Or a company can create a new brand name when it enters a new product category for which none of the company’s current brand names is appropriate.
Offering too many brands can result in a company spreading its resources too thin.
Use Key Terms Line Extension, Brand Extension here.
Managing Brands
Companies must carefully manage their brands.
Customers come to know a brand through a wide range of contacts and touchpoints. These include advertising, but also personal experience with the brand, word of mouth, personal interactions with company people, telephone interactions, company web pages, and many others. Any of these experiences can have a positive or negative impact on brand perceptions and feelings.
The brand’s positioning will not take hold fully unless everyone lives the brand. Companies carry on internal brand building to help employees understand, desire, and deliver on the brand promise.
Brand managers do not have enough power or scope to do all the things necessary to build and enhance their brands.
Many companies are appointing brand equity managers to maintain and protect their brands’ images, associations, and quality, and to prevent short-term actions by overeager brand managers from hurting the brand.
Companies need to periodically audit their brands’ strengths and weaknesses. The brand audit may turn up brands that need to be repositioned because of changing customer preferences or new competitors. Some cases may call for a complete “rebranding” of a product, service, or company. However, building a new image and re-educating customers can be a huge undertaking.
Use Focus on Ethics here.
Services Marketing
Service jobs accounted for 55% of all . jobs in 1970, but today they account for 82% of total employment. Services are growing even faster in the world economy, making up a quarter of the value of all international trade.
Service industries include governments, private not-for-profit organi-zations, and businesses that offer services.
Nature and Characteristics of a Service
A company must consider four special service characteristics when designing marketing programs: intangibility, inseparability, variability, and perishability. These characteristics are outlined in Figure 7-5.
Use Figure 7-5 here.
Service intangibility means that services cannot be seen, tasted, felt, heard, or smelled before they are bought. To reduce uncertainty, buyers look for “signals” of service quality, drawing conclusions from the place, people, price, equipment, and communications that they can see.
Service inseparability means that services cannot be separated from their providers, whether the providers are people or machines. Because the customer is also present as the service is produced, provider-customer interaction is a special feature of services marketing.
Service variability means that the quality of services depends on who provides them as well as when, where, and how they are provided.
Service perishability means that services cannot be stored for later sale or use.
Use Key Terms Service Inseparability, Service Intangibility, Service Variability, and Service Perishability here.
Use Chapter Objectives 4 here.
Use Discussing the Issues 6 here.
Marketing Strategies for Service Firms
In a service business, the customer and front-line service employees interact to create the service. Thus, service providers must interact effectively with customers to create superior value during service encounters.
The service-profit chain links service firm profits with employee and customer satisfaction. This chain consists of five links:
Internal service quality.
Satisfied and productive service employees.
Greater service value.
Satisfied and loyal customers.
Healthy service profits and growth.
Use Key Term Service-Profit Chain here.
Use Chapter Objectives 5 here.
Use Marketing at Work 7-4 here.
Figure 7-6 shows that service marketing also requires internal marketing and interactive marketing.
Internal marketing means that the service firm must effectively train and motivate its customer-contact employees and supporting service people to work as a team to provide customer satisfaction. Internal marketing precedes external marketing.
Interactive marketing means that service quality depends heavily on the quality of the buyer-seller interaction during the service encounter.
Use Key Terms Interactive Marketing, Internal Marketing here.
Use Figure 7-6 here.
The solution to price competition is to develop a differentiated offer, delivery, and image.
The offer can include innovative features that set one company’s offer apart from competitors’ offers.
Service companies can differentiate their service delivery by having more able and reliable customer-contact people, by developing a superior physical environment in which the service is delivered, or by designing a superior delivery process.
Service companies can work on differentiating their images through symbols and branding.
One of the major ways a service firm can differentiate itself is by delivering consistently higher quality than its competitors do.
Service quality is harder to define and judge than is product quality. Customer retention is probably the best measure of quality—a service firm’s ability to hang onto its customers depends on how consistently it delivers value to them.
Service quality will always vary, depending on the interactions among employees and customers.
Good service recovery can turn angry customers into loyal ones. In fact, good recovery can win more customer pur-chasing and loyalty than if things had gone well in the first place.
Service firms are under great pressure to increase service productivity.
They can do this by training current employees better or by hiring new ones who will work harder or more skillfully.
Companies must avoid pushing productivity so hard that doing so reduces quality.
Additional Product Considerations
Product Decisions and Social Responsibility
The government may prevent companies from adding products through acquisitions if the effect threatens to lessen competition.
Companies dropping products must be aware that they have legal obligations to their suppliers, dealers, and customers who have a stake in the dropped product.
Manufacturers must comply with specific laws regarding product quality and safety. Product liability suits are now occurring in federal and state courts at the rate of almost 110,000 per year, with a median jury award of $ million and individual awards often running into the tens of millions of dollars.
International Product and Services Marketing
International product and service marketers face special challenges. On the one hand, companies would like to standardize their offerings. This helps a company to develop a consistent worldwide image and lowers manu-facturing costs and eliminates duplication of research and development, advertising, and product design efforts.
On the other hand, consumers around the world differ in their cultures, attitudes, and buying behaviors. And markets vary in their economic conditions, competition, legal requirements, and physical environments. Companies must usually respond to these differences by adapting their product offerings.
Service companies wanting to operate in other countries are not always welcomed with open arms. In some cases, rules and regulations affecting international service firms reflect the host country’s traditions. In others, they appear to protect the country’s own fledgling service industries from large global competitors with greater resources. In still other cases, the restrictions seem to have little purpose other than to make entry difficult for foreign service firms.
Despite such difficulties, the trend toward growth of global service companies will continue.
Use Application Questions 3 here.
Travel Log
Discussing the Issues
Brand equity is the positive differential effect that knowing the brand name has on customer response to the product or service. Name three firms that you feel have high brand equity. How does having high brand equity help them compete against rival companies?
Student responses will vary based on the companies they select. Having strong brand equity means having a high level of consumer brand awareness and loyalty. Consumers expect stores to carry the brand, which gives the company more leverage in bargaining with resellers. Additionally, because the brand name carries high credibility, the company can more easily launch line and brand extensions.
Visit a grocery store and look at the packages for competing products in two or three different product categories. Which packages are the best? Why? What functions do the packages perform?
Instructors should encourage students to think about what makes one package “better” than another. Students can be asked to delve deeper into the topic by thinking about how the packaging for those products with poorly rated packaging could be improved. Packages can perform many functions from storage, to sales tasks—attracting attention, describing the product, and making the sale.
Visit the Kraft Foods company website ( and examine its list of different brands. Evaluate the company’s product mix on the dimensions of width, length, depth, and consistency.
Product mix length refers to the total number of items the company carries within its product lines. Product line depth refers to the number of versions offered of each product in the line. Product mix width refers to the number of different product lines the company carries. Product mix consistency refers to how closely related the various product lines are in end use, production requirements, distribution channels, or some other way.
Consider how Cheerios cereal has been positioned in terms of product attributes, desired benefits, and strong beliefs and values.
Positioning on product attributes for Cheerios would include the crunchy taste and the natural ingredients that make up the cereal. Desired benefit positioning might include the cereal being helpful in lowering cholesterol levels and staying crunchy in milk. The belief and value positioning for Cheerios can play on its long history with themes of nostalgia and tradition.
What issues should a manufacturer of canned green beans consider when deciding between selling the product as a manufacturer’s brand, store brand, licensed brand, or co-branded product?
There are many issues to consider in this decision, among them are the resources they have to promote a manufacturer’s brand, the demand for private label green beans from the retail stores and consumers, the profitability of licensing versus directly selling through private labels or national brands, and the potential partners that they could co-brand with. Students could also be asked about the advantages and disadvantages of these brand sponsorship options.
Discuss how the services offered by a dry cleaning company are different from the products offered by an auto parts store in terms of intangibility, inseparability, variability, and perishability.
The dry cleaner’s services (compared to the auto parts) cannot be seen, tasted, felt, heard, or smelled before they are bought (intangibility); their offering cannot be separated from the people providing the service (inseparability); their quality will depend on who provides the cleaning service as well as when, where, and how it is provided (variability); and finally they cannot build up an inventory and store it for later sale or use (perishability).
Application Questions
Consider the following brand extensions and evaluate how well the brand’s associations fit the new product: Kodak extending from film into batteries, Winnebago motor homes extending into tents, Fisher-Price toys extending into children’s eyeglass frames, Harley-Davidson motorcycles extending into cigarettes, and Dunkin’ Donuts extending into cereal. What about the proposed brand extensions work or do not work for you?
Instructors should focus student attention on how well the original brand’s associations fit the new product. Students should consider what fit means in this context (examples include image fit, usage occasion fit, and ingredient fit).
Develop a list of five characteristics that a good brand name should possess. Come up with three good brand names and three poor brand names of actual products currently sold based on the characteristics in your list. Imagine you are opening up a pizza restaurant. What would be a good name for the restaurant based on the characteristics in your list?
The name for the retail pizza outlet is analogous to brand naming. Good brand names should suggest something about the product’s benefits and qualities; be easy to pronounce, recognize, and remember; be distinctive; be extendable; and should translate easily into foreign languages. All but the last issue are appropriate to consider in naming the pizza restaurant.
Describe a product you feel must be customized or adapted to sell in different markets around the world and one you feel can sell in a standardized format. Discuss what it is about the two products that requires customization in one case, but not in the other. Can you articulate your reasons into general principles a company might use when considering the need to customize?
Issues that students may suggest include the ability of a product in a single form to satisfy consumers in different parts of the world. Products lacking this quality should consider customization. Another issue deals with governmental regulation; if governmental regulations are relatively homogeneous across different countries, then a standardized product is more feasible. Markets vary in their economic conditions, competition, legal requirements, and physical environments. These factors, depending upon the specific product, may suggest customization.
Under the Hood/Focus on Technology
The Hilton hotel’s product mix is represented by nine different hotel brands located around the world. Visit the web pages of three of Hilton’s hotel brands (, , and ) and respond to the following questions.
How are these three hotel brands positioned relative to each other?
Conrad Hotels is positioned as the premiere luxury brand, Hilton is positioned as the middle tier brand, and Hampton Inn is positioned as the low-cost brand.
Discuss Hilton’s various hotel brands with respect to the concepts of product line stretching and product line filling.
Product line stretching occurs when a company lengthens its product line beyond its current range. A company can stretch its line downward, upward, or both ways.
Product line filling is adding more items within the present range of the line. Hilton appears to have used both stretching and filling strategies. In terms of stretching, they appear to have stretched in both directions from the core Hilton property product. Additionally, some of the hotel chains compete with each other and thus the addition of these brands might be considered more of a filling strategy.
Why does Hilton use different brand names for each hotel? Do you agree or disagree with this approach?
Hilton is essentially using a multibranding strategy by offering multiple hotel lines using different names. This aids in being able to uniquely position one brand from the other. As such, different market segments are more easily targeted. A disadvantage is that the other brands are unable to leverage off the good Hilton hotel image.
Focus on Ethics
Companies have an interest in protecting their brand names whether in the physical world or the cyber world. The term cybersquatting has been used to refer to an individual registering a domain name that is identical or confusingly similar to a distinctive, famous trademark. For example, consider the website compared to . Cybersquaters typically did this with the goals of either using the similar web address to bring traffic to their own website or with the hope of selling the domain name back to the company for a substantial profit. Cybersquatting was made illegal in the United States by the 2000 Anti-Cybersquatting Consumer Protection Act. Under this law, individuals who are found to have registered a domain name in “bad faith” are subject to fines up to $100,000 per domain name.
Why should companies care about cybersquatters?
Cybersquatters have the potential to damage a company’s image, or worse, harm its relationship with customers. Brand name development is expensive and should be protected.
Some people feel that domain names should be on a “first come, first served” basis with no company or individual having a claim on unregistered domain names. How do you feel about that perspective?
Student responses will vary. Although some uses are legitimate (., a person whose last name is Ford setting up a “” type of website), those individuals who are just taking the domain name in order to profit from the good name of others seems unethical.
How does protecting one’s brand name in cyberspace compare with trademark protection?
The ideas are actually very similar. Both may require legal action, both require the company to monitor how others use their brand name, and both can have negative consequences for the firm if not protected properly.
Great Ideas
Barriers to Effective Learning
Students will most likely have difficulty understanding the levels of products exhibited in Figure 7-1; no one in class is likely to have thought of a product in that level of detail before. This is a critical piece of information the students will need, however, so it is worthwhile going through several products and services to get at the core benefit, actual product, and augmented product in each so that they can see how to apply this concept.
Many students have trouble with the concepts of product line and product mix. Using examples from Procter & Gamble tends to help tremendously here, because they have very deep product lines and a very varied product mix.
Students’ eyes can glaze over at the concepts of brand equity and brand sponsorship. Asking questions such as the students’ perceptions of well-known brands such as Starbucks, Coke, Nike, and the like will help them understand what brand equity is all about. You can also tie in the discussion of the three levels of product with this idea of brand equity. Finally, by using different products with different brand sponsorships—several examples from Sears, auto companies, department store private labels, and various licensed properties from Disney or Warner Brothers will do—you can bring students to an understanding of this important concept.
The service characteristics of intangibility, inseparability, variability, and perishability are usually picked up fairly easily, but again, various examples from day-to-day life help. For instance, everyone has had to cancel at least one doctor’s appointment in his or her life—that beautifully illustrates the problem of perishability. Girls will understand inseparability by talking about the beauty salons they use. Ask: If the hairdresser you used left, would you easily switch to another person at the salon? Most students today travel heavily, so talking about airline personnel can illustrate service variability. Intangibility is the easiest characteristic to appreciate, as most students will have suffered through having to choose between several universities from whom they’d received acceptances.
Student Projects
In small groups, discuss how you select a restaurant when you want to celebrate a key event. List and explain the core, actual, and augmented service that you would like a chosen restaurant to provide.
List five brand names that exhibit the characteristics listed in the text. List five brand names that violate many or most of these characteristics. Are there any differences in their success in the market?
List three companies each that use manufacturer’s brand sponsorship, private brands, and licensed brands.
Classroom Exercise/Homework Assignment
The ServiceMaster Company wants to keep your lawn the envy of your neighbors, keep your property free of bugs, and your house clean and tidy. Yet very few people have actually heard of ServiceMaster. But almost everyone has heard of many of their brands, including Terminix bug control, Merry Maids housecleaning, and TruGreen ChemLawn lawn service. Go to their website at and review their product and service offerings.
What type of product mix does ServiceMaster offer?
ServiceMaster’s tag line is “Schedule any home service, and leave the work to us.” They have focused on providing any kind of service that will keep your home safe, neat, and clean. Their product mix is fairly broad, yet concentrated.
What is the core product, actual product, and augmented product for TruGreen ChemLawn?
Most suburbanites want a gorgeous lawn that will help them show off their homes to their best advantage. The core product here, then, would be a desire to look good to neighbors. The actual product would be the fertilizers and pest control applied to the lawn. Finally, the augmented product would be the service provided in applying the chemicals and the guarantees the company provides for healthy-looking lawns.
How has ServiceMaster fared in selecting brand names for their products? Do they meet the criteria of suggesting the product’s benefits and qualities, being easy to pronounce, and being distinctive?
Merry Maids certainly meets the criteria. Terminix may or may not; certainly you can see that something might die, but what? TruGreen ChemLawn is a little long for a name (ServiceMaster acquired and then merged these two formerly competing companies), but a consumer would have no doubt about what this division provides. ServiceMaster also provides disaster recovery under this brand name, but very few consumers know about this service, and it can be tough to find on the website. It also doesn’t suggest the product’s benefits or qualities.
Classroom Management Strategies
At this point, the textbook is well on its way to delving deeply into the topics it presented in earlier chapters. This chapter will challenge the students to think more deeply about the concepts of products, services, and branding strategy.
The first major section of this chapter, What Is a Product?, should take 10 minutes. The primary focus should be on the classification of products and services, which will aid in the comprehension of the next section.
Product and Service Decisions should be covered in 20 minutes. The individual product decisions have the most material, and by and large students will never have focused before this on how important such issues as packaging and labeling are. Bringing in several products to discuss these attributes is generally helpful. Students will generally be confused about the product line and product mix decisions, and so a careful discussion of these topics is beneficial.
Branding Strategy should also take 20 minutes. Branding decisions are closely tied in with positioning discussed in the last chapter, but now would also be a good time to cover such areas as naming and sponsorship. Again, confusion can enter the student’s mind regarding line extensions, brand extensions, multibrands, and new brands, so examples of each are very helpful.
Services marketing can be covered in 10 minutes. The special characteristics of services, outlined in Figure 7-5, are very important to understanding the differences between products and services. The service-profit chain seems a difficult concept to students until they work through the fact that each link in the chain leads to the next.
Chapter 8
New-Product Development and Product Life-Cycle Strategies
Previewing the Concepts: Chapter Objectives
Explain how companies find and develop new product ideas.
List and define the steps in the new product development process.
Describe the stages of the product life cycle.
Describe how marketing strategies change during the product’s life cycle.
Just the Basics
Chapter Overview
For companies to succeed, they must be constantly developing new products and services. Even a company as strong in the marketplace as Microsoft must constantly innovate. Firms can either acquire new products through buying a whole company, a patent, or a license to produce a product, or through internal development in their own research and development department.
New product development should be a systematic process; this can lessen the probability of failure. New products fail at an alarming rate—some estimates are as high as 95% of all new products fail. To avoid that fate, companies follow a new product development process, which includes idea generation, idea screening, concept development and testing, marketing strategy development, business analysis, product development, test marketing, and commercialization. As each step is accomplished, a firm go/no go decision is made as to whether to continue. This is done because as each successive stage is passed, new product development costs increase. Therefore, it makes sense to cut the product development process short if it appears the product will not be a success in the marketplace.
All products follow a life cycle. Some go through the cycle quickly, others can take many years. The standard product life cycle (PLC) includes the phases of introduction, growth, maturity, and decline. The PLC concept can describe a product class, a product form, or a brand. Most products are in the mature stage of the PLC.
Chapter Outline
Introduction
Microsoft dominates in the world of computer and Internet software and technology. Its Windows operating system has 97% of the PC market and more than 40% of the business server market. Microsoft Office has a 90% share in office applications suites.
These and other products have made Microsoft very profitable. But Microsoft knows that its future depends on its ability to conquer new markets with innovative new products. And so it is on a quest to discover tomorrow’s exciting new technologies.
A company has to be good at developing and managing new products. Every product goes through a life cycle—it is born, goes through several phases, and dies as newer products come along.
This product life cycle presents two major challenges: First, because all products eventually decline, a firm must be good at developing new products. This is the challenge of new product development. Second, companies must be good at adapting marketing strategies as products pass through life-cycle stages; this is the challenge of product life-cycle strategies.
New Product Development Strategy
A firm can obtain new products in two ways. One is through acquisition of a whole company, a patent, or a license to produce someone else’s product. The other way is through new product development in the company’s own research and development department.
Use Key Term New Product Development here.
Use Chapter Objectives 1 here.
New products are original products, product improvements, product modifications, and new brands that the firm develops.
New product development is risky. One source estimates that no more than 10% of new products are still on the market and profitable after three years. Failure rates for new industrial products may be as high as 30%.
There are several reasons new products fail. Although an idea may be good, the market size may have been overestimated. The actual product might not have been designed as well as it should have been. The product could be incorrectly positioned in the market. Sometimes the cost of development is higher than expected.
To lower these risks, companies need to set up a systematic new product development process for finding and growing new products. Figure 8-1 shows the eight major steps in this process.
Use Figure 8-1 here.
Use Chapter Objectives 2 here.
Use Discussing the Issues 1 here.
Idea Generation
New product development begins with idea generation, which is a systematic search for new product ideas. A company normally has to generate many ideas in order to find a few good ones.
Use Key Term Idea Generation here.
Major sources of new product ideas include both internal and external sources.
The company can use internal sources to find new ideas through formal research and development. It can get the ideas from executives, scientists, engineers, manufacturing staff, and sales-people.
Good external sources include watching and listening to customers. The company can analyze the questions and complaints of customers to find new products. The company can also have engineers or salespeople meet and work with customers to get suggestions. It can also conduct surveys or focus groups to learn about customer needs and wants. Consumers can often create new products and uses on their own, and sometimes companies can give consumers the resources to design their own products.
Use Marketing at Work 8-1 here.
Use Discussing the Issues 2 here.
Use Under the Hood/Focus on Technology here.
For some products, especially technical ones, customers may not know what they need.
Competitors can be a good source of new product ideas. Companies can watch competitors’ ads to get clues about their products. They can purchase competing products, take them apart, analyze their sales, and decide if they should bring out a new product of their own.
Distributors and suppliers can also contribute new product ideas. Other sources include trade magazines, shows, and seminars, as well as government agencies, new product consultants, advertising agencies, marketing research firms, university and commercial laboratories, and individual inventors.
The search for new products should be systematic. Management can develop an idea management system that directs new ideas to a central point where they can be collected, reviewed, and evaluated.
Applying the Concept
Reread the opening vignette about Microsoft and its new product ideas. How might Microsoft collect product ideas from its customers?
Idea Screening
Idea generation is all about creating a large number of ideas. Idea screening is the first idea-reducing stage. Product development costs rise rapidly in later stages, so companies want to go ahead with only the product ideas that will become profitable.
Use Key Term Idea Screening here.
Concept Development and Testing
An attractive idea should be developed into a product concept. A product concept is a detailed version of the idea stated in meaningful consumer terms.
In concept development, several descriptions of the product are generated to find out how attractive each concept is to customers. From these concepts, the best one is chosen.
Concept testing calls for testing new product concepts with groups of target consumers. The concepts may be presented symbolically or physically. Table 8-1 lists some questions that might be asked of consumers after they have been exposed to the product concept. The answers will help the company decide which concept has the strongest appeal.
Use Key Terms Product Concept, Concept Testing here.
Use Table 8-1 here.
Use Discussing the Issues 3 here.
Use Application Questions 1, 2 here.
Marketing Strategy Development
Marketing strategy development entails designing an initial marketing strategy for introducing the product to the market. It consists of three parts:
The first part describes the target market, the planned product positioning, and the sales, market share, and profit goals for the first few years.
The second part outlines the product’s planned price, distribution, and marketing budget for the first year.
The third part describes the long-run sales, profit goals, and marketing mix strategy.
Use Key Term Marketing Strategy Development here.
Business Analysis
Now the company evaluates the business attractiveness of the proposed product. Business analysis involves a review of the sales, costs, and profit projections for a new product to find out whether they satisfy the company’s objectives.
To estimate sales, the company could look at the sales history of similar products, or conduct surveys of market opinion. It can then estimate the minimum and maximum sales to assess the range of risk.
Use Key Term Business Analysis here.
Product Development
If the product concept passes the business analysis stage, it moves into product development. Here, R&D or engineering develops the product concept into a physical product. There is now a large jump in investment, but this stage will show whether the product idea is workable.
Often, products will undergo rigorous tests to make sure that they perform safely and effectively. Tests might also show if consumers will find value in them.
Use Key Term Product Development here.
Let’s Discuss This
What kind of safety testing might a new baby stroller need to go through? How about a new flashlight? A new telephone?
Test Marketing
This is the stage in which the product and marketing program are introduced into more realistic market settings. Test marketing gives the marketer experience with marketing the product before going to the great expense of a full introduction.
The amount of test marketing varies with each new product.
When introducing a new product requires a big investment, or when management is not sure of the product or marketing program, a company may do a lot of test marketing. Although these costs can be high, they are often small when compared to the costs of making a major mistake.
Use Key Term Test Marketing here.
Commercialization
Commercialization involves introducing the product into the market. The first decision that needs to be made is timing. The second decision involves where to launch the product—a single location, a region, the national market, or the international market. Many companies will develop a planned market rollout.
Use Key Term Commercialization here.
Organizing for New Product Development
Under sequential product development, one company department works individually to complete its stage of the new product development process before passing the new product along to the next department and stage.
This orderly process can help bring control to complex and risky projects. But it can also be very slow.
Use Key Term Sequential Product Development here.
The simultaneous product development (or team-based or collaborative product development) concept can be used to get products to market more quickly.
Company departments work closely together through cross-functional teams, overlapping the steps in the product development process to save time and increase effectiveness.
Teams usually include people from the marketing, financing, design, manufacturing, and legal departments. Sometimes even suppliers and customer companies are involved.
There are some limitations to this approach. Fast product develop-ment can be riskier and more costly than the more orderly process. There can also be increased organizational tension and confusion. The company must also ensure that quality is not sacrificed by rushing a product to market.
But the rewards outweigh the risks. Companies that get new and improved products to the market faster than competitors often gain competitive advantage.
Use Key Term Simultaneous (or Team-based) Product Development here.
Use Marketing at Work 8-2 here.
Use Discussing the Issues 4 here.
Use Speed Bump: Linking the Concepts here.
Use Focus on Ethics here.
Product Life-Cycle Strategies
A typical product life cycle (PLC) is shown in Figure 8-2. It shows the course that a product’s sales and profits take over its lifetime. There are five distinct PLC stages:
Product development begins when the company finds and develops new product ideas. Sales are zero in this stage and the company’s investment costs mount.
Introduction is a period of slow sales growth as the product is introduced into the market. Profits are nonexistent because of the heavy expenses of product introduction.
Growth is a period of rapid market acceptance and increasing profits.
Maturity is a period of slower sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays.
Decline is the period when sales fall off and profits drop.
Use Key Term Product Life Cycle (PLC) here.
Use Figure 8-2 here.
Use Chapter Objectives 3 here.
Not all products follow this product life cycle. Some products are introduced and die quickly, others stay in the mature stage for a very long time. Some can enter the decline stage and then cycle back into the growth stage through strong promotion or repositioning.
The PLC concept can describe a product class, such as gasoline-powered automobiles; a product form, such as SUVs; or a brand, such as the Ford Explorer.
Product classes have the longest life cycles.
Product forms tend to have the standard PLC shape.
The PLC concept can also be applied to styles, fashions, and fads. Their special life cycles are shown in Figure 8-3.
A style is a basic and distinctive mode of expression.
A fashion is a currently accepted or popular style in a given field.
Fads are fashions that enter quickly, are adopted with great zeal, peak early, and decline very quickly. They last only a short time and tend to attract only a limited following.
Use Key Terms Style, Fashion, and Fad here.
Use Figure 8-3 here.
Use Discussing the Issues 5 here.
Using the PLC concept for forecasting product performance or for developing marketing strategies creates some difficulties. Marketers could have trouble identifying which stage of the PLC the product is in, or in pinpointing when the product moves into the next stage. It can also be difficult to determine why the product moves through the stages. Using the PLC concept to development marketing strategy also can be difficult because strategy is both a cause and a result of the product’s life cycle.
Introduction
The introduction stage starts when the new product is first launched.
In this stage, profits are negative or low because of low sales and high distribution and promotion expenses. Promotion spending is relatively high to inform consumers of the new product.
Use Key Term Introduction Stage here.
Growth Stage
If the new product satisfies the market, it will enter a growth stage in which sales will begin climbing quickly. Early adopters will continue to buy, and later buyers will start following their lead.
New competitors will enter the market. This leads to an increase in the number of distribution outlets. Prices remain where they are or fall slightly. Companies keep their promotion spending at the same or a slightly higher level.
Profits increase during the growth stage as promotion costs are spread over a larger volume and as unit manufacturing costs fall.
Use Key Term Growth Stage here.
Maturity Stage
As the product’s sales growth slows down, the product enters a maturity stage. This stage normally lasts longer than the previous stages. Most products are in the maturity stage of the life cycle, and therefore most of marketing management deals with the mature product.
Competitors begin marking down prices while increasing their advertising and sales promotions. They may also up their R&D budgets to find better versions of the product. These steps lead to a drop in profit.
Product managers should consider modifying the market, product, and marketing mix at this point.
In modifying the market, companies try to increase the con-sumption of the current product. It looks for new users and market segments.
The company may also try to modify the product by changing characteristics such as quality, features, or style to attract new users and to inspire more usage. Or the company could add new features to expand the product’s usefulness, safety, or convenience.
The company can modify the marketing mix to improve sales. It can cut prices, launch a better advertising campaign, or use aggressive sales promotions.
Use Key Term Maturity Stage here.
Use Marketing at Work 8-3 here.
Use Speed Bump: Linking the Concepts here.
Use Applications Questions 3 here.
Decline Stage
The sales of most product forms and brands eventually dip. This is the decline stage.
Sales decline for many reasons, including technological advances, shifts in consumer tastes, and increased competition. Some firms will withdraw from the market; others may prune their product offerings.
Marketers could decide to maintain the brand without change in the hope that competitors may leave the industry. Or management may decide to reposition or reformulate the brand in hopes of moving it back into the growth stage of the PLC. Marketers could also decide to harvest the product, which means reducing various costs while hoping that the sales hold up. Or the company could simply drop the product.
Table 8-2 summarizes the key characteristics of each stage of the product life cycle. It also lists the marketing objectives and strategies for each stage.
Use Key Term Decline Stage here.
Use Table 8-2 here.
Use Chapter Objectives 4 here.
Use Discussing the Issues 6 here.
Applying the Concept
Discuss several soft drinks that are on the market today. Define which stage of the PLC you think each is in and why.
Travel Log
Discussing the Issues
Describe some general reasons for why so many new products fail. How can marketing managers use this information in the new product development process?
Several reasons are provided in the text, including: The market size may have been overestimated; the actual product was not designed as well as it should have been; the product was incorrectly positioned in the market; the product is priced too high, advertised poorly, or pushed through despite poor marketing research findings. Also suggested in the text is that the costs of product development may have been higher than expected, and sometimes competitors will fight back harder than expected.
Describe the major internal and external sources of new product ideas. Which source do you think develops the best ideas? Which source delivers the most ideas? Explain your answer.
Internal sources include getting new ideas through formal research and development and also picking the brains of its executives, scientists, engineers, manufacturing staff, and salespeople. External sources include customers, competitors, distributors, and suppliers.
Discuss the difference between the following terms: product idea, product concept, and product image. How are they related to each other?
A product idea is an idea for a possible product that the company can see itself offering to the market. A product concept is a detailed version of the idea stated in meaningful consumer terms. A product image is the way consumers perceive an actual or potential product.
Compare sequential product development to simultaneous product development. What are the advantages and disadvantages of each approach?
With sequential product development, one department works individually to complete its stage of the process before passing the new product along to the next department and stage. This orderly, step-by-step process can help bring control to complex and risky projects, but it has the disadvantage of being slow and risking other firms beating it to market. Simultaneous product development (or team-based or collaborative product development) has departments work closely together through cross-functional teams, overlapping the steps in the product development process to save time and increase effectiveness. Instead of passing the new product from department to department, the company assembles a team of people from various departments that stay with the new product from start to finish.
Describe product classes that you feel represent each stage of the product life cycle. For each product class you came up with, do you think it will progress through all five stages of the product life cycle?
Student responses to this question will vary. It may also be instructive to have students consider this question using product forms and brands instead of product classes.
Explain the difference between maintaining, harvesting, and dropping a brand. Why would a company select one of these strategies over the other in a declining market?
Management may decide to maintain its brand without change in the hope that competitors will leave the industry. Harvesting the product means reducing various costs (plant and equipment, maintenance, R&D, advertising, sales force) and hoping that sales do not drop too much (., the cost savings is greater than the revenue loss). If successful, harvesting will increase the company’s profits in the short run. In dropping the product from the line, a firm will sell it to another firm or simply liquidate it at salvage value. The decision to use one strategy over another should be based on an analysis of profit potential under each scenario.
Application Questions
Develop this new product idea into three different product concepts: a sensor about the size of a quarter that measures ultraviolet rays from the sun and can sound an alarm when exposed to dangerous levels for a sustained time. Which product concept do you think is most viable? Explain your answer.
Student responses will vary. Examples may include a sticker that is applied to a sunbather’s skin to let him or her know when to come out of the sun or a device attached to a window that automatically lowers blinds when dangerous levels of UV rays are entering the window.
Take one of the product concepts you developed in the previous question and conduct a limited concept test by asking 10 people the questions in Table 8-1. The questions will have to be modified for your particular product concept. Summarize and report the results at the next class meeting.
Student responses will vary. An instructor can use this question when he or she would like to provide concept-testing experience to students. As a team assignment, groups of students could work together to develop the questions, collect data, conduct the analysis, and make the presentation.
Discuss a product that you feel has been modified to meet changing consumer needs and thus has been able to stay in the maturity stage of the PLC. What was modified: the market, the product, or the marketing mix? Explain your answer.
Student responses to this question will vary depending on the product they select. A television might be an illustrative example with modifications to size, weight, and picture and audio quality over the years.
Under the Hood/Focus on Technology
Instead of trying to figure out exactly what consumers want, some firms let consumers design their own products. Nike has done just that by allowing consumers to completely design the look and performance of its Air Pegasus 2000 running shoe over the Internet. Consumers can select the outer-sole to best suit the type of surface they run on, the density of the mid-sole for their foot shape, the shoe width, the color for eight different areas of the shoe, and even a personalized name on the heel of the shoe.
Go to and click “create your own shoe” under the “gear” link (note that this feature requires the Macromedia Flash plug-in be installed on your computer—you will be prompted to download this if it is not currently installed). Go through the steps of creating an Air Pegasus 2000 running shoe and then respond to the following questions.
What do you think of the ability to create your own running shoe online? Do you think this capability provides a competitive advantage for Nike over rival running shoe manufacturers?
This can be a competitive advantage to the extent that it is difficult or costly for competitors to emulate it and to the extent that targeted consumers care about the ability to self-design the shoe.
Why doesn’t Nike just select several variations and sell those rather than allow consumers to customize the shoe? Describe the target market most likely to make its own shoes with this process.
The number of variations would be too large. Further, the act of customization may be a large part of what drives the sale, in addition to what the final product is. Technology-savvy customers who have high product involvement for running shoes are the likely market to use this feature.
What disadvantages might there be for Nike in allowing consumers to create their own running shoes? How can those disadvantages be minimized?
Student responses will vary. A couple of disadvantages: Shoe design could be sub-optimal compared to what is currently available. Will the consumer blame himself or Nike for the poorly designed shoes? Production costs are increased due to small batch sizes.
In 2004, Honda will become the first auto manufacturer to sell natural gas–powered cars to the general public. Typically these vehicles have been sold in small fleets to entities, often governmental organizations, which use them for short trips and have the capacity to own their own natural gas refilling locations. That will change as Honda introduces a device that will allow owners to refill their vehicles in their own garages. Honda envisions eventually selling tens of thousands of these natural gas–powered vehicles, mainly as a family’s second vehicle or as a commuter car. Natural gas vehicles cost about 80 percent of what it costs to run gasoline-powered vehicles.
This second “Under the Hood” exercise is provided for students unable to run the Nike site due to a lack of Flash technology being available.
Describe how you would construct a test market for this new product.
Students should discuss issues related to selecting markets with generalizability to the target group, how they will measure the success of the test market, how long it should last, and what will be considered a successful result.
What major activities will Honda need to accomplish to make the commer-cialization phase of this new product launch successful?
Major activities will include building or renting a manufacturing facility, developing distribution networks (or utilizing existing ones while making sure there is enough capacity to handle the added vehicles), pricing the new product, and increasing consumer awareness through promotional activities.
How should Honda position the new natural gas–powered vehicles relative to its traditional line of cars?
Student responses to this question will vary. Instructors should get students to consider how the new vehicle might positively or negatively impact existing products. For example, if positioned as an environmentally friendly car, this implicitly suggests that the gasoline-powered vehicles are not. While probably true in a relative sense, is that the message Honda wants to send?
Focus on Ethics
Beating competitors to the marketplace with a product can result in substantial first-mover advantages for the initial market entrant. At times, this places tremendous pressure on a company’s employees to speed through the product development process as fast as possible. In such cases, skipping or reducing the level of effort placed on stages in the development process (., comprehensive safety testing) may become attractive alternatives for meeting tight timelines. Even the false reporting of outcomes associated with product testing may be encountered when employees are pressured to get a product to market as soon as possible.
What can a company do to ensure that all the necessary product development steps are adequately followed under the pressure of being first to market? What controls might be put in place?
Having standardized procedures in place regarding what specific information is presented and in what level of detail can help to have the same type of information available for different product development processes. The stan-dardized information may make spotting falsified data easier because managers will be used to the type of information available. Also designing the reporting structure of the organization to make sure that those doing the testing are autonomous from the users of the information would serve to eliminate some of the pressure.
Discuss the potential negative consequences of rushing a new product to market.
Perhaps the most important negative consequence is that rushing a new product to market may result in offering a product that is out of step with what the consumer wants and does not offer any advantages over current product offerings.
Great Ideas
Barriers to Effective Learning
Understanding the systematic nature of the new product development process will cause problems for some students. They will have some difficulty understanding why a process is needed at all, and they will also not realize how development costs rise at each and every stage. Finally, the amount of analysis that goes into the screening phases might be a surprise to them. To overcome these barriers, come up with a new product idea in class and review how you might develop it into a viable product.
The commercialization phase of the new product development process could also be somewhat difficult for the students to comprehend. They may not be aware that not all products are launched nationally or globally when first introduced. Some examples of products that are available only regionally—food and drink products frequently are regional—may help them to understand the logistics of launching a new product.
The phases of the product life cycle, and the fact that it can apply to product classes, forms, and brands, can cause some difficulty. Discussing brands that are in each stage helps tremendously, as does discussing products that have successfully moved back from decline into maturity or growth (., Arm & Hammer baking soda).
The differences among fads, fashions, and styles can be explained through asking the students to discuss clothing in those terms. Because these items are routinely discussed in terms of fashions and styles, students can easily internalize the differences in meaning of these terms.
Student Projects
Discuss the purpose for test marketing. What potential problems may complicate test marketing?
Discuss how you would use the Internet to collect new product ideas.
For your favorite soft drink, trace the product life cycle. Do enough research to be able to support your timeline and the stage it is in today.
Classroom Exercise/Homework Assignment
If ever a product class seemed to be in the maturity stage, it would be bottled drinks. They’ve been around for a long time, and it doesn’t seem like there’s much you can do to energize the category. But that’s not the case at all, as evidenced by the success of Snapple brand drinks. Named for a carbonated apple beverage, Snapple has achieved stunning success in its category. And it’s done that by being extremely innovative, developing and launching new products at breakneck speed. Snapple now offers juice drinks, teas, lemonades, and diet drinks. Review to see their innovative marketing techniques as well as a full listing of their products.
Which of Snapple’s types of drinks and flavors would you think are in the mature stage of the product life cycle?
Snapple is constantly bringing new flavors to market. While iced tea as a product class and flavored teas as a product form would both seem to be in a mature stage, the flavors Snapple introduces, such as Kiwi Teawi, keep their brands in the growth stage. The same can be applied to their other drink categories as well, except for lemonades, in which there are only two flavors: traditional lemonade and pink lemonade. These could be considered mature products, and perhaps even in decline.
How is Snapple managing to keep so much of its product line in the growth stage?
Snapple uses innovative marketing techniques that most companies would steer clear of. For instance, when you go to their website, you don’t immediately see a display of their products; instead, you are launched into a make-believe town where you can meet all kinds of interesting characters.
Snapple has made their brand fun. And so they can capture the youth market, which spends the most on bottled drinks. They are also constantly launching new flavors and naming them sometimes-silly names. Again, this keeps the youth crowd returning for more.
How might Snapple generate ideas for new products and flavors?
Snapple gives ample opportunity on its website for customers to write in. They have also run story contests and are in the process (in 2003) of running “yard sales” across the country, where Wendy “The Snapple Lady” will meet and greet you, as well as haggle with you on the price for yard sale items (prices are in numbers of bottle caps). These events gather valuable information for the company on what the consumers like and don’t like.
Student responses can vary as to where Snapple can generate product ideas outside of the website and local events.
Classroom Management Strategies
This is a relatively short chapter, and so you have the luxury of really being able to focus on each section. Still, there is a lot of material to discuss, so effective use of time is important. The majority of class time should be spent on the New Product Development section, with slightly less than half being devoted to Product Life-Cycle Strategies.
An introductory 5 minutes should be spent on the discussion of Microsoft’s product development as an example of why companies need to continually offer new products and services.
Another 5 minutes should be spent discussing the reasons why a systematic new product development process is important, rather than developing products in a haphazard manner. Tie this discussion back to earlier in the term when you talked about marketing strategies, mission statements, and goals and objectives for the company as a whole.
Spend about 35 minutes going through the eight stages of the new product development process. At each phase, using examples from your own and the students’ experience will help tremendously. Having a guest speaker from a company that has developed and launched several products is a unique way of driving home the importance of a systematic process.
Finally, spend 15 minutes discussing the PLC and the marketing strategies that can accompany each stage. Going online and looking at websites for various kinds of products at each of the different stages could make this more interesting for the students, while also providing a more detailed introduction to the meaning of a product life cycle.
Chapter 9
Pricing Considerations and Strategies
Previewing the Concepts: Chapter Objectives
Identify and explain the external and internal factors affecting a firm’s pricing decisions.
Contrast the three general approaches to setting prices.
Describe the major strategies for pricing imitative and new products.
Explain how companies find a set of prices that maximizes the profits from the total product mix.
Discuss how companies adjust their prices to take into account different types of customers and situations.
Discuss the key issues related to initiating and responding to price changes.
Just the Basics
Chapter Overview
Pricing is the second element in the marketing mix. It plays a powerful role, and that role is detailed in this chapter. There are several sections to this chapter and a lot of material to address.
The chapter begins with discussing what a price actually is. It makes the point that price is more than just the money the buyer hands over to the seller—the broader view is that the price is the sum of all the values that the buyer exchanges for obtaining or using the product. There is also a brief discussion of dynamic- versus fixed-price policies, and how we as a society have evolved from dynamic to fixed and back to dynamic again.
The chapter then moves into the heart of pricing. Both internal and external factors that must be considered when setting price are detailed, as are the three general pricing approaches of cost-based pricing, value-based pricing, and competition-based pricing. The new product pricing strategies of market skimming versus market penetration are also discussed.
The chapter then moves into product mix pricing strategies. Five different strategies are outlined, including the often-forgotten category of by-product pricing. Strategies for adjusting prices, such as discount and allowance pricing, segmented pricing and psychological pricing are described, as well as initiating and responding to price changes in the marketplace. Finally, the public policy implications of pricing are covered, including the major laws that pertain to pricing.
Chapter Outline
Introduction
The Internet has had a dramatic impact on pricing, particularly through , which is a service that lets consumers name their own prices.
Jay Walker, the founder of , reasoned that letting consumers set their own prices would benefit both the consumers and the sellers, because buyers would get lower prices and sellers would be able to turn excess inventory into profits.
is especially attractive to those who sell products that have “time sensitivity,” which is why it works so well in the travel industry. makes its money by buying up unsold hotel rooms, airline seats, or vacation packages at heavily discounted rates, marking them up, and selling them to consumers for as much as a 12% return.
The recent economic downturn has put companies in a “pricing vise.” It has been impossible to raise prices, and there is lot of pressure to slash them. But reducing prices can lead to lost profits and damaging price wars. It can signal to customers that price is more important than brand. The challenge is to find the price that will let the company make a fair profit by harvesting the customer value that it creates.
Let’s Discuss This
As the economy comes out of the recession and subsequent slow growth of the early 2000s, how might companies now use the better economic environment to raise prices? As a consumer, do you wait for sales to buy, or when you want something, do you go buy it whether it’s on sale or not?
What Is a Price?
In the narrowest sense, price is the amount of money charged for a product or service. More broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.
Throughout most of history, prices were set by negotiation between buyers and sellers. Fixed price policies—setting one price for all buyers—is a relatively modern idea that arose with the development of large-scale retailing at the end of the nineteenth century.
The Internet, corporate networks, and wireless communications are con-necting sellers and buyers as never before, and we are seeing a return to dynamic pricing—charging different prices depending on individual customers and situations.
Pricing is the number one problem facing many marketing executives. But many companies do not handle pricing well. A frequent problem is that companies are too quick to reduce prices in order to get a sale rather than convincing buyers that their products are worth a higher price. Other common mistakes include pricing that is too cost-oriented and pricing that does not take the rest of the marketing mix into consideration.
Use Key Terms Price, Dynamic Pricing here.
Use Marketing at Work 9-1 here.
Use Under the Hood/Focus on Technology here.
Factors to Consider When Setting Prices
A company’s pricing decisions are affected by both internal company factors and external environmental factors.
Use Chapter Objectives 1 here.
Use Figure 9-1 here.
Use Discussing the Issues 1 here.
Internal Factors Affecting Pricing Decisions
The company must decide on its strategy for the product before setting its price. The marketing objectives include its target market and positioning; if this is set properly, then the marketing mix strategy, including price, is fairly straightforward. Pricing strategy is largely determined by decisions on market positioning.
There are other general or specific objectives.
General objectives include survival, current profit maximi-zation, market share leadership, and product quality leader-ship.
More specifically, a company can set prices low to prevent competition from entering the market, or they can set prices at competitors’ levels to stabilize the market. Prices can be set to keep the loyalty and support of resellers. Prices can be reduced temporarily to create excitement for a new product.
The marketing mix strategy is very important. Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program.
Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Target costing reverses the usual process of first designing a new product, determining its cost, and then determining if they can sell it for that. Instead, it starts with an ideal selling price based on customer considerations, then targets costs that will ensure that the price is met.
Use Key Term Target Costing here.
Other companies de-emphasize price and use other marketing mix tools to create nonprice positions. Decisions about quality, promo-tion, and distribution will strongly affect price.
Costs set the floor for the price the company can charge. The company wants to charge a price that both covers all its costs for producing, distributing, and selling the product and delivers a fair rate of return for its effort and risk.
Fixed costs or overhead are costs that do not vary with production or sales level. Examples include rent, heat, and executive salaries.
Variable costs vary directly with the level of production. These costs tend to be the same for each unit produced.
Total costs are the sum of the fixed and variable costs for any given level of production.
Use Key Terms Fixed Costs, Variable Costs here.
There are also organizational considerations to setting prices. Companies handle pricing in a variety of ways.
In small companies, prices are often set by top management.
In large companies, pricing is typically handled by divisional or product line managers.
In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges.
In industries where pricing is a key factor, such as aerospace and steel, companies may have a pricing department to set the best prices or help others in setting them.
Others who may have an influence on pricing include sales managers, production managers, finance managers, and accoun-tants.
External Factors Affecting Pricing Decisions
Costs may set the lower limit of prices, but the market and demand set the upper limit of prices. All buyers balance the price of a product or service against the benefits of owning it. Before setting prices, marketers must understand the relationship between price and demand for their products.
Pricing freedom varies with the different types of markets. Economists recognize four types of markets.
Pure competition is a market that consists of many buyers and sellers trading in a uniform commodity such as wheat, copper, or financial securities.
No single buyer or seller has much effect on the going market price. Sellers in these markets do not spend much time on marketing strategy.
Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price.
A range of prices occurs because sellers can differentiate their offers to buyers. Either the physical product can be varied in quality, features, or style, or the accompanying services can be varied.
Buyers see differences in sellers’ products and will pay different prices for them.
Because there are many competitors in such markets, each firm is less affected by competitors’ pricing strategies than in oligopolistic markets.
In oligopolistic markets, there are a few sellers who are highly sensitive to each other’s pricing and marketing strategies.
The product can be uniform, as in steel, or nonuniform, as in cars and computers.
There are few sellers because it is difficult for new sellers to enter the market.
In a pure monopoly, the market consists of one seller.
The seller may be a government monopoly (. Postal Service), a private regulated monopoly (a power company), or a private nonregulated monopoly (DuPont when it introduced nylon).
Pricing is handled differently in each case.
In a regulated monopoly, the government permits the company to set rates that will yield a “fair return,” one that will let the company maintain and expand its operations as needed.
Nonregulated monopolies are free to set prices at what the market will bear.
Applying the Concept
Name one company in each of a purely competitive market, in monopolistic competition, in an oligopolistic market, and in a pure monopoly. How do they differ in terms of products or services offered and how responsive they are to customers? How about in how they price their products and services?
The consumer will decide whether a product’s price is right. Pricing decisions must be buyer-oriented.
Companies find it difficult to measure the values customers will attach to its product. These values will vary both for different consumers and different situations.
Each price the company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in the demand curve in Figure 9-2.
The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged.
In normal cases, demand and price are inversely related; that is, the higher the price, the lower the demand.
In the case of prestige goods, the demand curve sometimes slopes upward. Consumers think that higher prices mean more quality. Still, if a company charges too high a price, the level of demand will be lower.
Use Key Term Demand Curve here.
Use Figure 9-2 here.
Most companies try to measure their demand curves by estimating demand at different prices. The type of market makes a difference.
In a monopoly, the demand curve shows the total market demand resulting from different prices.
If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices.
Price elasticity is how responsive demand will be to a change in price. If demand hardly changes with a small change in price, demand is inelastic. If demand changes greatly, demand is elastic.
Buyers are less price sensitive when the product they are buying is unique or when it is high in quality, prestige, or exclusiveness. They are also less price sensitive when substitute products are hard to find or when they cannot easily compare the quality of sub-stitutes. Finally, they are less price sensitive when the total expen-diture for a product is low relative to their income or when the cost is shared by another party.
If demand is elastic rather than inelastic, sellers will consider lowering their price. A lower price will produce more total revenue. This practice makes sense as long as the extra costs of producing and selling more do not exceed the extra revenue.
Use Key Term Price Elasticity here.
Competitors’ costs and prices as well as possible competitor reactions to the company’s own pricing moves also affect pricing. The company’s pricing strategy may affect the nature of the competition it faces.
Economic conditions can have a strong impact on the firm’s pricing strategies. The company must also consider what impact its prices will have on other parties, such as resellers and the government. Social con-cerns should also be taken into account.
General Pricing Approaches
The price the company charges will be somewhere between one that is too low to produce a profit and one that is too high to produce any demand. Figure 9-3 summarizes the major considerations in setting price.
Companies set prices by selecting a general price approach.
Use Chapter Objectives 2 here.
Use Figure 9-3 here.
Cost-based Pricing
The simplest pricing method is cost-plus pricing—adding a standard markup to the cost of the product.
Any pricing method that ignores demand and competitor prices is not likely to lead to the best price. Still, markup pricing remains popular for many reasons.
Sellers are more certain about costs than about demand. By tying price to cost, sellers simplify pricing.
When all firms in the industry use this pricing method, prices tend to be similar and price competition is minimized.
Many people feel that cost-plus pricing is fairer to both buyers and sellers.
Break-even pricing and target-profit pricing are other cost-oriented approaches. The firm tries to determine the price at which it will break even or make the target profit it is seeking.
Target pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels. See Figure 9-4 for an example. Variable costs are added to fixed cost to form total costs, which rise with each unit sold. The slope of the total revenue curve reflects the price.
However, as the price increases, demand decreases, and the market may not buy even the lower volume needed to break even at the higher price. Much depends on the relationship between price and demand. Break-even analysis and target-profit pricing do not take this relationship into account.
Use Key Terms Cost-Plus Pricing, Breakeven Pricing (Target-Profit Pricing) here.
Use Figure 9-4 here.
Value-based Pricing
Value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set price. Price is considered along with the other marketing mix variables before the marketing program is set.
Use Key Term Value-based Pricing here.
Use Figure 9-5 here.
A comparison of cost-based pricing and value-based pricing is found in Figure 9-5. Cost-based pricing is product-driven. Value-based pricing reverses this process. The company sets its target price based on customer perceptions of the product value.
A company using value-based pricing must find out what value buyers assign to different competitive offers. Measuring this perceived value can be difficult. Sometimes companies ask consumers how much they would pay for a basic product and for each benefit added to the offer. Or a company might conduct experiments to test the perceived value of different product offers.
More and more, marketers have adopted value-pricing strategies—offering just the right combination of quality and good service at a fair price. In many cases, this has involved introducing less-expensive versions of established brand-name products.
An important type of value pricing at the retail level is everyday low pricing (EDLP). EDLP involves charging a constant, everyday low price with few or no temporary price discounts.
In contrast, high-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
Wal-Mart practically defined this concept. To offer everyday low prices, a company must first have everyday low costs.
Use Key Term Value Pricing here.
In many business-to-business situations, the challenge is to build the company’s pricing power—its power to escape price competition and to justify higher prices and margins without losing market share. To do this, many companies adopt value-added strategies. They attach value-added services to differentiate their offers and thus support higher margins.
Often, the best strategy is not to price below the competitor, but rather to price above and convince the customers that the product is worth it.
Use Speed Bump: Linking the Concepts here.
Let’s Discuss This
Has Wal-Mart’s “everyday low pricing” had much of an impact on other retailers? Why would Wal-Mart not want to do “high-low” pricing like most retailers? What advantages does Wal-Mart have over other discount stores in their EDLP strategy? What are the disadvantages they face?
Competition-based Pricing
One form of competition-based pricing is going-rate pricing, in which a firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand. The firm might charge the same as, more than, or less than its major competitors.
Use Key Term Competition-based Pricing here.
When demand elasticity is hard to measure, firms feel that the going price represents the collective wisdom of the industry concerning the price that will yield a fair return.
Competition-based pricing is also used when firms bid for jobs. Using sealed-bid pricing, a firm bases its price on how it thinks competitors will price, rather than on its own costs or on the demand.
Pricing decisions are subject to an incredibly complex array of environ-mental and competitive forces. A company sets not a single price, but rather a pricing structure that covers different items in its line. This pricing structure changes over time as products move through their life cycles. The company adjusts product prices to reflect changes in costs and demand and to account for variations in buyers and situations.
Use Discussing the Issues 2 here.
New-Product Pricing Strategies
Pricing strategies usually change as the product passes through its life cycle. The introductory stage is especially challenging.
Market-Skimming Pricing
Many companies that invent new products set high prices to “skim” revenues layer by layer from the market. This is called market-skimming pricing.
Market skimming makes sense only under certain conditions. First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price.
Use Key Term Market-Skimming Pricing here.
Use Chapter Objectives 3 here.
Market-Penetration Pricing
Market-penetration pricing sets an initial low price in order to penetrate the market quickly and deeply—to attract a large number of buyers quickly and win a large market share. The high sales volume results in falling costs, allowing the company to cut is price even further.
The market must be highly price sensitive so that a low price produces more market growth. Production and distribution costs must fall as sales volume increases. The low price must help keep out competition, and the company that uses penetration pricing must maintain its low-price position.
Use Key Term Market-Penetration Pricing here.
Use Application Questions 1 here.
Product Mix Pricing Strategies
The strategy for setting a product’s price often has to be changed when the product is part of a product mix. In this case, the firm looks for a set of prices that maximizes the profits on the total product mix. Pricing is difficult because the various products have related demand and costs and face different degrees of competition.
Product Line Pricing
Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between the various products in a line.
The price steps should take into account cost differences between the products in the line, customer evaluations of their different features, and competitors’ prices.
In many industries, sellers use well-established price points for the products in their line.
The seller’s task is to establish perceived quality differences that support the price differences.
Use Key Term Product Line Pricing here.
Use Chapter Objectives 4 here.
Use Application Questions 3 here.
Optional-Product Pricing
Optional-product pricing is offering to sell optional or accessory products along with the main product. For example, a car buyer may choose to order power windows, cruise control, and a CD changer.
Pricing these options is a sticky problem. Using the previous example, automobile companies have to decide which items to include in the base price and which to offer as options.
Use Key Term Optional-Product Pricing here.
Captive-Product Pricing
Companies that make products that must be used along with a main product are using captive-product pricing. Producers of the main products often price them low and set high markups on the supplies.
In the case of services, this strategy is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage cost. For example, theaters charge admission, then generate additional revenues from concessions. The service firm must decide how much to charge for the basic service and how much for the variable usage. The fixed amount should be low enough to induce usage of the service; profit can be made on the variable fees.
Use Key Term Captive-Product Pricing here.
By-product Pricing
In producing many commodities, such as processed meats and petroleum products, there are often by-products. Using by-product pricing, the manufacturer will seek a market for these by-products and should accept any price that covers more than the cost of storing and delivering them.
By-products can even turn out to be profitable.
Use Key Term By-product Pricing here.
Product Bundle Pricing
Sellers often combine several of their products and offer the bundle at a reduced price.
Price bundling can promote the sales of products consumers might not otherwise buy, but the combined price must be low enough to get them to buy the bundle.
Use Key Term Product Bundle Pricing here.
Use Application Questions 2 here.
Price-Adjustment Strategies
Companies usually adjust their basic prices to account for various customer differences and changing situations.
Use Chapter Objectives 5 here.
Discount and Allowance Pricing
Most companies adjust their basic price to reward customers for certain responses, such as early payment of bills, volume purchases, and off-season buying.
The many forms of discounts include a cash discount, which is a price reduction to buyers who pay their bills promptly. A quantity discount is a price reduction to buyers who buy large volumes. A functional discount (also called a trade discount) is offered by the seller to trade-channel members who perform certain functions, such as selling, storing, and record keeping. A seasonal discount is a price reduction to buyers who buy merchandise or services out of season.
Allowances are another type of reduction from list price. Trade-in allowances are price reductions given for turning in an old item when buying a new one. Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programs.
Use Key Terms Discount, Allowance here.
Segmented Pricing
In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs.
Under customer-segment pricing, different customers pay different prices for the same product or service.
Under product-form pricing, different versions of the product are priced differently, but not according to differences in their costs.
Using location pricing, a company charges different prices for different locations, even though the cost of offering each location is the same.
Using time pricing, a firm varies its price by the season, the month, the day, and even the hour.
Segmented pricing can be called revenue management or yield management.
For segmented pricing to be effective, the market must be segmentable, and the segments must show different degrees of demand. The costs of segmenting and watching the market cannot exceed the extra revenue from the price difference. The segmented price must be legal. And segmented prices should reflect real differences in customers’ perceived value.
Use Key Term Segmented Pricing here.
Applying the Concept
Why would a movie theater use segmented pricing? How is it applied? What kinds of companies use product-form pricing? Name some examples.
Psychological Pricing
In using psychological pricing, sellers consider the psychology of prices and not simply the economics. Consumers usually perceive higher-priced products as having higher quality; when they cannot judge quality because they lack the information or skill, price becomes an important quality signal.
Reference prices are prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation.
Use Key Terms Psychological Pricing, Reference Prices here.
Promotional Pricing
With promotional pricing, companies will temporarily price their products below list price and sometimes even below cost to create buying excitement and urgency.
Supermarkets and department stores will price a few products as loss leaders to attract customers to the store in the hope that they will buy other items at normal markups.
Sellers will also use special-event pricing in certain seasons to draw more customers.
Manufacturers sometimes offer cash rebates to consumers who buy a product from dealers within a specified time; the manufacturer sends the rebate directly to the customer.
Some manufacturers offer low-interest financing, longer warranties, or free maintenance to reduce the customer’s “price.” Or the seller may simply offer discounts from normal prices to increase sales and reduce inventories.
Promotional pricing can have adverse effects. Used too frequently and copied by competitors, price promotions can create “deal-prone” cus-tomers who wait until brands go on sale before buying them. Or, constantly reduced prices can erode a brand’s value in the eyes of customers. The frequent use of promotional pricing can also lead to industry price wars.
Use Key Term Promotional Pricing here.
Use Marketing at Work 9-2 here.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 3 here.
Geographical Pricing
A company also must decide how to price its products for customers located in different parts of the country.
FOB-origin pricing means that goods are placed free on board a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.
Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their locations. The freight charge is set at the average freight cost. This is fairly easy to administer, and it lets the firm advertise its price nationally.
Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.
Basing-point pricing is when the seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually sent. Some companies set up multiple basing points to create more flexibility; they quote freight charges from the basing-point city nearest to the customer.
Finally, the seller who is anxious to do business with a certain customer or geographical area might use freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business.
Use Key Term Zone Pricing here.
Use Discussing the Issues 5 here.
International Pricing
Companies that market their products internationally must decide what prices to charge in the different countries in which they operate. In some case, a company can set a uniform worldwide price. Most companies adjust their prices to reflect local market conditions and cost considerations.
The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing systems. Consumer perceptions and preferences also may vary from country to country, calling for different prices. Or the company may have different marketing objectives in various world markets, which require changes in pricing strategy.
Costs play an important role in setting international prices. In some cases, price escalation may result from differences in selling strategies or market conditions. In most instances, it is simply a result of the higher costs of selling in another country—the additional costs of product modifications, shipping and insurance, import tariffs and taxes, exchange-rate fluctuations, and physical distribution.
More detail on international pricing is presented in Chapter 15.
Price Changes
After developing their pricing structures and strategies, companies often face situations in which they must initiate price changes or respond to price changes by competitors.
Use Chapter Objectives 6 here.
Initiating Price Changes
Several situations may lead a firm to consider cutting its price. One reason is excess capacity. In this case, the firm needs more business and cannot get it through increased sales effort, product improvement, or other measures.
Another situation leading to price changes is falling market share in the face of strong price competition. A company may also cut prices in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors, or it cuts prices in the hope of gaining market share that will further cut costs through larger volume.
A successful price increase can greatly increase profits. A major factor in price increases is cost inflation. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers.
Another factor leading to price increases is overdemand; when a company cannot supply all that its customers need, it can raise its prices, ration products to customers, or both.
Prices can be raised almost invisibly by dropping discounts and adding higher-priced units to the line.
In passing price increases on to customers, the company must avoid being perceived as a price gouger. There are some techniques for avoiding this problem. One is to maintain a sense of fairness surrounding any price increase. Price increases should be supported by company communi-cations telling customers why prices are being increased.
Making low-visibility price moves first is a good technique—eliminating discounts, increasing minimum order sizes, and curtailing production of low-margin products.
A company should try to meet higher costs of demand without raising prices. It can consider more cost-effective ways to produce or distribute its products. It can shrink the product instead of raising the price. It can substitute less expensive ingredients or remove certain product features, packaging, or services. Or it can “unbundle” its products and services, removing and separately pricing elements that were formerly part of the offer.
Whether the price is raised or lowered, the action will affect buyers, competitors, distributors, and suppliers, and may interest the government as well.
Customers do not always interpret prices in a straightforward way. They may view a price cut in several ways. They might believe that quality was reduced. Or they might think that the price will come down even further and that it will pay to wait and see.
A price increase may have some positive meanings for buyers. Customers might think that the item is very “hot” and may be unobtainable unless they buy it soon. Or they might think that the item is an unusually good value.
Competitors are most likely to react to a price change when the number of firms involved is small, when the product is uniform, and when the buyers are well informed.
Like with a consumer, a competitor can interpret price changes in many ways. So the company must guess each competitor’s likely reaction.
Responding to Price Changes
In responding to competitors’ price changes, the company needs to consider several issues: Why did the competitor change the price? Was it to take more market share, to sue excess capacity, to meet changing cost conditions, or to lead an industry-wide price change? Is the price change temporary or permanent? What will happen to the company’s market share and profits if it does not respond? Are other companies going to respond?
A broader analysis must also be done. The company has to consider its own product’s stage in the life cycle, the product’s importance in the company’s product mix, the intentions and resources of the competitor, and the possible consumer reactions to price changes.
Planning ahead for price changes cuts down reaction time. Figure 9-6 shows the ways a company might assess and respond to a competitor’s price cut.
It could reduce its price to match the competitor’s price. It may decide the market is price sensitive and that it would lose too much market share to the lower-price competitor.
The company could maintain its price but raise the perceived value of its offer. It could improve communications, stressing the relative quality of its product over that of the lower-price competitor.
The company might improve quality and increase price, moving its brand into a higher-price position.
The company might launch a low-price “fighting brand” by adding a lower-price item to the line or creating a separate lower-price brand. This is necessary if the particular market segment being lost is price sensitive and will not respond to arguments of higher quality.
Use Figure 9-6 here.
Use Discussing the Issues 4 here.
Public Policy and Pricing
Price competition is a core element of our free-market economy. In setting prices, companies are not usually free to charge whatever prices they wish. Many federal, state, and even local laws govern the rules of fair play in pricing. The most important pieces of legislation affecting pricing are the Sherman, Clayton, and Robinson-Patman acts, initially adopted to curb the formation of monopolies and to regulate business practices that might unfairly restrain trade.
Figure 9-7 shows the major public policy issues in pricing. These include price-fixing and predatory pricing as well as retail price maintenance, discriminatory pricing, and deceptive pricing.
Use Marketing at Work 9-3 here.
Use Figure 9-7 here.
Pricing Within Channel Levels
Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected.
Sellers are also prohibited from using predatory pricing—selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business. This protects small sellers from larger ones who might sell items below cost temporarily or in a specific locale to drive them out of business.
Pricing Across Channel Levels
The Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade. Every retailer is entitled to the same price terms from a given manufacturer. However, price discrimination is allowed if the seller can prove that its costs are different when selling to different retailers. Or the seller can discriminate in its pricing if the seller manufactures different qualities of the same product for different retailers.
Retail price maintenance is also prohibited—a manufacturer cannot require dealers to charge a specified retail price for its products. Although the seller can propose a manufacturer’s suggested retail price to dealers, it cannot refuse to sell to a dealer who takes independent pricing action, nor can it punish a dealer by shipping late or denying advertising allowances.
Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. This might involve bogus reference or comparison prices, as when a retailer sets artificially high “regular” prices then announces “sale” prices close to its previous everyday prices.
Scanner fraud is another means of deceptive pricing. The widespread use of scanner-based computer checkouts has led to increasing complaints of retailers overcharging their customers.
Price confusion results when firms employ pricing methods that make it difficult for consumers to understand just what price they are really paying. For example, consumers are sometimes misled regarding the real price of a home mortgage or car leasing agreement.
Use Focus on Ethics here.
Travel Log
Discussing the Issues
Imagine that you are setting flight prices for Southwest Airlines. How would the internal and external factors identified in Figure 9-1 impact your pricing decision?
Several of the factors listed in Figure 9-1 will likely have an impact on Southwest’s pricing decision. For example, the marketing objective of being the low cost airline will lead to prices being set at or below competitors’ levels. The airline’s costs will set the floor for its pricing levels, while market demand will set the upper limits. The current economic conditions and the number of passengers traveling are also factors that Southwest will take into account. Airlines are an interesting industry from a pricing standpoint because they change their price so often to account for fluctuations in demand and competitors’ actions.
Explain the differences between cost-based pricing, value-based pricing, and competition-based pricing. Under what conditions might a company favor one approach over the others?
Cost-based pricing focuses on the company’s costs as an integral part of the pricing decision. As such, it is product-driven. For example, const-plus pricing is a cost-based method that adds a standard markup (often a percentage) to the cost of the product. Value-based pricing uses buyers’ perceptions of value to set price. In value based pricing, price is considered along with the other marketing mix variables before the marketing program is set. Competition-based pricing places a great deal of emphasis on the price of other firms’ competitive products. One form of competition-based pricing is going-rate pricing, in which a firm bases its price largely on competitors’ prices, with less attention paid to its own costs or to demand.
Given that higher-priced products are often perceived as being higher in quality, what implications does a low price have for marketers using promotional pricing strategies?
Low prices bring with them the concern that consumers may perceive the product as being of low quality, rather than being a great value. One way to combat this is to have a high base price and then represent the discounted price as a markdown from the higher base price. In this way, consumers are able to use the high base price as a reference in their quality assessments.
Your major competitor has just cut its prices by 20% on all products. How should you react? What information do you want to have before you craft a response?
The company has several response options (not all of which entail lowering its own price), but should first consider several issues: Why did the competitor change the price? Was it to take more market share, to use excess capacity, to meet changing cost conditions, or to lead an industry-wide price change? Is the price change temporary or permanent? What will happen to the company’s market share and profits if it does not respond? Are other companies going to respond? And what are the competitor’s and other firms’ responses to each possible reaction likely to be? It also has to consider its own product’s stage in the life cycle, the product’s importance in the company’s product mix, the intentions and resources of the competitor, and the possible consumer reactions to price changes.
Review the geographical pricing strategies of FOB-origin pricing, uniform-delivered pricing, zone pricing, basing-point pricing, and freight absorption pricing. What factors influence the choice of a geographical pricing strategy?
Companies should consider how its competitors handle shipping costs, how much time it has to spend on administering different pricing options for shipping, and the price sensitivity of the customer.
Application Questions
Your company is about to launch a new brand of paper towels on the market that are more absorbent and durable than current paper towels being sold. Your boss wants you to consider both market-skimming pricing and market-penetration pricing strategies. What factors should you consider in making your decision?
Market skimming makes sense only under certain conditions. First, the product’s quality and image must support its higher price, and enough buyers must want the product at that price. Second, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. Finally, competitors should not be able to enter the market easily and undercut the high price. For market-penetration pricing the following conditions should be considered: First, the market must be highly price sensitive. Second, production and distribution costs must fall as sales volume increases. Finally, the low price must help keep out the competition.
Select an athletic team, theater series, or other event at your school where tickets can be purchased individually or in a bundle (., season tickets). Get pricing information for both single event/game and bundled tickets. Is the cost on a per- ticket basis less expensive for the bundled price? Does the price difference entice you to buy the bundle instead of individual tickets? Aside from maximizing revenue, what else might an event marketer be concerned with in deciding how to set ticket prices?
Responses to this question will vary according to the particular event selected by the student. An event marketer may also be interested in filling the theater or stadium. No one wants to go to a football game and be the only one there! As such, some may charge a lower price knowing that the event will be filled, rather than have a large number of empty seats.
Visit a department store and find brands in three different product categories (., televisions, refrigerators, tennis racquets) that engage in product line pricing. Do you feel that the price-to-attribute/feature trade-off in the product line is appro-priate? Pick the product in each line that offers the most value to you. Describe a market segment that would have selected a different product as having the most value. What market segment is each product trying to reach with its offerings?
Responses will vary depending on the products selected and student opinion. Instructors can use this question to highlight the notion of product line pricing. This question can be extended by asking students to consider if they feel price changes are needed based on competitive products or to differentiate the company’s own brands further.
Under the Hood/Focus on Technology
The ability to quickly compare prices over the Internet has been a boon to consumers and either a blessing or curse to retailers (depending which side of the “pricing fence” you are on). Websites such as , , and allow consu-mers to quickly comparison shop for specific products at dozens of retailers. Imagine how long that would take if you were trying to drive all over town to accomplish the same thing! Some will even email you when the product you are interested in reaches or falls below your target price.
Go to one of the websites listed above and do a comparison for a television and a vacuum cleaner. Then respond to the following questions.
What do you think of this service? Do you trust the retailers offering the lowest prices? What concerns might a consumer have when using one of these websites to select a seller?
Student responses to this question will vary. Concerns that may be brought up by the instructor if not discussed by the students include issues of not being able to “touch” the merchandise, delivery times, dealing with product returns, revealing credit card information, and the inability to ask the seller questions prior to a purchase. These concerns apply to most Internet buys.
How can a local “brick and mortar” store in your town compete with the com-panies offering products through such websites?
Price advantages will often go to the Internet sites. Local firms may need to emphasize other aspects to make the consumer feel the added price is the better overall value. For example, a brick and mortar store may offer additional service at the point of sale and after the purchase is made.
What other features of these websites make them attractive for buyers?
Students will often come up with responses such as the convenience to access product and price information from home, the ability to quickly look at multiple sellers of the same product in a side-by-side comparison, and the direct links to the sellers’ websites.
Focus on Ethics
In order to promote competition, federal laws prohibit price-fixing—competitors agreeing on what levels to set prices. Some companies find themselves in the media spotlight after being accused of price-fixing. In recent years, rival auction houses Christie’s and Sotheby’s have been found guilty of fixing the commission rates they earned from auctions. More recently, some of the top modeling agencies have come under investi-gation for conspiring to fix the commissions they charge models to book their assign-ments. Being found guilty of price-fixing in the United States can bring jail time and large fines.
Why is price-fixing dealt with so harshly in the United States? Why shouldn’t companies be able to discuss price levels and set whatever price they agree on?
Most students will understand that the purpose behind the laws is to promote a competitive market that offers the best price/value combination to the consumer. Allowing collusion between businesses will harm the consumer.
What might a company do to discourage employees from engaging in price-fixing? What factors might encourage companies to collude on prices?
Education can be a large part of efforts to stop price-fixing by employees. By making it clear what the laws and consequences of breaking those laws are, employees will better understand appropriate and inappropriate behaviors.
Does the rapid availability of competitive price information on the Internet help to facilitate price-fixing?
This is an interesting question, because on the one hand competitors have better access to each other’s prices, which would allow price-fixing to take place. However, on the other hand, access to the information also exposes price-fixing information or at least makes it more visible to regulators and the public.
Great Ideas
Barriers to Effective Learning
Even if a student or two has worked in a family business, it is a very safe bet that none of them have ever set prices on anything. Even if they are a devotee of eBay and have been buying and selling items for years, they still won’t have set prices because of the auction environment of that and other sites that have sprung up in the years since the explosion of the World Wide Web. So although the “What Is a Price?” section is very short, it is well worthwhile spending some time talking about the difference between fixed-price policies and dynamic pricing. A discussion of what it’s like to buy a meal at a restaurant, where you cannot typically haggle on price, and buying a car, where you are expected to haggle on price, can drive home the difference between the two. A discussion of what has happened with auctions and exchanges online will also help. Using Marketing at Work 9-1 here to launch the discussion would be useful.
There are so many factors to consider in setting prices that the students might begin to feel overwhelmed very early in the chapter. It might be easier to discuss this in the context of a new business the class will launch—say, a laundry service on campus. Most students hate doing laundry, so they are willing to pay for someone to do it for them, especially with pickup and delivery service. You can easily run through the internal and external factors that would affect such a service, and even discuss pricing strategy if a competitor were to develop a similar service.
Students will also likely not understand why cost-based pricing isn’t the right way to price everything. It’s simple, it’s easy to apply a formula, and there is no guesswork involved. You need to drive home the point that it ignores the custo-mer completely—cost-based pricing is internally focused, without a thought to the demand parameters or competitors’ prices. You can talk about this from the perspective of a high-cost manufacturer; how much would they be able to sell if their product cost 50% more than the competition simply because the company hadn’t figured out how to manufacture it effectively?
Value-based pricing could engender a considerable amount of conversation, particularly if someone thinks it is unethical to charge a price for something that yields the company a very large margin. Why wouldn’t you treat customers “right” by charging them less? A discussion of the meaning of customer focus and of benefits to the customer will help the class to understand that if the customer thinks he is getting value, he will happily pay the price.
After this discussion, the students might then be quite confused that value pricing and everyday low pricing are subsets of value-based pricing. It might be helpful here to differentiate between value-based pricing in a business market and value or EDLP in the consumer market. Many businesses will buy based on a value they assign to a product or service, often in terms of ROI for themselves. Consumers will rarely do that explicitly and, at least for basic necessities, will often buy based on price. It is still value-based pricing.
Product line pricing can easily be illustrated with the example of gasoline. Virtually every gas station in this country sets the prices of each of its grades of gas between 8 and 10 cents apart (., regular for $, the next grade for $, and the premium grade for $). This is an everyday example of price steps with which everyone will have experience. Captive-product pricing will also be a fairly easy concept to understand with the example of razors and razor blades. Optional-product pricing could cause some problems, however. Discussing the example of buying a computer with or without a service agreement could help explain how this is done.
Segmented pricing can easily be explained with senior citizen discounts or the discount you get at the movies for going during the day (matinee prices). Most students today have traveled, so it is also useful to talk about the airlines’ use of yield management.
Geographical pricing can cause some problems. Although the students might have heard of FOB pricing, it will not be a common term for them. Explaining that this is basically a decision between the customer paying the freight and the company paying the freight will help, especially because the majority of the students will have purchased at least something online, so they will have experience with freight or delivery charges.
Discussing the meaning students have applied to price changes on the goods they buy is an interesting way of introducing this section. You may need to force the students to really think through why, for instance, so many retailers seem to run constant sales, and what that says about their merchandise and their business. This would also be a good time to swing back to the new business launched in Barrier #2 (above) to have the students discuss how they would react price-wise to new competitors. Would they start a price war, feeling certain that their customers would stick around, so that they could then drive the price back up when the competitor “leaves town”?
Student Projects
Explain the concept of elasticity of demand. Identify several factors that influence elasticity and give examples as to how they affect the degree of elasticity in a product or service.
When does a price become a promotional price? What pitfalls does a firm risk in promotional pricing?
How does price relate to consumer perceptions of quality? Give examples of your perception of an acceptable price range for toothpaste, a haircut, and a dinner at a fancy restaurant. How might price outside this range affect your image of the product’s quality?
Find examples of products that seem to fit the following marketing objectives for pricing and explain your reasons for picking the products: survival, current profit maximization, market share leadership, and product quality leadership.
Are optional-product pricing and captive-product pricing ethical? Are these policies sound? Why or why not?
Classroom Exercise/Homework Assignment
Airlines are well known for their yield management practices. Assume that your next Spring Break trip is to Cancun, Mexico. Go online to “book” your trip and compare airfares among the major airlines that fly to that destination, as well as the major travel websites. Some of the airline websites include . Air (), Delta Airlines (), Continental Airlines (), and United Airlines (). Also look at the online travel agencies including Orbitz () and Expedia (). Another possibility is Cheap Fares, an industry consolidator ().
First check fares through the individual airlines’ sites, and then go to the two online travel agency sites to check fares for the same dates and times. Do they differ, or are they the same? Why might they differ?
Student responses will differ, but by and large the fares should be different not only among the different airlines, but also between the individual airlines and the travel consolidator. This is due to the airlines’ yield management systems as well as their explicit decision to offer the lowest fares on their own websites.
Go back the next day and the next week to check the fares for the exact same dates and times. Are the fares different yet? Why might that be?
Fares may have gone either up or down, depending on demand at the time. Students should discuss this in terms of why demand shifts as you get closer to the date of takeoff, as well as elasticity of demand.
Read through the business press, searching such sites as and (CNN Money and the Wall Street Journal) to see if there has been any recent news about any of these airlines. What internal and external factors might be affecting the setting of the airfares at this particular moment in time?
Responses will vary based on what is in the recent news. However, the bankruptcy proceedings of the major airlines in Chapter 11 should figure prominently in their answers.
Classroom Management Strategies
This is a very long chapter, and it might be best to break it into two class periods. It will be noted in the following where a reasonable break would be if you are able to do that.
Discussing the history of pricing, and the differences between fixed prices and dynamic prices is worthy of at least 5 minutes. You can also tie dynamic pricing back into the individual markets that were discussed in a previous chapter to drive home the value of dynamic pricing.
If you are breaking the chapter into two class sessions, spend 20 minutes on Factors to Consider when Setting Prices. If you do not have that luxury, 10 minutes will suffice. But in this case, you will want to hit the major factors of marketing objectives and marketing mix strategy for internal factors, and the market and demand for the external factors.
Another 20 minutes should be spent on General Pricing Approaches in a two-session approach to this chapter. If covering the material in one session, spend 10 minutes on this. In this approach, focus on the differences among the three pricing approaches.
New Product Pricing Strategies should be covered in 15 minutes. In one class session, spend about 5 minutes covering the differences between market skimming and market penetration. This would also be where you should break for the session if you are going to continue with the chapter in the next class.
Product Mix Pricing Strategies has a lot of information in it. In the second class session, spend 20 minutes on this topic, being sure to cover each of the five subsections. In one class period, you can cover this in 10 minutes by focusing on the three pricing strategies, briefly explaining the last two.
Price-Adjustment Strategies also has a lot of material in it. In a second class section, 20 minutes should also be spent on this topic. In one, again you can cover this in 10 minutes by focusing on the first three subsections.
Regardless of whether you are presenting this material in one class or two, spend 15 minutes on Price Changes. This is an important element to understanding pricing, and this is the area where many marketing managers make their money when it comes to pricing.
Public Policy and Pricing can be covered in 5 minutes. The important topics in this section are the problems that can occur in and the ethical issues around setting prices.
Chapter 10
Marketing Channels and Supply Chain Management
Previewing the Concepts: Chapter Objectives
Explain why companies use distribution channels and discuss the functions these channels perform.
Discuss how channel members interact and how they organize to perform the work of the channel.
Identify the major channel alternatives open to a company.
Explain how companies select, motivate, and evaluate channel members.
Discuss the nature and importance of marketing logistics and integrated supply chain management.
Just the Basics
Chapter Overview
This chapter covers the important topics of supply chain management. Supply chains consist of both upstream and downstream partners, including suppliers, intermediaries, and even intermediary customers. The term value delivery network expands on the limited nature of “supply chain.” It consists of the company, suppliers, distributors, and ultimately customers who “partner” with each other to improve the performance of the entire system.
The chapter focuses on marketing channels—the downstream side of the value delivery network. A company’s channel decisions directly affect every other marketing decision. And because distribution channel decisions often involve long-term commitments to other firms, management must define its channels carefully, with an eye on tomorrow’s likely selling environment as well as today’s.
Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them. Members of the marketing channel perform many key functions, such as gathering and distributing marketing information; promoting products; contacting prospective buyers; matching supply with demand; negotiating final prices; and performing the physical distribution of the goods, financing large purchases, and taking the risk of selling the product.
For channels to work properly, each channel member’s role must be specified and conflict must be managed. Conventional distribution systems typically lacked a strong leader; vertical marketing systems (VMS) have evolved to provide that channel leadership. The three major types of VMSs include corporate, contractual, and administered.
In designing marketing channels, managers must analyze customer needs, set channel objectives, identify major channel alternatives, and then evaluate those alternatives. In designing international channels, marketers will face additional complexities. Each country has its own unique distribution system that has evolved over time and changes very slowly.
Marketing logistics, also called physical distribution, involves planning, implementing and controlling the physical flow of goods, services, and other related information from points of origin to points of consumption. It involves getting the right product to the right customer in the right place at the right time. Marketing logistics addresses not only outbound distribution, but also inbound and reverse distribution. The major logistics functions include warehousing, inventory management, and transportation.
Chapter Outline
Introduction
Caterpillar believes its dominance over seven decades in the market for heavy construction and mining equipment results from its unparalleled distribution and customer support system.
Caterpillar sells more than 300 products in nearly 200 countries, generating sales of more than $20 billion annually. It has 27% of the worldwide construction-equipment business, more than double that of number two Komatsu.
Competitors often bypass their dealers and sell directly to big customers to cut costs or make more profits for themselves, but Caterpillar wouldn’t think of going around its dealers. Caterpillar’s superb distribution system serves as a major source of competitive advantage. The system is built on a firm base of mutual trust and shared dreams.
Most firms cannot bring value to customers by themselves. Instead, they must work closely with other firms in a larger value delivery network.
Use Chapter Objectives 1 here.
Supply Chains and the Value Delivery Network
The supply chain consists of “upstream” and “downstream” partners, including suppliers, intermediaries, and even intermediary customers.
Upstream from the manufacturer or service provider is the set of firms that supply the raw materials, components, parts, infor-mation, finances, and expertise needed to create a product or service.
Marketers have traditionally focused on the downstream side of the supply chain, which are the marketing channels or distribution channels that look forward toward the customer.
Use Key Term Marketing Channel (or Distribution Channel) here.
It is the unique design of each company’s supply chain that enables it to deliver superior value to customers.
The term supply chain may be too limited—it takes a make-and-sell view of the business.
A better term would be demand chain because it suggests a sense-and-respond view of the market. Under this view, planning starts with the needs of the target customers, to which the company responds by organizing resources with the goal of building profitable customer relationships.
Even this might be too limiting, however. A value delivery network is made up of the company, suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system.
Use Key Term Value Delivery Network here.
Use Discussing the Issues 5 here.
This chapter focuses on marketing channels—on the downstream side of the value delivery network.
There are four major questions concerning marketing channels:
What is the nature of marketing channels and why are they important?
How do channel firms interact and organize to do the work of the channel?
What problems do companies face in designing and managing their channels?
What role do physical distribution and supply chain management play in attracting and satisfying customers?
The Nature and Importance of Marketing Channels
A marketing channel or distribution channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.
A company’s channel decisions directly affect every other marketing decision.
Distribution channel decisions often involve long-term commitments to other firms. Therefore, management must design its channels carefully, with an eye on tomorrow’s likely selling environment as well as today’s.
How Channel Members Add Value
The use of intermediaries results from their greater efficiency in making goods available in target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own.
Figure 10-1 shows how using intermediaries can provide economies.
The role of marketing intermediaries is to transform the assortments of products made by producers into the assortments wanted by consumers.
Producers make narrow assortments of products in large quantities, but consumers want broad assortments of products in small quantities.
Intermediaries play an important role in matching supply and demand.
Use Figure 10-1 here.
Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them.
Members of the marketing channel perform many key functions:
Information: gathering and distributing marketing research and intelligence.
Promotion: developing and spreading persuasive communications about an offer.
Contact: finding and communicating with prospective buyers.
Matching: shaping and fitting the offer to the buyer’s needs.
Negotiation: reach an agreement on price and other terms of the offer.
Physical distribution: transporting and storing goods.
Financing: acquiring and using funds to cover the costs of the channel work.
Risk taking: assuming the risks of carrying out the channel work.
In dividing the work of the channel, the various functions should be assigned to the channel members who can add the most value for the cost.
Let’s Discuss This
Mobile phone manufacturers largely distribute their products through service providers such as Verizon, AT&T Wireless, and T-Mobile. Why have they chosen this method of distribution?
Number of Channel Levels
Each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer is a channel level.
Use Key Term Channel Level here.
The number of intermediary levels indicates the length of a channel. Figure 10-2A shows several distribution channels of different lengths.
A direct marketing channel has no intermediary levels; the company sells directly to consumers.
An indirect marketing channel contains one or more interme-diaries.
Use Key Terms Direct Marketing Channel, Indirect Marketing Channel here.
Use Figure 10-2 here.
Figure 10-2B shows some common business distribution channels.
A business marketer can use its own sales force to sell directly to business customers.
Or it can sell to various types of intermediaries, who in turn sell to these customers.
From the producer’s point of view, a greater number of levels means less control and greater channel complexity.
The institutions in the channel are connected by several types of flows.
The flows include physical flow of the products, the ownership flow, the payment flow, the information flow, and the promotion flow.
These flows can make even channels with only one or a few levels very complex.
Use Chapter Objectives 2 here.
Channel Behavior and Organization
Distribution channels are complex behavioral systems in which people and companies interact to accomplish individual, company, and channel goals.
Some channel systems consist only of informal interactions among loosely organized firms.
Others consist of formal interactions guided by strong organi-zational structures.
Channel Behavior
Each channel member plays a specialized role in the channel. The channel will be most effective when each member is assigned the tasks it can do best.
Ideally, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their activities, and cooperate to attain overall channel goals.
Although channel members depend on one another, they often act alone in their own short-run best interests. Disagreements over goals, roles, and rewards generate channel conflict.
Horizontal conflict occurs among firms at the same level of the channel.
Vertical conflict is more common; it is conflict between different levels of the same channel.
Some conflict in the channel takes the form of healthy competition.
Severe or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships.
Use Key Term Channel Conflict here.
Vertical Marketing Systems
Historically, conventional distribution systems have lacked leadership and power, often resulting in damaging conflict and poor performance.
Use Key Term Conventional Distribution Channel here.
One of the biggest channel developments over the years has been the emergence of vertical marketing systems that provide channel leadership. Figure 10-3 contrasts the two types of channel arrangements.
A conventional distribution channel consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits.
A vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them, or wields so much power that they must all cooperate. The VMS can be dominated by either the producer, the wholesaler, or the retailer.
A corporate VMS integrates successive stages of produc-tion and distribution under single ownership.
A contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.
The franchise organization is the most common type. There are three types of franchises: manufacturer-sponsored retailer franchiser system; manufacturer-sponsored wholesaler franchise system; and a service-firm-sponsored retailer franchiser system.
An administered VMS is one where leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members.
Use Key Terms Vertical Marketing System (VMS), Corporate VMS, Contractual VMS, Franchise Organization, and Administered VMS here.
Use Figure 10-3 here.
Use Discussing the Issues 1 here.
Horizontal Marketing Systems
A horizontal marketing system is one in which two or more companies at one level join together to follow a new marketing opportunity. By working together, companies can combine their financial, production, or marketing resources to accomplish more than any one company could alone.
Companies might join forces with competitors or noncompetitors. They might work with each other on a temporary or permanent basis, or they may create a separate company.
Use Key Term Horizontal Marketing System here.
Applying the Concept
Why are there bank branches in many grocery stores today? Discuss why this application of a horizontal marketing system makes sense for both the grocery store and the bank.
Multichannel Distribution Systems
More and more companies have adopted multichannel distribution systems, which are also called hybrid marketing channels.
This occurs when a single firm sets up two or more marketing channels to reach one or more customer segments.
Figure 10-4 shows a hybrid channel. These days almost every large company and many small ones distribute through multiple channels.
With each new channel, the company expands its sales and market cover-age and gains opportunities to tailor its products and services to the specific needs of diverse customer segments.
Multichannel systems are harder to control and they generate conflict as more channels compete for customers and sales.
Use Key Term Multichannel Distribution System here.
Use Figure 10-4 here.
Changing Channel Organizations
One major trend is toward disintermediation—more and more, product and service producers are bypassing intermediaries and going directly to final buyers, or to radically new types of channel intermediaries.
This presents problems and opportunities.
To avoid being swept aside, traditional intermediaries must find new ways to add value in the supply chain.
To remain competitive, product and service producers must develop new channel opportunities, such as Internet and other direct channels. Developing these channels brings them into direct competition with their established channels, resulting in conflict.
Use Key Term Disintermediation here.
Use Marketing at Work 10-1 here.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 3 here.
Applying the Concept
Discuss some likely trends in the distribution of automobiles in the 21st century. Will there be a shift away from exclusive distribution? What might the distribution channel(s) look like?
Channel Design Decisions
In designing marketing channels, manufacturers struggle between what is ideal and what is practical.
A new firm with limited capital usually starts by selling in a limited market area.
In this way, channel systems often evolve to meet market opportunities and conditions.
Channel analysis and design should be purposeful—decision making should include analyzing consumer needs, setting channel objectives, identifying major channel alternatives, and evaluating those alternatives.
Analyzing Customer Needs
Marketing channels are part of the overall customer value delivery network. Thus, designing the marketing channel starts with finding out what target consumers want from the channel.
The company must balance consumer needs not only against the feasibility and costs of meeting these needs, but also against customer price preferences.
Setting Channel Objectives
Companies should state their marketing channel objectives in terms of targeted levels of customer service. In each segment, the company wants to minimize the total channel cost of meeting customer service requirements.
The company’s channel objectives are influenced by the nature of the company, its products, its marketing intermediaries, its competitors, and the environment.
Environmental factors such as economic conditions and legal constraints may affect channel objectives and design.
Identifying Major Alternatives
The company should next identify its major channel alternatives in terms of types of intermediaries, the number of intermediaries, and the respon-sibilities of each channel member.
A firm should identify the types of channel members available to carry out its channel work.
Company sales force
Manufacturer’s agency
Industrial distributors
Companies must also determine the number of channel members to use at each level.
Intensive distribution is a strategy in which they stock their products in as many outlets as possible.
In exclusive distribution, the producer gives only a limited number of dealers the exclusive right to distribute its product in their territories.
In between intensive and exclusive distribution is selective distribution—the use of more than one, but fewer than all, of the intermediaries who are willing to carry a company’s products.
Use Key Terms Intensive Distribution, Exclusive Distribution, and Selective Distribution here.
Use Discussing the Issues 2 here.
The producer and intermediaries need to agree on the terms and responsibilities of each channel member.
They should agree on price policies, conditions of sale, territorial rights, and specific services to be performed by each party.
Mutual services and duties need to be spelled out carefully.
Evaluating the Major Alternatives
Each alternative should be evaluated against economic, control, and adaptive criteria.
Using economic criteria, a company compares the likely sales, costs, and profitability of different channel alternatives.
The company must also consider control issues. Using interme-diaries usually means giving them some control over the marketing of the product, and some intermediaries take more control than others.
The company must also apply adaptive criteria. Channels often involve long-term commitments, yet the company wants to keep the channel flexible so that it can adapt to environmental changes.
Designing International Distribution Channels
International marketers face many additional complexities in designing their channels.
Each country has its own unique distribution system that has evolved over time and changes very closely.
Use Chapter Objectives 3 here.
Channel Management Decisions
Once the company has reviewed its channel alternatives and decided on the best channel design, it must implement and managed the chosen channel.
Channel management calls for selecting, managing, and motivating individual channel members and evaluating their performance over time.
Selecting Channel Members
Producers vary in their ability to attract qualified marketing interme-diaries.
When selecting intermediaries, the company should determine what characteristics distinguish the better ones. It will want to evaluate each channel member’s years in business, other lines carried, growth and profit record, cooperativeness, and reputation.
Managing and Motivating Channel Members
Once selected, channel members must be continuously managed and motivated to do their best.
The company must sell not only through the intermediaries but to and with them.
They practice strong partner relationship management (PRM) to forge long-term partnerships with channel members.
In managing its channels, a company must convince distributors that they can succeed better by working together as a part of a cohesive value delivery system.
Use Marketing at Work 10-2 here.
Evaluating Channel Members
The producer must regularly check channel member performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged and lost goods, cooperation in company promotion and training programs, and services to the customer.
The company should recognize and reward intermediaries who are performing well and adding good value for consumers. Those who are performing poorly should be assisted or replaced.
Use Speed Bump: Linking the Concepts here.
Use Chapter Objectives 4 here.
Use Application Questions 1 here.
Public Policy and Distribution Decisions
For the most part, companies are legally free to develop whatever channel arrangements suit them.
Laws affecting channels seek to prevent the exclusionary tactics of some companies that might keep another company from using a desired channel.
Exclusive Dealing
Exclusive distribution is when the seller allows only certain outlets to carry its products. When the seller requires that these dealers not handle competitors’ products, its strategy is called exclusive dealing.
Both parties can benefit from exclusive arrangements.
But exclusive arrangements also exclude other producers from selling to these dealers.
This brings exclusive dealing contracts under the scope of the Clayton Act of 1914.
They are legal as long as they do not substantially lessen competition or tend to create a monopoly, and as long as both parties enter into the agreement voluntarily.
Exclusive dealing often includes exclusive territorial agreements.
Producers of a strong brand sometimes sell it to dealers only if the dealers will take some or all of the rest of the line. This is called full-line forcing.
These tying arrangements may not be illegal, but if they lessen competition substantially, they do come under the Clayton Act.
Producers are free to select their dealers, but their right to terminate dealers is somewhat restricted.
Sellers can drop dealers “for cause.”
They cannot drop dealers if, for example, the dealers refuse to cooperate in a doubtful legal arrangement.
Use Focus on Ethics here.
Marketing Logistics and Supply Chain Management
Companies must decide on the best way to store, handle, and move their products and services so that they are available to customers in the right assortments, at the right time, and in the right place.
Physical distribution and logistics effectiveness has a major impact on both customer satisfaction and company costs.
Use Key Term Marketing Logistics (or Physical Distribution) here.
Nature and Importance of Marketing Logistics
Marketing logistics, also called physical distribution, involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet customer requirements at a profit. It involves getting the right product to the right customer in the right place at the right time.
Marketing logistics addresses not only outbound distribution (moving products from the factory to resellers and ultimately to customers) but also inbound distribution (moving products and materials from suppliers to the factory) and reverse distribution (moving broken, unwanted, or excess products returned by customers or resellers).
It involves entire supply chain management—managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers. See Figure 10-5.
Use Key Term Supply Chain Management here.
Use Figure 10-5 here.
The logistics manager’s task is to coordinate activities of suppliers, purchasing agents, marketers, channel members, and customers.
Companies can gain a powerful competitive advantage by pursuing improved logistics to give customers better service or lower prices.
Improved logistics can yield tremendous cost savings to both the company and its customers. As much as 20% of an average prod-uct’s price is accounted for by shipping and transportation alone.
The explosion in product variety has created a need for improved logistics management.
Improvements in information technology have created oppor-tunities for major gains in distribution efficiency.
Goals of the Logistics System
No logistics system can both maximize customer service and minimize distribution costs.
Maximum customer service implies rapid delivery, large inven-tories, flexible assortments, liberal return policies, and other ser-vices—all of which raise distribution costs.
Minimum distribution costs imply slower delivery, smaller inventories, and larger shipping lots, which represent a lower level of overall customer service.
The goal of marketing logistics should be to provide a targeted level of customer service at the least cost.
A company must first research the importance of various distri-bution services to customers and then set desired service levels for each segment.
The objective is to maximize profits, not sales.
Major Logistics Functions
The major logistics functions include warehousing, inventory manage-ment, transportation, and logistics information management.
A company must decide on how many and what types of warehouses it needs and where they will be located.
A storage warehouse stores goods for moderate to long periods.
Distribution centers are designed to move goods rather than to store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill those orders efficiently, and deliver goods to customers as quickly as possible.
New, single-storied automated warehouses have advanced, computer-controlled materials-handling systems requiring few employees. Computers and scanners read orders and direct lift trucks, electric hoists, or robots to gather goods, move them to loading docks, and issue invoices.
Use Key Term Distribution Center here.
Inventory management also affects customer satisfaction. Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much.
Just-in-time logistics systems carry only small inventories of parts or merchandise, often for only a few days of operation. New stock arrives exactly when needed, rather than being stored in inventory until being used.
The choice of transportation carriers affects the pricing of products, delivery performance, and condition of the goods when they arrive.
Trucks have increased their share of transportation steadily and now account for 39% of total cargo ton-miles (more than 69% of actual tonnage). They account for the largest portion of trans-portation within cities as opposed to between cities.
Railroads account for 38% of total cargo ton-miles moved. They are one of the most cost-effective modes for shipping large amounts of bulk products.
Water carriers, which account for about 10% of cargo ton-miles, transport large amounts of goods by ships and barges on . coastal and inland waterways. Although the cost of water transportation is very low for shipping bulky, low-value, nonperishable products, water transportation is the slowest mode and may be affected by the weather.
Pipelines are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets.
Although air carriers transport less than 1% of the nation’s goods, they are an important transportation mode. Airfreight rates are much higher than rail or truck rates, but airfreight is ideal when speed is needed or distant markets have to be reached.
The Internet carries digital products from producer to customer via satellite, cable modem, or telephone wire.
Intermodal transportation is combining two or more modes of transportation.
Piggyback describes the use of rail and trucks.
Fishyback is combining water and trucks.
Trainship combines water and rail.
Airtruck combines air and trucks.
Use Key Term Intermodal Transportation here.
Use Application Questions 2, 3 here.
Use Under the Hood/Focus on Technology here.
Applying the Concept
How are automobiles shipped to the United States from Japan? How are they distributed within the United States?
Integrated Logistics Management
Integrated logistics management recognizes that providing better customer service and trimming distribution costs require teamwork, both inside the company and among all the marketing channel organizations.
Use Key Term Integrated Logistics Management here.
Use Marketing at Work 10-3 here.
The goal of integrated supply chain management is to harmonize all of the company’s logistics decisions.
Some companies have created permanent logistics committees made up of managers responsible for different physical distribution activities.
Companies can also create management positions that link the logistics activities of functional areas.
Companies can employ sophisticated, systemwide supply chain management software.
The members of a distribution channel are linked closely in delivering customer satisfaction and value as well as building customer relationships.
Smart companies coordinate their logistics strategies and forge strong partnerships with suppliers and customers to improve customer service and reduce channel costs.
Many companies have created cross-functional, cross-company teams.
Other companies partner through shared projects.
Integrated logistics companies, called third-party logistics (3PL) providers, perform any or all of the functions required to get their clients’ product to market.
Companies use third-party logistics providers for many reasons.
Getting the product to market is the focus of the logistics provider, so these providers can often do it more efficiently and at lower cost.
Outsourcing logistics frees a company to focus more intensely on its core business.
Integrated logistics companies understand increasingly complex logistics environments. This can be helpful to companies attempting to expand their global market coverage.
Use Key Term Third-Party Logistics (3PL) Provider here.
Use Chapter Objectives 5 here.
Use Discussing the Issues 4 here.
Travel Log
Discussing the Issues
Discuss the differences between a conventional distribution channel, a corporate VMS, a contractual VMS, and an administered VMS. Give an example of each one.
In an administered VMS, leadership is assumed not through common ownership or contractual ties but through the size and power of one or a few dominant channel members. A corporate VMS integrates successive stages of production and distribution under single ownership. A contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies than each could achieve alone.
Discuss the conditions under which a manufacturer would want its distribution intensity to be exclusive, selective, and intensive. Which distribution level makes sense for the following products: Mountain-Dew soft drinks, Rolex watches, and Ford automobiles? Explain your answer.
Producers of convenience products and common raw materials typically seek intensive distribution—a strategy in which they stock their products in as many outlets as possible. These goods must be available where and when consumers want them. By contrast, some producers purposely limit the number of intermediaries handling their products. The extreme form of this practice is exclusive distribution, in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. By granting exclusive distribution, a firm gains stronger distributor selling support and more control over dealer prices, promotion, credit, and services. Exclusive distribution also enhances a product’s image and allows for higher markups. Selective distribution uses more than one, but fewer than all, of the intermediaries who are willing to carry a company’s products. Selective distribution gives producers good market coverage with more control and less cost than does intensive distribution.
Although some channel members are removed through disintermediation, the functions performed by the channel must still take place. Using the travel industry as an example, explain how airlines and hotels will perform key distribution functions (., information, promotion, contact, matching, and negotiation) that travel agents historically have performed.
Responses to this question will vary by student. To provide an illustration of channels evolving, students can discuss how the Internet has allowed consumers to bypass the travel agent and go directly to the airline or hotel chain.
With which major functions would someone managing the logistics area of a company be concerned? Give an example of decisions this manager would make for each major function.
The major logistics functions include warehousing, inventory management, transportation, and logistics information management. In terms of warehousing, a company must decide on how many and what types of warehouses it needs and where they will be located. With regard to managing inventory, firms must balance the costs of carrying larger inventories against resulting sales and profits. The choice of transportation carriers affects the pricing of products, delivery performance, and condition of the goods when they arrive—all of which will affect customer satisfaction. In terms of transportation, the company can choose among five main transportation modes: truck, rail, water, pipeline, and air, along with an alternative mode for digital products: the Internet.
Discuss the rationale behind the text’s argument that demand chain may be a better term than supply chain. Do you agree or disagree? How does the concept of a value delivery network fit with these two concepts?
The term supply chain may be too limited—it takes a make-and-sell view of the business. It suggests that raw materials, productive inputs, and factory capacity should serve as the starting point for market planning. A better term would be demand chain because it suggests a sense-and-respond view of the market. Under this view, planning starts with the needs of target customers, to which the company responds by organizing resources with the goal of building profitable customer relationships. Students will have different opinions as to their agreement or disagreement with this statement. A value delivery network is made up of the company, suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system. So supply or demand chains represent part of the value delivery network.
Application Questions
Your company has just developed a new line of organic foods. Discuss the factors you should consider in selecting channel members. What methods will you use to motivate the channel members to work their best for you? Finally, how will you evaluate channel member performance?
When selecting intermediaries, the company should determine what characteristics distinguish the better ones. It will want to evaluate each channel member’s years in business, other lines carried, growth and profit record, cooperativeness, and reputation. Motivating channel members is often done by showing how they can be more profitable by working as part of an integrated delivery system. The producer must regularly check channel member performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged and lost goods, cooperation in company promotion and training programs, and services to the customer. The company should recognize and reward intermediaries who are performing well and adding good value for consumers. Those who are performing poorly should be assisted or, as a last resort, replaced. A company may periodically “requalify” its intermediaries and prune the weaker ones.
Advances in technology and the increasingly widespread use of the Internet have led many firms to create Internet-based channels of distribution that bypass intermediaries and go right to the consumer. Provide an example of a specific company that has used this approach. What does the company gain from using a direct-to-consumer Internet strategy? What disadvantages are there for the manufacturer and consumers under this strategy?
Students will come up with their own examples for this question. Dell Computers is a classic example of an Internet-based channel that goes direct to consumers. However, even Dell has been getting its foot in the door with retailers. Their recent activity has led them to set up areas inside Sears stores to sell Dell computers.
One of the challenges for companies opting for an Internet distribution channel is providing timely customer service. One solution to this is to have “live” customer service representatives available to answer questions. Look at the “live chat” online customer service available at ()—click on the “Customer Service” tab at the top of the page, and then the “Lands’ End Live” icon. What is your reaction to this type of customer service? Do you think it differentiates Lands’ End from online retailers without this feature? Where do you think online customer service will be in 5 years?
Student responses to this service will vary. Because this service is offered in a “text only” format currently, it may be interesting to have students consider how this might change in 5 years if a voice component is added.
Under the Hood/Focus on Technology
In the late 1990s, e-grocers promised to change the way we shop for milk, chicken, and paper towels. Imagine no more trips to the grocery store. With a few clicks of your mouse your shopping list would be sent to the grocery store and a few days later the groceries would appear at your door. Unfortunately, most e-grocers went bankrupt. But now Internet-based grocery stores are back and growing. Indeed, more groceries are sold online today than ever before, with annual sales in the online grocery industry expected to reach $ billion in 2003. According to the Food Marketing Institute, a quarter of all grocery retailers now offer some form of Web-based shopping. This market segment is certainly attractive as online customers spend an average of $125 per customer, compared with only $25 per customer in traditional supermarkets.
Visit ( and look around its Web site. Then respond to the following questions.
Would you use this service? Why or why not? Describe the market segment you feel is most likely to use an e-grocer to shop for groceries.
Student responses will vary. A likely market segment for this type of service is those individuals who have limited time to shop and are not price sensitive (perhaps dual-income couples).
How big a threat is this channel to traditional grocery stores? Explain your response. Why would a traditional grocery store consider adding a Web-based component to their bricks-and-mortar offering?
Students will have different opinions. Instructors should try and focus attention on which customers are likely to be served by each channel. The size of the online market should also be brought up in the discussion of threats to traditional grocery stores.
What are likely to be the biggest challenges to success that online grocers will have to overcome? What can they do to minimize these obstacles?
Challenges may include overcoming consumer tradition of going to the store, limited Internet access among shoppers, delivery of goods when customers are not home, managing inventory levels, and delivery issues.
Focus on Ethics
The music industry is one of the many industries that have started taking advantage of the speed and convenience of the Internet to add another distribution channel to their repertoire (., Unfortunately for the industry, this same channel lets consumers share music with each other for free. Music CD sales have dropped almost 15 percent in the past two years, according to the Recording Industry Association of America. What some consumers call “sharing,” industry executives call online piracy or bootlegging, and they blame the illegal downloads for the decline in CD sales. It is reported that music-sharing Web sites have accounted for billion files a month in illegal downloads, with much of the activity emanating from college campuses. The music industry estimates that it loses $300 million per year to illegal song copying and distribution. In the extreme, Senator Orrin Hatch of Utah has said that he is in favor of exploring technology that would remotely destroy computers used for illegal music downloads.
What is your position on this issue? Should users be able to freely share music over the Internet that they have legally purchased from retailers?
Many of the students may have used online music-sharing programs in the past, and thus have great insight and strong opinions relative to this question. Opinions will vary.
If you worked for a music recording company, what would you suggest that the recording industry do to address this issue?
Student response will vary. Instructors can bring up ideas related to educating music buyers about the harm to the record industry, technology development to stop the sharing capabilities of buyers, the lowering of CD prices as a weapon to stop piracy, and so forth.
Divide into two groups and have a debate in class over this issue. One group should take the side of the music industry, while the other group should take the side of consumers digitally sharing music.
As a twist, instructors might have the students switch sides at some point during the debate and argue for the other side of the issue.
Great Ideas
Barriers to Effective Learning
Average students are going to have a difficult time with this chapter. They will not have previously considered the complicated nature of getting products to consumers before, and the concepts of “supply chain” and “value delivery network” will most likely be foreign. Figure 10-1 is excellent in showing how complex delivery networks could become without intermediaries, and an early focus should be placed on this figure. Also, an example of how difficult it would be for Hershey’s, for example, to deliver one candy bar to one consumer exactly when that consumer wanted it will very quickly drive home the need for channels of distribution.
Vertical marketing systems can be difficult to understand. It might actually be easier to begin discussion of the contractual VMS with the illustration of franchises. Most students understand that McDonald’s is a franchise organization, and so the concept will be understood quickly and easily. A corporate VMS then becomes easy to understand, because those consumer outlets are all owned by the company whose logo is on the door. Administered VMSs can be illustrated by the example of Wal-Mart, whose marketplace power has been making news throughout 2003.
Students will recognize horizontal VMSs if they have been in a grocery store recently. The addition of bank branches, and in some grocery stores, Starbucks outlets, easily explains this concept.
Multichannel distribution systems can be illustrated through the example of many PC manufacturers. HP, for instance, sells through many retail outlets, but they also have their own sales force for businesses. IBM will sell to consumers via its website, to large companies through its own sales force, and to small businesses through many certified resellers.
The entire textbook has clearly been focused on beginning every planning task with understanding customer needs, so it should come as no surprise that the first channel design decision starts at the same place. The same holds true for setting channel objectives.
The examples in the text of intensive, exclusive, and selective distribution are highly illustrative and should be reviewed. Additional examples can be provided in discussion with the students.
In marketing logistics, the concepts of inbound and reverse logistics should be fully explained. Most students, at this point in the chapter, will have no problems with outbound logistics. But they will likely not have thought about having products shipped in to the company; because the chapter focuses on getting products to market, students will assume that all companies make the decisions about how to ship their products to their customers, without the customers (in this case, other companies) having much say about it. The truth is, however, that effectively managing inbound logistics can save large companies millions of dollars a year, and so it is a very important concept. Reverse distribution can be easily understood by discussing the problems of returns and products sent in for maintenance or repair. An interesting discussion could also ensue regarding the problem of discarded computers and monitors and even cell phones; while many of these are still going in the trash, more and more companies are taking them back in order to recycle them. This is also a reverse distribution issue.
Student Projects
Compare the distribution systems of a service firm and a product firm. What are the differences? What are the similarities?
Discuss the implications for travel agencies and for consumers of the airlines selling and distributing tickets via the Internet.
Why do some manufacturers choose not to own their dealers, but instead establish contractual relationships with them?
Classroom Exercise/Homework Assignment
Aveda () and The Body Shop () are two cosmetics and personal care companies that care about the environment. They both use all-natural ingredients in their products, and they tend to target the same type of consumer. Yet they distribute their products in different ways. Visit their websites to review their corporate philosophies and the way their products enter the market.
Compare and contrast the two distribution methods.
Aveda, which started as an independent company but is now owned by Estee Lauder, distributes largely through salons. Their salon outlets are required to have at least one employee trained in the Aveda products and methods. They also have some company-owned stores, and regional distributors may also have retail outlets. Their distributor network includes 11 domestic distributors and 15 more around the world. The distributors hire account executives and cosmetology professionals to sell the products and act as educators.
The Body Shop, in contrast, owns all its retail outlets. These outlets are largely found in malls, making the products somewhat more accessible to consumers. They operate in 50 countries with more than 1,900 outlets.
Of the two distribution philosophies, which one reaches the broadest audience? Are both companies effectively reaching their target markets?
Most students will be familiar with The Body Shop, but not many will have heard of Aveda. That is directly related to the two distribution strategies that the companies use: By utilizing retail outlets in malls, The Body Shop has become a familiar face in our retail-driven society. Their employees can both explain their products and how to use them, although they may not have the ability to develop long-term relationships with the customers.
Aveda, on the other hand, has chosen to focus on the cosmetology sector for getting the word out. They want to ensure that the hairdressers and makeup professionals who use and sell their products are not only skilled practitioners, but also understand the products thoroughly so they can not only explain them to the ultimate customers, but also teach those customers how to use the products effectively. Because most women have long-term relationships with their hairdressers, Aveda can in turn develop long-term relationships with their customers, without having to own the retail outlets.
So, although both companies seem to be focused on the same consumer, they are each distributing their products in the manner that they think is best for the type of user they want.
Classroom Management Strategies
Once again we have a chapter with a lot of very important material, but planned carefully, this chapter can easily be covered in one class period.
The first two sections of this chapter, Supply Chains and the Value Delivery Network and The Nature and Importance of Marketing Channels, can be covered in 5 minutes each. Both sections are important for establishing a vocabulary and baseline for the remainder of the chapter and, as such, are relatively short and to the point. Utilizing Figures 10-1 and 10-2 will be extremely helpful.
The next section, Channel Behavior and Organization, should be covered in 15 minutes. The concept of vertical marketing systems will most likely take the majority of that time, because it can be a difficult concept to comprehend. Utilizing lots of examples will help here, as will asking students for their knowledge of both vertical and horizontal marketing systems.
Channel Design Decisions should also take 15 minutes to discuss. In this section, an equal amount of time should be spent on virtually all the subheadings, although Identifying Major Alternatives may take several minutes longer than the remain-ing sections.
The next two major sections, Channel Management Decisions and Public Policy and Distribution Decisions, can be covered in 5 minutes each. Again, these sections are short, with the information presented in a concise manner.
Finally, Marketing Logistics and Supply Chain Management can be covered in 10 minutes. Half of this time should be spent on the subsection Major Logistics Functions. If the students are required to take an Operations Management course, they will cover these topics in more detail, but if not, this could be the only time they are exposed to these concepts while in college.
Chapter 11
Retailing and Wholesaling
Previewing the Concepts: Chapter Objectives
Explain the role of retailers and wholesalers in the distribution channel.
Describe the major types of retailers and give examples of each.
Identify the major types of wholesalers and give examples of each.
Explain the marketing decisions facing retailers and wholesalers.
Just the Basics
Chapter Overview
This chapter is a continuation of the prior chapter on marketing channels; it provides more detail on retailing and wholesaling, two very important concepts in the value delivery network.
It begins with a discussion of retailers and the challenges they face. There are many types of retailers. These retailers can be classified according to several characteristics, includ-ing the amount of service they offer, the breadth and depth of their product lines, the relative prices they charge, and how they are organized.
Retailers are always searching for new strategies to attract and retain customers. The major decisions retailers need to make are centered around their target market and positioning, their product assortment and services, their price, their promotion strategies, and where they are located.
Retailing is facing many challenges, including new retail forms, such as warehouse stores. The wheel of retailing concept says that many new retailing forms begin as low-margin, low-price, low-status operations. They challenge established retailers, and then the new retailers’ success leads them to upgrade their facilities and offer more service. In turn, their costs increase, and eventually they become like the conventional retailers they replaced. The cycle begins again.
Wholesalers buy mostly from producers and sell mostly to retailers, industrial customers, and other wholesalers. As a result, many of this country’s largest and most important wholesalers are largely unknown to final consumers. Wholesalers provide important services, however, and they add value through performing one or more of several functions.
There are many types of wholesalers, including merchant wholesalers, agents and brokers, and manufacturers’ sales branches and offices. They face many of the same decisions as retailers, including the choice of target market, positioning, and the marketing mix.
The distinction between large retailers and large wholesalers continues to blur. Many retailers now operate formats such as wholesale clubs and hypermarkets that perform many wholesale functions. In return, many large wholesalers are setting up their own retailing operations.
Chapter Outline
Introduction
Wal-Mart is the ultimate retailer. Its phenomenal success has resulted from an unrelenting focus on bringing value to its customers. Wal-Mart is passionately dedicated to its value proposition of “Always Low Prices, Always.”
Wal-Mart knows its customers well and takes good care of them. It delivers what customers want: a broad selection of carefully selected goods at unbeatable prices.
This chapter looks at the nature and importance of retailing, major types of store and nonstore retailers, the decisions retailers make, and the future of retailing, as well as the same topics as they relate to wholesaling.
Retailing
Retailing includes all the activities involved in selling products or services directly to final consumers for their personal, nonbusiness use.
Retailers are businesses whose sales come primarily from retailing.
Nonstore retailing has been growing much faster than has store retailing. Nonstore retailing includes selling to final consumers through direct mail, catalogs, telephone, the Internet, TV home shopping shows, home and office parties, door-to-door contact, vending machines, and other direct selling approaches.
Use Key Terms Retailing, Retailer here.
Use Chapter Objectives 1 here.
Use Discussing the Issues 3 here.
Types of Retailers
Table 11-1 shows the most important types of retail stores.
Use Table 11-1 here.
Retailers can be differentiated on amount of service.
Self-service retailers serve customers who are willing to perform their own “locate-compare-select” process to save money. Self-service is the basis of all discount operations and is typically used by sellers of convenience goods and nationally branded, fast-moving shopping goods.
Limited-service retailers provide more sales assistance because they carry more shopping goods about which customers need information.
Full-service retailers, such as specialty stores and first-class department stores, offer salespeople who assist customers in every phase of the shopping process.
Let’s Discuss This
What type of service strategy is implemented at a 7 Eleven? At . Penney? At Neiman Marcus?
Retailers can also be classified according to the length and breadth of their product assortments.
Specialty stores carry narrow product lines with deep assortments within those lines.
Department stores carry a wide variety of product lines. Service remains the key differentiating factor.
Supermarkets are the most frequently shopped type of retail store.
Convenience stores are small stores that carry a limited line of high-turnover convenience goods.
Superstores are much larger than regular supermarkets and offer a large assortment of routinely purchased food prod-ucts, nonfood items, and services.
Wal-Mart, Kmart, Target, and others offer super-centers, combination food and discount stores that emphasize cross-merchandising.
Category killers feature stores the size of airplane hangars that carry a very deep assortment of a particular line with a knowledgeable staff.
Hypermarkets are huge superstores. Hypermarkets have been very successful in Europe and other world markets, but they have met with little success in the United States.
Use Key Terms Specialty Store, Department Store, Supermarket, Convenience Store, Superstore, and Category Killer here.
Use Discussing the Issues 1 here.
Use Focus on Ethics here.
Retailers can be classified according to the prices they charge.
A discount store sells standard merchandise at lower prices by accepting lower margins and selling higher volume.
An off-price retailer buys at less-than-regular wholesale prices and charges consumers less than retail.
Independent off-price retailers either are owned and run by entrepreneurs or are divisions of larger retail operations.
Most large off-price retailer operations are owned by bigger retail chains.
Factory outlets sometimes group together in factory outlet malls and value-retail centers, where dozens of outlet stores offer prices as low as 50% below retail on a wide range of items.
Warehouse clubs (or wholesale clubs or membership warehouses) operate in huge, drafty, warehouselike facilities and offer few frills.
Use Key Terms Discount Store, Off-Price Retailer, Independent Off-Price Retailer, Factory Outlet, and Warehouse Club here.
Use Chapter Objectives 2 here.
The major types of retail organizations are described in Table 11-2.
Chain stores are two or more outlets that are commonly owned and controlled.
A voluntary chain is a wholesaler-sponsored group of independent retailers that engages in group buy-ing and common merchandising.
A retailer cooperative is a group of independent retailers that bands together to set up a jointly owned, central wholesale operation and conducts joint merchandising and promotion efforts.
Franchise systems are normally based on some unique product or service; on a method of doing business; or on the trade name, goodwill, or patent that the franchiser has developed.
Merchandising conglomerates are corporations that com-bine several different retailing forms under central owner-ship.
Use Key Terms Chain Store, Franchise here.
Use Table 11-2 here.
Use Application Questions 1 here.
Use Speed Bump: Linking the Concepts here.
Retailer Marketing Decisions
Retailers are always searching for new marketing strategies to attract and hold customers.
Figure 11-1 shows the major marketing decisions retailers face.
Use Figure 11-1 here.
Retailers must first define their target markets and then decide how they will position themselves in these markets.
Too many retailers fail to define their target markets and positions clearly. They try to have “something for every-one” and end up satisfying no market well.
Use Marketing at Work 11-1 here.
Retailers must decide on three major product variables.
The retailer’s product assortment should differentiate the retailer while matching target shoppers’ expectations.
The services mix can also help set one retailer apart from another.
The store’s atmosphere is another element in the reseller’s product arsenal.
Applying the Concept
You want to open a store that caters to the local college population. You will sell T-shirts, sweatshirts, and other casual clothing favored by college students. How will you differ-entiate your product assortment from the school’s bookstore? What type of service will you offer (keeping in mind the needs of the college students who are your target)? What kind of store atmosphere will you provide?
A retailer’s price policy must fit its target market and positioning, product and service assortment, and competition.
Most retailers seek either high markups on lower volume or low markups on higher volume.
Retailers use any or all of the promotion tools—advertising, personal selling, sales promotion, public relations, and direct marketing—to reach consumers.
Retailers often point to three critical factors in retailing success—location, location, and location.
It is very important that retailers select locations that are accessible to the target market in areas that are consistent with the retailer’s positioning.
Central business districts were the main form of retail cluster until the 1950s.
A shopping center is a group of retail businesses planned, developed, owned, and managed as a unit.
A regional shopping center, or regional shopping mall, the largest and most dramatic shopping center, contains from 40 to more than 200 stores.
A community shopping center contains between 15 and 40 retail stores.
Most shopping centers are neighborhood shopping centers or strip malls that generally contain between 5 and 15 stores.
A recent addition to the shopping center scene is the so-called power center. These huge unenclosed shopping centers consist of a long strip of retail stores, each with its own entrance with parking directly in front.
Use Key Term Shopping Center here.
Use Application Questions 2 here.
The Future of Retailing
Retailers operate in a harsh and fast-changing environment, which offers threats as well as opportunities.
New retail forms continue to emerge to meet new situations and consumer needs, but the life cycle of new retail forms is getting shorter.
The wheel of retailing concept says that many new types of retailing forms begin as low-margin, low-price, low-status oper-ations. They challenge established retailers that have become “fat” by letting their costs and margins increase. The new retailers’ success leads them to upgrade their facilities and offer more services. In turn, their costs increase, forcing them to increase their prices. Eventually, the new retailers become like the conventional retailers they replaced. The cycle begins again.
Use Key Term Wheel of Retailing Concept here.
Use Marketing at Work 11-2 here.
Use Discussing the Issues 2 here. Use Application Questions 3 here.
Use Under the Hood/Focus on Technology here.
Americans are increasingly avoiding the hassles and crowds at malls by doing more of their shopping by phone or online.
Today’s retailers are increasingly selling the same products at the same price to the same consumers in competition with a wider variety of other retailers.
This merging of consumers, products, prices, and retailers is called retail convergence.
This convergence means greater competition for retailers and greater difficulty in differentiating offerings.
Let’s Discuss This
Do you avoid the crowds at malls? Do your parents? Do you think that there could be a backlash against the ever-larger malls and stores? Use the wheel of retailing concept to think about consumers’ reactions to crowds, the same merchandise everywhere, and the difficulty retailers have in differentiating themselves.
The rise of huge mass merchandisers and specialty superstores, the formation of vertical marketing systems and buying alliances, and a rash of retail mergers and acquisitions have created a core of superpower megaretailers. They are shifting the balance of power between retailers and producers.
Retail technologies are becoming critically important as compet-itive tools.
Progressive retailers are using advanced information tech-nology and software systems to produce better forecasts, control inventory costs, order electronically from suppliers, send email between stores, and even sell to customers within stores.
Retailers with unique formats and strong brand positioning are increasingly moving into other countries.
. retailers are still significantly behind Europe and Asia when it comes to global expansion.
There has been a resurgence of establishments that, regardless of the product or service they offer, also provide a place for people to get together.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 4 here.
Wholesaling
Wholesaling includes all activities involved in selling goods and services to those buying for resale or business use.
Wholesalers are firms engaged primarily in wholesaling activity.
Use Key Terms Wholesaling, Wholesaler here.
Use Chapter Objectives 3 here.
Use Marketing at Work 11-3 here.
Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers, and other wholesalers.
Wholesalers add value by performing one or more of the following channel functions:
Selling and promoting
Buying and assortment building
Bulk breaking
Warehousing
Transportation
Financing
Risk bearing
Market information
Management services and advice
Use Discussing the Issues 5 here.
Types of Wholesalers
Wholesalers fall into three major groups as shown in Table 11-3.
Use Table 11-3 here.
Merchant wholesalers are the largest single group of wholesalers, accounting for roughly 50% of all wholesaling.
Full-service wholesalers provide a full set of services.
Limited-service wholesalers offer fewer services to their suppliers and customers.
Brokers and agents do not take title to goods, and they perform only a few functions. They generally specialize by product line or customer type.
A broker brings buyers and sellers together and assists in negotiations.
Agents represent buyers or sellers on a more permanent basis.
Manufacturers’ agents are the most common type of agent wholesaler.
Manufacturers’ sales branches and offices are the third major type of wholesaler.
Use Key Terms Merchant Wholesaler, broker, Agent, and Manufacturers’ Sales Branches and Office here.
Wholesaler Marketing Decisions
As with retailers, wholesaler marketing decisions include choices of target markets, positioning, and the marketing mix. See Figure 11-2.
Wholesalers must define their target markets and position themselves effectively. They can choose a target group by size of customer, type of customer, need for service, or other factors.
Wholesalers must decide on product assortment and services, prices, promotion, and place.
The wholesaler’s “product” is the assortment of products and services that it offers.
Price is an important decision. Wholesalers usually mark up the cost of goods by a standard percentage, say 20%.
Most wholesalers are not promotion minded.
Place is important—wholesalers must choose their loca-tions, facilities, and Web locations carefully.
Use Chapter Objectives 4 here.
Use Figure 11-2 here.
Trends in Wholesaling
As the wholesaling industry moves into the 21st century, it faces considerable challenges.
The industry remains vulnerable to one of the most enduring trends of the last decade—fierce resistance to price increases and the winnowing out of suppliers who are not adding value based on cost and quality.
The distinction between large retailers and large wholesalers continues to blur.
Many retailers now operate formats such as wholesale clubs and hypermarkets that perform many wholesale functions.
In return, many large wholesalers are setting up their own retailing operations.
Wholesalers will continue to increase the services they provide to retailers.
Many large wholesalers are now going global.
Travel Log
Discussing the Issues
Distinguish between the following types of retail forms: specialty stores, department stores, supermarkets, convenience stores, superstores, and category killers.
Specialty stores carry narrow product lines with deep assortments within those lines. In contrast, department stores carry a wide variety of product lines. Supermarkets primarily carry grocery items and are the most frequently shopped type of retail store. Convenience stores are small stores that carry a limited line of high turnover convenience goods. Superstores are much larger than regular supermarkets and offer a large assortment of routinely purchased food products, nonfood items, and services.
Identify a retailer in your town that has gone out of business in the past few years. What factors do you think led to this store’s downfall?
Student response will vary. Instructors may wish to have students focus on the role that competition (Internet, big box retailers, etc.) may have played in the store’s downturn.
As the chapter indicates, the popularity of nonstore retailing continues to grow. From a consumer’s perspective, what are some of the advantages and disad-vantages of shopping through mail-order catalogs, television shopping networks, and online?
Students might discuss the convenience of shopping from home, the ability to easily compare products from different sources, and the perception of cost savings from nonstore retailers due to a lack of overhead.
Discuss the concept of retail convergence as it applies to wristwatches. How can smaller retailers compete in such an environment?
Today’s retailers are increasingly selling the same products at the same prices to the same consumers in competition with a wider variety of other retailers. This merging of consumers, products, prices, and retailers is called retail conver-gence. Such convergence means greater competition for retailers and greater difficulty in differentiating offerings. Despite this, many small, independent retailers are thriving. They are finding that sheer size and marketing muscle are often no match for the personal touch small stores can provide or the specialty niches that small stores fill for a devoted customer base.
Describe the functions that wholesalers have traditionally performed. Which ones appear to be the most likely candidates for either large producers or large retailers to take over? Explain your response.
Selling and promoting: Wholesalers’ sales forces help manufacturers reach many small customers at a low cost. The wholesaler has more contacts and is often more trusted by the buyer than the distant manufacturer.
Buying and assortment building: Wholesalers can select items and build assortments needed by their customers, thereby saving the consumers much work.
Bulk breaking: Wholesalers save their customers money by buying in carload lots and breaking bulk (breaking large lots into small quantities).
Warehousing: Wholesalers hold inventories, thereby reducing the inventory costs and risks of suppliers and customers.
Transportation: Wholesalers can provide quicker delivery to buyers because they are closer than the producers.
Financing: Wholesalers finance their customers by giving credit, and they finance their suppliers by ordering early and paying bills on time.
Risk-bearing: Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence.
Market information: Wholesalers give information to suppliers and customers about competitors, new products, and price developments.
Management services and advice: Wholesalers often help retailers train their salesclerks, improve store layouts and displays, and set up accounting and inventory control systems.
Financing and Bulk-breaking would appear to be good candidates for large retailers to perform due to the number of outlets they have and their financial resources.
Application Questions
Develop a table with the retail characteristics of amount of service, product line length and breadth, relative prices, and organizational structure as the rows of the table. Place the following retailers at the top of each column in the table: Best Buy, Sears, Sam’s Club, The Gap, Wal-Mart, and a local convenience store. Complete the cells in the table by describing each of the retailers on each of the characteristics. What implications can you draw from this table?
Instructors can use this question to emphasize how different types of retailers are differentiated on service level, product assortment, price, and structure. Implications with regard to positioning of retailers can be drawn based upon the ratings given to the specific retail chains. Students might be asked to identify unfilled needs that appear to exist given their table, by assuming that these were the only outlets available for a particular product type.
Pick one of these national retail chains (The Gap, Barnes & Noble, Foot Locker, or Walgreens) and a local retail firm that sells the same type and quality of merchandise. Compare and contrast the two retailers on their target market, prod-uct and service assortment, store atmosphere, prices, promotion tools, and loca-tion. Why would a shopper pick one of these retailers over the other when shopping for products they both carry?
Student responses will vary for this question. Instructors may want to focus on the types of differences between the two retailers, how much customers are concerned about those differences, and how sustainable those differences are?
Visit a store in your community that also has an e-commerce website (., Kroger, K-mart, Target, or Sears). After visiting both the store and the website, consider the following questions. Do the two retail shopping alternatives attract the same type of customer? Describe the customer who would shop at the bricks-and-mortar store location and the customer who would shop on the store’s website. How are the store and website positioned differently? If they are not positioned differently, should they be and how could this be accomplished? Are there any potential disadvantages for the store in having these two distribution channels?
Student responses will vary based on the store selected and the particular merchandise/services considered. Students might be asked if rather than competing against each other, these two store channels provide some synergies for each other.
Under the Hood/Focus on Technology
New technology may be coming to a grocery store near you. Shopping Buddy, currently in a test market in Massachusetts, is a small cart-mounted computer monitor and barcode reader. To begin using the cart, customers scan their customer card on the cart and their shopping history with the store is automatically downloaded to the cart. Customers can then scan items as they pull them off the shelf and place them directly in to bags in the cart. When it is time to check out, they simply scan their card again and pay. No more waiting in lines as the cashier scans all your items.
But Shopping Buddy does more than just speed the checkout process. Because it knows your shopping history, it can remind you when you have not purchased an item in a while, it can tell you where in the store to find particular items you are looking for and how far away from them you are, it will alert you to any sale items that day, and you can even place your order at the Deli counter from the cart and it will alert you when it is ready to be picked up.
What is your initial reaction to this type of technology? Would you want to shop this way?
Student responses will vary. Instructors may wish to probe deeper into what might keep some shoppers away from this technology.
What advantages and disadvantages are there for stores implementing this technology?
The following should be considered when assessing the advantages and disadvantages: cost of the technology, employee training, maintenance time, customer training time, informational benefits to the company, does the device increase sales, does it increase store loyalty?
What privacy concerns might shoppers have and how could a store minimize those concerns?
Customers may be concerned that their shopping habits will be revealed to third parties who will use the information in some harmful manner (., solicit them with unwanted products; provide eating habit information to their health insurer, etc). Stores should have clearly stated privacy policies that explain that no individual-level data will be revealed.
Focus on Ethics
Some individuals complain that big retailers like Wal-Mart, Home Depot, and Best Buy are hurting communities by driving smaller “mom and pop” operations out of business. These critics complain that the loss of these smaller retailers means that profits leave the community, service levels get reduced, and retail locations sit empty. On the other hand, proponents of large retailers suggest that these “big box” retailers offer consumer convenience, lower prices, and many employment opportunities for citizens.
What, if anything, should city governments do to protect local retailers from the threat of large retailers?
Student opinion will be mixed on this subject. Zoning restrictions and economic incentives are two things that governments could implement to either help or harm big box retailers if they wanted to do so.
What are some alternative strategies smaller retailers can use to compete against large retailers, rather than going head to head with them on the basis of large selection and low prices?
Students will likely mention more personalized service as an effective strategy. Another strategy would be to specialize in a smaller niche that may be unprofitable for a large firm.
Divide into teams of three to five students and have each team take one side of this issue: Do large retailers like Wal-Mart, Home Depot, and Best Buy ultimately help or harm the communities they enter?
Students should be asked to switch sides of the argument about halfway through the debate and then debate against a different group. This should show that there are no black-and-white answers to this issue.
Great Ideas
Barriers to Effective Learning
Retailing is generally not a difficult concept for students, however the different types of retailers should be thoroughly explained to the students to ensure their understanding. Table 11-1 is an excellent resource in this regard. The differing types of retail organizations are also critical to understand; again, Table 11-2 helps here.
The decisions retailers need to make will be easily understood with a review of Figure 11-1. It is very clear in this figure that the marketing mix elements studied earlier in the text are being applied in a retail environment. Explain carefully how the type of retail organization chosen affects the marketing mix, and vice versa.
The wheel of retailing concept can be difficult to understand without a proper explanation. Drawing the parallel to the product life-cycle concept is an aid in this. Also, discuss with the students how retailing has changed from “Main Street,” to the mall, to megastores like Wal-Mart Supercenters, horizontal marketing systems, and such.
Nonstore retailing should be familiar to students, but perhaps not by this name. Many students may not realize that they are visiting a retailer when they buy books or CDs from , or select an item from a catalog and order it over the phone. Explain that this is an extension of the “place” variable of the marketing mix, but it is still selling to ultimate consumers, so it is indeed a retailing outlet.
Wholesaling, by contrast, could be a difficult subject for many students. Although the concept was introduced in an earlier chapter, there is more detail here, and there are many more terms for the students to learn. A careful review of the introduction to this section, with a description of the various channel functions wholesalers perform, will set the stage for the students’ ability to learn these concepts.
The description of the types of wholesalers is brief but important. Examples will help tremendously, even though most wholesalers, by their nature and as discussed in the text, are virtually unknown to consumers. Some students, however, might be familiar with distributors who service grocery stores and other retail outlets from summer jobs or those held by family members. You can also draw the parallel between stockbrokers and product brokers, because the function is virtually the same, although the item being brokered is very different. A stockbroker never takes ownership of the stock, however, just as a product broker does not. A celebrity or sports agent can be the parallel descriptor for manufac-turers’ agents. Table 11-3 will be very helpful in this discussion.
As with retailers, the decisions wholesalers make revolve around the marketing mix components. This concept should be easily grasped by students at this point.
Student Projects
How do retailers identify target markets? Explain the major strategies by which retailers reach their target markets.
Cite several examples (not from the textbook) in each of the following categories: department store, specialty store, convenience store, discount store, off-price retailer.
Show how the elements of the marketing mix apply to retailers. Apply these elements to the decision process for a major chain of convenience stores to open an outlet on your college campus.
Select two stores that you shop in frequently. What sort of atmosphere do these stores have? Does it aid in your shopping experience, detract from it, or not affect it at all?
Classroom Exercise/Homework Assignment
C&S Wholesale Grocers is New England’s largest food wholesaler and the second largest in the United States. It distributes more than 53,000 items, including groceries, produce, and nonfood items. They have more than 36 facilities in the United States and serve grocery stores on the East Coast, West Coast, and Hawaii. Visit their website at .
C&S is largely a wholesaler, but in looking at its press releases, you see that it joined IGA, a retail outlet organized as a volunteer chain. Why would a wholesaler join a retailer chain?
Student responses to this will vary, but C&S saw an opportunity. Fleming Foods has been in bankruptcy and has dropped out of the IGA family. C&S took its place to solidify its place as the second largest wholesaler in the nation. It also wanted to further expand its market. Finally, it is one of many firms joining the conver-gence of retailing and wholesaling, as large retailers become wholesalers and large wholesalers become retailers.
C&S distributes to both independent grocery stores and chains. With its long list of customers, how might C&S develop its marketing strategy? Discuss all four elements of the marketing mix: product, price, place, and promotion.
Again, student responses will vary. However, C&S will need to ensure that it has a thorough product mix to serve the needs of its various customers. Because these customers are located in many regions of the country, there will need to be some variety in the products it carries; in Vermont, for instance, they probably don’t sell any Taro chips, which are a very big product in Hawaii.
As mentioned in the text, margins are very thin in the grocery business, at both the retail and wholesale level. So C&S probably does not hold a lot of pricing power and must constantly keep in mind the profit needs of its customers.
Place is critical for wholesalers: They need a lot of space to take large shipments in from producers, and then break bulk and ship the new assortment out to the local grocery retail outlets. Therefore, they need to be outside major city centers, but close enough to their retail customers to keep transportation costs down.
Finally, their promotional efforts may vary between the large chains and small independents, but they must ensure that they do not break any laws that govern pricing and its promotional aspects (this was covered in Chapter 10).
Classroom Management Strategies
This chapter can easily be covered in one standard class period. Although the terminology will be new to students, particularly the types of retailers and wholesalers, the material itself is easily understood as a general rule, and students will tend to be pretty familiar with retailing in particular.
The majority of the class, perhaps 40 minutes in a 60-minute class, should be spent on retailing. This can be broken down further, with 15 minutes on the Types of Retailers, 15 minutes on Retailer Marketing Decisions, and 10 minutes on the Future of Retailing. You can liberally use examples and the various questions from the chapter in going through this material.
The remaining 20 minutes of the class will be spent on the Wholesaling section. Here, it is very important that time be spent on discussing the various types of wholesalers and what kinds of functions they perform. Students will be less familiar with this type of business, so several examples should be gathered to discuss in class. The Classroom Exercise/Homework Assignment provided previously can be very useful.
Chapter 12
Integrated Marketing Communication:
Advertising, Sales Promotion, and Public Relations
Previewing the Concepts: Chapter Objectives
Discuss the process and advantages of integrated marketing communications.
Define the five promotion tools and discuss the factors that must be considered in shaping the overall promotion mix.
Describe and discuss the major decisions involved in developing an advertising program.
Explain how sales promotion campaigns are developed and implemented.
Explain how companies use public relations to communicate with their publics.
Just the Basics
Chapter Overview
This chapter discusses the importance of coordinating the company’s marketing mix components and integrating all the messaging elements into one cohesive unit. A company’s marketing communications mix consists of a specific blend of advertising, sales promotion, public relations, personal selling, and direct-marketing tools that the company uses to pursue its advertising and marketing objectives.
Customers don’t distinguish between message sources the way marketers do. In the consumer’s mind, advertising messages from different media and different promotional approaches all become part of a single message about the company. Conflicting messages from these different sources can result in confused company images and brand positions. The problem is that different communications usually come from different company sources. Under integrated marketing communications, the company carefully integrates and coordinates its many communications channels to deliver a clear, consistent, and compelling message about the organization and its brands.
Integrated marketing communications involves identifying the target audience and shaping a well-coordinated promotional program to elicit the desired audience response. Marketers are moving toward viewing communications as managing the customer relationship over time. Thus, the communications process should start with an audit of all the potential contacts target customers may have with the company and its brands.
The chapter covers each marketing communications and promotion tool in detail, ex-plaining how they are each used, their advantages and disadvantages, and how best to plan each communication as well as the overall process and communications mix. Also described are the factors that influence the marketer’s choice of promotion tools.
Chapter Outline
Introduction
AFLAC’s ads used to look just like every other insurance company’s ads. In 1999, AFLAC began looking for a better way to build brand awareness and deliver its message to consumers.
The company wanted something different that would break through today’s advertising clutter. Someone on the team pointed out that the name of the company sounded like a duck quack, and the rest is history.
The campaign was risky, but consumers loved the duck. The company’s name recognition jumped from 13% to 91% in the two years after the start of the campaign. Four out of ten people in the United States not only recognize the name, they can identify AFLAC as a supplemental insurer.
Modern marketing calls for more than just developing a great product, pricing it attractively, and making it available to target customers. Companies must communicate with current and prospective customers. All of their communications efforts must be blended into a consistent and coordinated communications program.
The Marketing Communications Mix
A company’s total marketing communications mix—also called its promotion mix—consists of the specific blend of advertising, sales promotion, public relations, personal selling, and direct-marketing tools that the company uses to pursue its advertising and marketing objectives. Definitions of the five major promotion tools follow:
Use Key Term Marketing Communications Mix here.
Use Chapter Objectives 1 here.
Advertising is any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor.
Sales promotions are short-term incentives to encourage the purchase or sale of a product or service.
Public relations involves building good relations with the com-pany’s various publics by obtaining favorable publicity, building up a good corporate image, and handling or heading off unfavor-able rumors, stories, and events.
Personal selling is personal presentation by the firm’s sales force for the purpose of making sales and building customer relation-ships.
Direct marketing establishes direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships.
Use Key Terms Advertising, Sales Promotion, Public Relations, Personal Selling, and Direct Marketing here.
Use Chapter Objectives 2 here.
Use Discussing the Issues 1 here.
Communication goes beyond these specific promotion tools.
The product’s design, its price, the shape and color of its package, and the stores that sell it—all communicate something to buyers.
Although the promotion mix is the company’s primary communi-cation activity, the entire marketing mix—promotion and product, price, and place—must be coordinated for the greatest communi-cation impact.
Applying the Concept
Pick several brands of shampoo, one from the grocery store, one from a salon, and one from a health food store (if available). Discuss how each package design, the stores in which it is sold, its price, and so forth all communicate messages to the consumer. What are those messages?
Integrated Marketing Communications
During the past several decades, companies around the world have perfected the art of mass marketing.
However, as we move into the twenty-first century, marketing managers face some new marketing communications realities.
The Changing Communications Environment
Two major factors are changing the face of today’s marketing communi-cations.
As mass markets have fragmented, marketers are shifting away from mass marketing. They are developing focused marketing programs designed to build closer relationships with customers in more narrowly defined micromarkets.
Vast improvements in information technology are speeding the movement toward segmented marketing. Today’s information technology helps marketers to keep closer track of customer needs.
The shift from mass marketing to segmented marketing has had a dramatic impact on marketing communications. The shift toward one-to-one mar-keting is spawning a new generation of more specialized and highly targeted communications efforts.
Market fragmentation has resulted in media fragmentation. There has been an explosion of more focused media that better match today’s targeting strategies.
Let’s Discuss This
How many magazines do you subscribe to? What are their topics? Do you read a magazine that applies to your hobbies? To your demographic segment (age, ethnic group, income level)? To your lifestyle (working out, music interest, etc.)?
The Need for Integrated Marketing Communications
Customers don’t distinguish between message sources the way marketers do. In the consumer’s mind, advertising messages from different media and different promotional approaches all become part of a single message about the company. Conflicting messages from these different sources can result in confused company images and brand positions.
Companies often fail to integrate their various communications channels. Mass-media advertisements say one thing, a price promotion sends a different signal, a product label creates still another message, company sales literature says something altogether different, and the company’s website seems out of sync with everything else.
The problem is that these communications often come from different company sources.
Under the concept of integrated marketing communications, the company carefully integrates and coordinates its many communications channels to deliver a clear, consistent, and compelling message about the organization and its brands. The concept is illustrated in Figure 12-1.
IMC calls for recognizing all contact points where the customer may encounter the company, its products, and its brands. Each brand contact will deliver a message—whether good, bad, or indifferent. The company must strive to deliver a consistent and positive message with each contact.
Use Key Term Integrated Marketing Communications here.
Use Figure 12-1 here.
A View of the Communication Process
Integrated marketing communications involves identifying the target audience and shaping a well-coordinated promotional campaign to elicit the desired audience response.
Marketers are moving toward viewing communications as managing the customer relationship over time. Because customers differ, communica-tions programs need to be developed for specific segments, niches, and even individuals.
The communications process should start with an audit of all potential contacts target customers may have with the company and its brands.
Setting the Overall Communication Mix
The concept of integrated marketing communications suggests that the company must blend the promotion tools carefully into a coordinated promotion mix.
The factors that influence the marketer’s choice of promotion tools follow. Each promotion tool has unique characteristics and costs.
Advertising can reach masses of geographically dispersed buyers at a low cost per exposure, and it enables the seller to repeat a message many times.
Large-scale advertising says something positive about the seller’s size, popularity, and success.
Consumers tend to view advertised products as more legitimate.
Advertising also has shortcomings. Although it reaches people quickly, advertising is impersonal. It can carry on only a one-way communication with the audience, and the audience does not feel that it has to pay attention or respond. It can be very costly.
Personal selling is the most effective tool at certain stages of the buying process, particularly in building up buyers’ preferences, convictions, and actions.
It involves personal interaction between two or more people, so each person can observe the other’s needs and characteristics and make quick adjustments.
The effective salesperson keeps the customer’s interests at heart in order to build a long-term relationship.
A sales force requires a longer-term commitment than does advertising. Personal selling is the company’s most expen-sive promotion tool.
Sales promotion includes a wide assortment of tools. These tools attract consumer attention, offer strong incentives to purchase, and can be used to dramatize product offers and to boost sagging sales.
Public relations is very believable.
Public relations can reach many prospects who avoid salespeople and advertisement.
A well-thought-out public relations campaign used with other promotion mix elements can be very effective and economical.
Direct marketing is nonpublic. The message is normally directed to a specific person.
It is immediate and customized.
It is interactive.
Marketers can choose from two basic promotion mix strategies. See Figure 12-2.
A push strategy involves “pushing” the product through distribu-tion channels to final consumers. The producer directs its market-ing activities toward channel members to induce them to carry the product and to promote it to final consumers.
In a pull strategy, the producer directs its marketing activities toward final consumers to induce them to buy the product. Consumers will demand the product from channel members, who will in turn demand it from producers.
Use Key Terms Push Strategy, Pull Strategy here.
Use Figure 12-2 here.
Use Application Questions 2 here.
Companies consider many factors when designing their promotion mix strategies, including type of product/market and the product life-cycle stage.
Use Marketing at Work 12-1 here.
Advertising
Advertising can be traced back to the very beginnings of recorded history.
Although advertising is used mostly by business firms, it is also used by a wide range of not-for-profit organizations, professionals, and social agen-cies that advertise their causes to various target publics.
Advertising is a good way to inform and persuade.
Marketing management must make four important decisions when devel-oping advertising campaign. See Figure 12-3.
Use Figure 12-3 here.
Use Chapter Objectives 3 here.
Setting Advertising Objectives
The first step is to set advertising objectives. These objectives should be based on past decisions about the target market, positioning, and marketing mix, which define the job that advertising must do in the total marketing program.
An advertising objective is a specific communication task to be accom-plished with a specific target audience during a specific period of time.
Use Key Term Advertising Objective here.
Advertising objectives can be classified by primary purpose—whether the aim is to inform, persuade, or remind. Table 12-1 lists examples.
Informative advertising is used heavily when introducing a new product category. In this case, the objective is to build primary demand.
Persuasive advertising becomes more important as competition increases. Here, the company’s objective is to build selective demand. Some persuasive advertising becomes comparative advertising, in which a company directly or indirectly compares its brand with one or more other brands.
Reminder advertising is important for mature products—it keeps consumers thinking about the product.
Use Table 12-1 here.
Setting the Advertising Budget
After determining its advertising objectives, the company next sets its advertising budget for each product.
There are four common methods used to set the total budget for advertising.
In the affordable method, the company sets the promotion budget at the level it thinks it can afford.
Small businesses often use this method.
This method of setting budgets completely ignores the ef-fects of promotion on sales.
It places advertising last among spending priorities.
It leads to an uncertain annual promotion budget.
In the percentage-of-sales method, the company sets the promotion budget at a certain percentage of current or forecasted sales.
There are advantages, because it is simple to use and helps management think about the relationships between pro-motion spending, selling price, and profit per unit.
But this method has little to justify it.
It wrongly views sales as the cause of promotion rather than as the result.
It is based on availability of funds rather than opportunities.
It may prevent increased spending that is sometimes needed to turn around falling sales.
Because the budget varies with year-to-year sales, long-range planning is difficult.
The method does not provide any basis for choosing a specific percentage, except what has been done in the past or what competitors are doing.
In the competitive-parity method, companies set their promotion budget to match competitors’ outlays.
Competitors’ budgets represent the collective wisdom of the industry. Spending what competitors spend helps pre-vent promotion wars.
But there are no grounds for believing that the competition has a better idea of what a company should be spending on promotion. And there is no evidence that budgets based on competitive parity really do prevent promotion wars.
The most logical budget-setting method is the objective-and-task method. Here, the company sets its promotion budget based on what it wants to accomplish with promotion.
This method entails defining specific promotion objectives, determining the tasks needed to achieve these objectives, and estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget.
This method forces management to spell out its assump-tions about the relationship between dollars spent and pro-motion results.
It is also the most difficult method to use.
Use Key Terms Affordable Method, Percentage-of-Sales Method, and Objective-and-Task Method here.
Use Discussing the Issues 2 here.
Let’s Discuss This
Compare and contrast what happens to an advertising budget when sales are slipping using each budget setting method described.
Developing Advertising Strategy
Advertising strategy consists of two major elements: creating advertising messages and selecting advertising media.
In the past, companies often viewed media planning secondary to the message-creation process. But media fragmentation, soaring media costs, and more-focused target marketing strategies have promoted the impor-tance of the media-planning function.
Good advertising messages are especially important in today’s costly and cluttered advertising environment.
With the growth in cable and satellite TV, VCRs, and remote-control units, today’s viewers have many more options. They can avoid ads by watching commercial-free cable channels. They can “zap” commercials by pushing the fast-forward button during taped programs.
Many advertisers now see themselves as creating “advertain-ment”—ads that are both persuasive and entertaining.
Use Marketing at Work 12-2 here.
Use Under the Hood/Focus on Technology here.
The first step in creating effective advertising messages is to plan a message strategy—to decide what general message will be communicated to consumers.
Developing an effective message strategy begins with identifying customer benefits that can be used as advertising appeals. Ideally, advertising message strategy will follow directly from the com-pany’s broader positioning strategy.
The next step is to develop a compelling creative concept or “big idea” that will bring the message strategy to life in a distinctive and memorable way.
Applying the Concept
What is Staples’ big idea? Ben & Jerry’s ice cream? T-Mobile wireless service?
The creative concept will guide the choice of specific appeals to be used. Advertising appeals should have three characteristics: They should be meaningful, pointing out benefits that make the product more desirable or interesting to consumers; they should be believ-able; and they should be distinctive.
The advertiser now has to turn the big idea into an actual ad execution that will capture the target market’s attention and interest. Any message can be presented in different execution styles
Slice of life: shows one or more “typical” people using the product in a normal setting.
Lifestyle: shows how a product fits in with a particular lifestyle.
Fantasy: creates a fantasy around the product or its use.
Mood or image: builds a mood or image around the product, such as beauty, love, or serenity.
Musical: shows one or more people or cartoon characters singing about the product.
Personality symbol: creates a character that represents the product.
Technical expertise: shows the company’s expertise in making the product.
Scientific evidence: presents survey or scientific evidence that the brand is better or better liked than one or more other brands.
Testimonial evidence or endorsement: features a highly believable or likable source endorsing the product.
Use Application Questions 1 here.
The advertiser must also choose a tone for the ad.
The advertiser must use memorable and attention-getting words in the ad.
Format elements make a difference in an ad’s impact as well as its cost.
The illustration is the first thing the reader notices.
The headline must effectively entice the right people to read the copy.
The copy—the main block of text in the ad—must be simple but strong and convincing.
These three elements must work together effectively.
The major steps in media selection are deciding on reach, frequency, and impact; choosing among major media types; selecting specific media vehicles; and deciding on media timing.
Reach is a measure of the percentage of people in the target market who are exposed to the ad campaign during a given period of time. Frequency is a measure of how many times the average person in the target market is exposed to the message. Media impact is the qualitative value of a message exposure through a given medium.
The media planner has to know the reach, frequency, and impact of each of the major media types. Table 12-2 summarizes the media types.
Use Table 12-2 here.
Use Discussing the Issues 3 here.
Media planners consider many factors when making their media choices.
The media habits of target consumers.
The nature of the product.
The different types of messages.
Cost is another major factor. Media impact and cost must be reexamined regularly.
Use Marketing at Work 12-3 here.
The media planner must now choose the best media vehicles—specific media within each general media type.
Media planners must compute the cost per thousand persons reach by a vehicle.
The media planner must also consider the costs of producing ads for the different media.
In selecting media vehicles, the media planner must balance media cost measures against several media impact factors.
The advertiser must also decide how to schedule the advertising over the course of a year. The advertiser also has to choose the pattern of the ads.
Continuity means scheduling ads evenly within a given period.
Pulsing means scheduling ads unevenly over a given time period.
Let’s Discuss This
How are ads scheduled for Chia Pets? How does . Penney schedule its ads?
Evaluating Advertising
The advertising program should regularly evaluate both the communi-cation effects and the sales effects of advertising.
Measuring the communication effects of an ad—copy testing—tells whether the ad is communicating well. Copy testing can be done before or after an ad is printed or broadcast.
The sales effects of advertising are often harder to measure than the communication effects. Sales are affected by many factors besides advertising, such as product features, price, and avail-ability.
Use Application Questions 3 here.
Other Advertising Considerations
The company must address two additional questions. First, how will the company organize its advertising function? Second, how will the company adapt its advertising strategies and programs to the complexities of inter-national markets?
Different companies organize in different ways to handle adver-tising.
In small companies, advertising might be handled by some-one in the sales department.
Large companies set up advertising departments whose job it is to set the advertising budget, work with the ad agency, and handle advertising not done by the agency.
Advertising agencies employ specialists who can often perform advertising tasks better than can the company’s own staff.
Most large advertising agencies have the staff and resources to handle all phases of an advertising campaign for its clients, from creating a marketing plan to developing ad campaigns and preparing, placing, and evaluating ads.
Use Key Term Advertising Agency here.
International advertisers face many complexities not encountered by domestic advertisers.
The most basic issue concerns the degree to which global advertising should be adapted to the unique characteristics of markets in various countries.
Standardization produces many benefits—lower advertising costs, greater global advertising coordi-nation, and a more consistent worldwide image.
There are also drawbacks. It ignores the facts that country markets differ greatly in their cultures, demographics, and economic conditions.
Global advertisers face several special problems.
Advertising media costs and availability differ vastly from country to country.
Countries also differ in the extent to which they regulate advertising practices.
Although advertisers may develop global strategies to guide their overall advertising efforts, specific advertising programs must usually be adapted to meet local cultures and customers, media characteristics, and advertising regu-lations.
Use Speed Bump: Linking the Concepts here.
Sales Promotion
Sales promotion consists of short-term incentives to encourage the purchase or sales of a product or service.
Whereas advertising and personal selling offer reasons to buy a product or service, sales promotion offers reasons to buy now.
Use Chapter Objectives 4 here.
Rapid Growth of Sales Promotion
Sales promotion tools are used by most organizations, including manufacturers, distributors, retailers, trade associations, and not-for-profit institutions.
They are targeted toward final buyers, retailers, and wholesalers; business customers; and members of the sales force.
Several factors have contributed to the rapid growth of sales promotions.
Inside the company, product managers face greater pressures to increase their current sales, and promotion is viewed as an effective short-run sales tool.
Externally, the company faces more competition and competing brands are less differentiated.
Advertising efficiency has declined because of rising costs, media clutter, and legal restraints.
Consumers have become more deal-oriented, and ever-larger retailers are demanding more deals from manufacturers.
The growing use of sales promotion has resulted in promotion clutter, similar to advertising clutter.
Sales Promotion Objectives
Sales promotion objectives vary widely.
Sellers may use consumer promotions to increase short-term sales or to help build long-term market share.
Objectives for trade promotions include getting retailers to carry new items and more inventory, getting them to advertise the product and give it more shelf space, and getting them to buy ahead.
For the sales force, objectives include getting more sales force support for current or new products or getting salespeople to sign up new accounts.
Applying the Concept
Why would a business want to give salespeople incentive to sign up new accounts? Why would they need to gain support for new products?
Major Sales Promotion Tools
Many tools can be used to accomplish sales promotion objectives.
The main consumer promotion tools include those following:
Samples are offers of a trial amount of a product. Sampling is the most effective, but most expensive, way to introduce a new product.
Coupons are certificates that give buyers savings when they purchase specified products.
Cash refund offers (or rebates) are like coupons except that the price reduction occurs after the purchase rather than at the retail outlet. The consumer sends a “proof of purchase” to the manufacturer, who then refunds part of the purchase price by mail.
Price packs (also called cents-off deals) offer consumers savings off the regular price of a product. The reduced prices are marked by the producer directly on the label or package.
Premiums are goods offered either free or at low cost as an incentive to buy a product. A premium may come inside the package (in-pack), outside the package (on-pack), or through the mail.
Advertising specialties, also called promotional products, are useful articles imprinted with an advertiser’s name that are given as gifts to consumers.
Use Key Term Advertising Specialty here.
Patronage rewards are cash or other awards offered for the regular use of a certain company’s products or services.
Point-of-purchase (POP) promotions include displays and demonstrations that take place at the point of purchase or sale.
Contests, sweepstakes, and games give consumers the chance to win something.
A contest calls for consumers to submit an entry to be judged by a panel that will select the best entries.
A game sweepstakes calls for consumers to submit their names for a drawing.
A game presents consumers with something every time they buy, which may or may not help them win a prize.
Use Discussing the Issues 4 here.
Manufacturers direct more sales promotion dollars toward retailers and wholesalers (78%) than to consumers (22%).
Trade promotion can persuade resellers to carry a brand, give it shelf space, promote it in advertising, and push it to consumers.
Manufacturers have several trade promotion tools.
Many of the tools used for consumer promotions, such as contests, premiums, and displays, can also be used as trade promotions.
A discount is off the list price on each case pur-chased during a stated period of time (also called a price-off, off-invoice, or off-list).
An allowance can be offered in return for the retailer’s agreement to feature the manufacturer’s products in some way.
An advertising allowance compensates re-tailers for advertising the product.
A display allowance compensates retailers for using special displays.
Use Key Terms Discount, Allowance here.
Manufacturers may offer free goods, which are extra cases of merchandise, to resellers who buy a certain quantity or feature a certain flavor or size.
Manufacturers may offer push money—cash or gifts to dealers or their sales forces—to “push” the manufacturer’s goods.
Manufacturers may give retailers free specialty advertising items that carry the company’s name.
Business promotion tools are used to generate business leads, stimulate purchases, reward customers, and motivate salespeople.
Business promotion tools include many of the same tools used for consumer or trade promotion.
Many companies and trade associations organize conven-tions and trade shows to promote their products. Firms selling to the industry show their products at the trade show.
A sales contest is a contest for salespeople or dealers to motivate them to increase their sales performance over a given period.
Developing the Sales Promotion Program
The marketer must make several other decisions in order to define the full sales promotion program.
The marketer must decide on the size of the incentive.
The marketer must set conditions for participation.
The marketer must decide how to promote and distribute the pro-motion program itself.
The marketer must consider the length of the promotion, which is also important.
The marketer must also evaluate the program.
Consumer research would show the kinds of people who responded to the promotion and what they did after it ended.
Surveys can provide information on how many consumers recall the promotion, what they thought of it, how many took advantage of it, and how it affected their buying.
Sales promotions can also be evaluated through experiments that vary factors such as incentive value, length, and distribution method.
Public Relations
Public relations is building good relations with the company’s various publics by obtaining favorable publicity, building up a good corporate image, and handling or heading off unfavorable rumors, stories, and events.
Public relations departments may perform any or all of the following functions:
Press relations or press agency.
Product publicity.
Public affairs.
Lobbying.
Investor relations.
Development.
Public relations is used to promote products, people, places, ideas, activities, organizations, and even nations.
Use Chapter Objectives 5 here.
Use Discussing the Issues 5 here.
The Role an Impact of Public Relations
Public relations can have a strong impact on public awareness at a much lower cost than advertising can.
The company does not pay for the space or time in the media. Rather, it pays for a staff to develop and circulate information and to manage events.
Public relations is often described as a marketing stepchild because of its limited and scattered use.
Major Public Relations Tools
Public relations professionals use several tools.
One of the major tools is news. PR professionals find or create favorable news about the company and its products or people.
Speeches can also create product and company publicity.
Special events range from news conferences, press tours, grand openings, and fun events.
Many marketers are now designing buzz marketing campaigns that create excitement and generate favorable word-of-mouth commu-nication for their brands.
Use Marketing at Work 12-4 here.
Mobile marketing, traveling promotional tours that bring the brand to consumers, has emerged as an effective way to build one-to-one relationships with targeted consumers.
Written materials including annual reports, brochures, articles, and company newsletters and magazines are often produced.
Audiovisual materials, such as films, are being used increasingly as communication tools.
Corporate identify materials, such as logos, stationery, brochures, signs, business forms, business cards, buildings, uniforms, and company cars and trucks, all become marketing materials.
Public service activities can improve public goodwill.
A company’s website can be a good public relations vehicle.
As with other promotion tools, management should set PR objectives, choose the PR messages and vehicles, implement the PR plan, and evaluate the results.
The company’s public relations should be blended smoothly with other promotion activities within the company’s overall integrated marketing communications efforts.
Use Discussing the Issues 6 here.
Use Focus on Ethics here.
Travel Log
Discussing the Issues
What are the five major promotional tools? Broadly speaking, what type of objective is each promotional tool best suited to accomplish?
Advertising: Any paid form of nonpersonal presentation and promotion of ideas, goods, or services by an identified sponsor.
Sales promotion: Short term incentives to encourage the purchase or sale of a product or service.
Public relations: Building good relations with the company’s various publics by obtaining favorable publicity, building up a good corporate image, and handling or heading off unfavorable rumors, stories, and events.
Personal selling: Personal presentation by the firm’s sales force for the purpose of making sales and building customer relationships.
Direct marketing: Direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships—the use of telephone, mail, fax, email, the Internet, and other tools to communicate directly with specific consumers.
Describe the four methods for setting the advertising budget discussed in the text. For each of the four methods, explain why a company might use that method over the other three.
The affordable method involves setting the promotion budget at the level the company thinks it can afford. The company starts with total revenues, deducts operating expenses and capital outlays, and then devotes some portion of the remaining funds to advertising.
For the percentage of sales method one sets its promotion budget at a certain percentage of current or forecasted sales.
For the competitive parity method, the company sets its promotion budget to match competitors’ outlays. The most logical budget-setting method is the objective and task method, whereby the company sets its promotion budget based on what it wants to accomplish with promotion. This budgeting method entails (1) defining specific promotion objectives, (2) determining the tasks needed to achieve these objectives, and (3) estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget.
Explain how the advertising factors of reach, frequency, and impact will influence consumer awareness of a brand. Is one more important than the others for increasing consumer awareness?
Reach is a measure of the percentage of people in the target market who are exposed to the ad campaign during a given period of time. Frequency is a measure of how many times the average person in the target market is exposed to the message. Media impact is a qualitative value of message exposure through a given medium. In general, the more reach, frequency, and impact the advertiser seeks, the higher the advertising budget will have to be and the higher consumer awareness will be.
Consumer promotion tools include samples, coupons, cash refunds, price packs, premiums, advertising specialties, patronage rewards, point-of-purchase displays and demonstrations, and contests, sweepstakes, and games. Describe two of these promotional tools you have received or participated in. How did it impact your purchase decision?
Student response to this question will vary based on the promotional tools they select to describe and their own experiences. Instructors may wish to probe deeper by having students think about why the promotion did or did not influence their purchase decision.
Compare and contrast the public relations functions of press relations, product publicity, public affairs, lobbying, investor relations, and development.
Press relations: Creating and placing newsworthy information in the news media to attract attention to a person, product, or service.
Product publicity: Publicizing specific products.
Public affairs: Building and maintaining national or local community relations.
Lobbying: Building and maintaining relations with legislators and government officials to influence legislation and regulation.
Investor relations: Maintaining relationships with shareholders and others in the financial community.
Development: Public relations with donors or members of nonprofit organiza-tions to gain financial or volunteer support.
What are some of the likely challenges companies will face when trying to implement an integrated marketing communications program? How might these obstacles be overcome?
The shift from mass marketing to targeted marketing, and the corresponding use of a larger, richer mix of communication channels and promotion tools, poses a problem for marketers and their efforts to implement IMC programs. Messages must be coordinated so that they are communicating a consistent, not conflicting message to the consumer.
Application Questions
Find examples of advertisements in magazines that illustrate each of the execution styles presented in this chapter. Present your findings to the class, including a discussion explaining which execution styles you think are most effective for this type of product.
Student responses to this question will vary depending upon the advertisements selected by the students. Instructors may wish to point out that more than one execution style may be present in a given advertisement.
Assume that you have recently taken a position in the marketing area for a company manufacturing cellular phones that are capable of taking and transmitting pictures. Your boss has asked you to create a promotional plan that will include both push and pull strategies. Describe the plan and what objectives you hope to accomplish with each component.
Student response will vary. Instructors may wish to point out that most large companies use both push and pull components in their promotional efforts.
Identify three advertisements for consumer goods or services (., toothpaste, athletic shoes, insurance, beverages, restaurants, etc.), one from the radio, one from television, and one from a magazine. For each of the three, evaluate the advertising appeal. Specifically, rate each advertisement in terms of the appeals being meaningful, believable, and distinctive from those made for other brands. For those aspects you rated low, how could the advertisement be changed to improve that aspect of the advertising appeal?
Student response will vary depending upon the advertisements selected. Instructors might choose to further explore this question by asking students if changing the media vehicle of the advertisement (., if it was a television or radio ad instead of in a magazine) would impact the meaningfulness, believ-ability, or distinctiveness of the advertisement.
Under the Hood/Focus on Technology
Although not yet as widespread as VCRs or DVDs, personal video recorders (PVRs) have been gaining popularity. However, the biggest names in the PVR industry, TiVo and RelayTV, have come under fire from the television industry for some of the features these new devices are capable of delivering. Perhaps of biggest concern to television executives is the ability of these machines to automatically skip over commercials, which the television industry claims is a violation of copyright laws. This takes consumers one big step beyond simply fast-forwarding through commercials using their VCRs. Because advertising is the primary source of income for television networks, they are justifiably concerned that this automatic channel-skipping technology will damage their ability to sell commercial time, or will at least decrease its value. Indeed, there are competing lawsuits working their way through the legal system with television and movie studios suing to stop this commercial-skipping feature and many users suing to give them the right to do exactly that.
Do you feel that PVRs will ultimately change the nature of advertising on broadcast television?
Student responses will vary depending upon their perspective. Instructors may wish to probe deeper into how advertising would change by asking for specific examples to be provided.
Whose side are you on in the debate over the automatic commercial-skipping technology? Choose sides and debate the issue.
Student responses will vary. Have students think about the implications for broadcast TV if advertisements are no longer worth as much money to the network. Would this impact the quality of shows produced? Would “free TV” be a thing of the past?
Beyond the current strategies discussed in the text, what alternatives might a company pursue to overcome the impact this new technology has on advertising?
As one example, integrating products into the actual television program in the form of product placement could be used instead of the traditional “commercial break” format currently used. A product placement (., the lead character drinking a Pepsi) would still have promotional value to the company, but would not be able to be skipped by the PVR technology.
Focus on Ethics
Straddling the line between advertising and publicity is cause-related marketing, which can be described as linking a company to a social cause or issue for their mutual benefit. Advocates of this approach suggest that it is an effective way of communicating the values of the company while at the same time supporting important social issues. For example, The Kellogg Company sponsors the Hannah Neil World of Children Awards, which provides $100,000 “to honor and recognize those people who make a world of difference in the lives of children across the globe.”
When choosing between two products that are equal in all areas, what impact would knowing that one of the firms supports a cause that is meaningful to you have on your purchase decision?
Instructors may want to explore the same question but have the cause not be one that is meaningful or important to the student. Does the purchase influence from the cause-related marketing change?
Do companies have a moral responsibility to spend some of their profits assisting causes and issues that are of social value (., funding cancer research, searching for missing children, preventing drug abuse, promoting environmental issues, etc.)?
Student responses are likely to vary depending upon their own philosophical position. Instructors might want to have students consider the place of for-profit companies in the broader context of how a society should function together. Ask who will fund these activities if not the companies?
Visit the Kellogg website ( and click the “corporate citizenship” link to learn more about the cause-related activities this company sponsors. Should a company that engages in these types of activities do more to make others aware of its activities? Should the support of activities such as these be considered a form of product promotion?
Have students debate the issue of self-promotion of good deeds. If the company actively publicizes its actions, does it sound like it is being insincere about the giving and is just in it for enhancing its image?
Great Ideas
Barriers to Effective Learning
The majority of the textbook has been showing the students how to do each individual function, as it must do to effectively explain the nuances of each of the marketing mix components. This chapter shows how the communications piece of the marketing mix must mesh with the other pieces of the mix, delivering the same message in every medium. The difficulty for the students will lie in the fact that there are so many moving parts to coordinate. Ask students for examples of companies who do it well—Target is one brand whose messaging is always consistent.
Some students will need to have explained in detail the differences among the various communication methods outlined in the chapter. Figure 12-1 will help in this regard. Asking students for examples from each channel of communication will also help. Many students will be able to give examples from their parents’ work.
Push and pull strategies will be new to the students and can sometimes present some problems. Push, in particular, because it is aimed at channel members, can be difficult for students to comprehend. Discussing this in the context of trade promotions can often help; discuss, in particular, how those special display cases and racks in many retail stores can signal both a promotional item and a push strategy on the part of the producer or manufacturer. Pull is an easier concept to get across—you can ask the students if any of them have, for instance, asked their gym/golf course/high school to carry a certain juice or other item. Or how many of them, or their parents, have asked their doctor about a drug seen advertised on television.
There is a tremendous amount of information delivered in only a few pages in the advertising section. The differences among informative, persuasive, and reminder advertising may seem simple to students at first, but these concepts should be studied in some detail to ensure understanding. Again, examples are a tremendous help here.
Message execution is also a key concept. Many students will have trouble with the various execution styles and will particularly have difficulty with slice of life versus lifestyle. There could also be difficulty in understanding the difference between fantasy and mood or image. Again, use examples of your own and from the class, as well as those shown in the text.
Sales promotions, particularly consumer promotions, will be familiar to students. It is important that they understand the terminology, however. Trade promotion is also fairly simple, although the difference between a discount and an allowance is crucial to understand. Business promotions, as well, will go quickly. You can tie this section back into the push strategy to show how a strategy gets turned into tactics.
Public relations is a mystery to almost everyone. There will be some questions regarding the product publicity done by public relations versus that done by a marketing manager, but these questions can be answered by the notion of free, because the vast majority of what PR does is to get the company in the press. One of the examples of masterful public relations the book points out is Johnson & Johnson during the Tylenol product-tampering scare. This example alone is often enough to explain the importance of this communication channel.
Student Projects
Find at least two examples of push and pull strategies by manufacturers.
Look through newspapers and magazines to find examples of ads that aim to inform, persuade, and remind.
Find examples of companies that are offering consumers coupons and rebates. What are the differences? Which are you more likely to use?
Discuss the use of special display cases in supermarkets. Are these examples of consumer promotion, trade promotion, or both? Are they effective?
Classroom Exercise/Homework Assignment
Hewlett Packard is a very successful IT solutions provider. It sells to all segments of the market, from consumers to very large businesses. Its tag line is “Invent.” Visit the company’s website at to read through some of the corporate history, as well as to review its products and services. Also take a look at its press releases before answering the following questions.
Does HP really focus on Invent in its messaging? Is this an effective positioning strategy for the company?
Students might first be drawn to the “HP labs” section of the website, where naturally everything is about invention. Other students will point out that the amazing width and depth of the HP product line, by its very nature, signifies that the company’s focus is on invention. Still others will go to the “newsroom,” where the majority of press releases are about new technologies.
HP does, therefore, seem to live and breathe “Invent.”
How does HP use promotions in its marketing?
There is a link on the HP home page taking the viewer directly to all business and consumer promotions that are available. They generally are running several promotions at once. It will be difficult to find out about trade promotions, but an assignment for students could be to visit various retail outlets that sell HP products (CompUSA, Staples, etc.) to ask managers about HP trade promotions.
How does HP use executive speeches and articles on its website?
Only the speeches and articles by Carly Fiorina, the HP CEO, are on the website. The majority of the speeches have to do with corporate social responsibility, a primary concern after the business scandals all over the newspapers. In this regard, her speeches are a great PR tool, but don’t necessarily tie into the “Invent” theme. However, there are several speeches that address technology issues and how HP is inventing the next generation of computing technology.
Has HP succeeded in integrating its marketing communications?
Student responses will vary. The majority of the website is focused on the products the company sells (even though HP’s stated strategy in the press is to move into services to become more profitable), and that does point to its tag line. However, a good portion of the public relations pieces on the website spend more time talking about social responsibility.
HP has done a good job of combining its product line with its recent acquisition, Compaq, and thus has taken that step toward integrating its messaging. The company is also working very hard toward global branding for its products and is no longer allowing individual business units to develop their own messaging. So in that regard, HP is doing a fine job in integrating its communications.
Classroom Management Strategies
This chapter is replete with good information. Make sure to keep the focus on integrating all communication channels as you go through the material. As discussed previously in Barriers to Effective Learning, use examples liberally through your discussion to drive home the importance of cohesive marketing messaging.
The introductory sections are short and can be covered in 10 minutes. These sections set the stage for the chapter and provide valuable background information so that the remaining material is put into the proper context. Figure 12-1 illustrates the tools in the communication process.
Setting the Overall Communication Mix goes through the different communi-cations channels, and 10 minutes should be spent here. Attention should be paid to the push and pull strategies. Figure 12-2 illustrates these two strategies in a very clear format, and Marketing at Work 12-1 talks about push strategies being used by consumer goods companies.
The section on Advertising is meaty and should take 15 minutes. There are several subsections here, with the heart of the section in Developing Advertising Strategy. Table 12-1 discusses advertising objectives. The Absolut Vodka ads re-created in the text explain how media placement decisions are made.
Sales Promotion should also be given 15 minutes. The Major Tools subsection contains a lot of material and can be the focus of this section.
Public relations can be covered in 10 minutes. Be sure to talk in some detail about the different tools PR managers have at their disposal so that the students understand this is not just about getting mentions in the newspapers, even though that is extremely important and one of the key focus points for PR departments. Marketing at Work 12-4 talks about buzz marketing.
If time permits, visit websites of those companies popular with students, such as Starbucks and other retail outlets that cater to a young crowd. As a class, critique the companies’ ability to fully integrate their messaging, bringing in examples from personal knowledge and that of the students who have visited these locations.
Chapter 13
Integrated Marketing Communication:
Personal Selling and Direct Marketing
Previewing the Concepts: Chapter Objectives
Discuss the role of a company’s salespeople in creating value for customers and building customer relationships.
Identify and explain the six major sales force management steps.
Discuss the personal selling process, distinguishing between transaction-oriented marketing and relationship marketing.
Define direct marketing and discuss its benefits to customers and competitors.
Identify and discuss the major forms of direct marketing.
Just the Basics
Chapter Overview
This chapter continues the discussion of communication methods begun in Chapter 12. It focuses on personal selling and direct marketing. Personal selling is the interpersonal arm of marketing communications in which the sales force interacts with customers and prospects to make sales and build relationships. Direct marketing consists of direct connections with carefully targeted consumers to both obtain an immediate response and cultivate lasting customer relationships.
Selling is one of the oldest professions in the world. Today, most salespeople are well-educated, well-trained professionals who work to build and maintain longer-term customer relationships. They listen to their customers, assess customer needs, and organize the company’s efforts to solve customer problems. The sales force serves as a critical link between a company and its customers.
A sales force can be organized such that it has a territorial structure. In this structure, each salesperson is assigned to an exclusive geographic area and sells the company’s full line of products or services to all customers in that territory. A product sales force structure is one in which the sales force sells along product lines. In a customer sales force structure, the sales force is organized along customer or industry lines. Many companies, particularly those that sell a wide variety of products to many types of customers over a broad geographic area, use a complex sales force structure that combines several types.
Personal selling consists of a seven-step process. The first is prospecting and qualifying, followed by the preapproach, approach, presentation, handling objections, closing, and follow-up. All of this should lead to long-term customer relationships.
Direct marketing consists of direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships. Most companies still use direct marketing as a supplementary channel or medium for marketing their goods. However, for many companies today, direct marketing is more than that—it constitutes a new and complete model for doing business.
Effective direct marketing begins with a good customer database. This database is an organized collection of comprehensive data about individual customers or prospects, including geographic, demographic, psychographic, and behavioral data. The database can be used to locate good potential customers, tailor products and services to the special needs of targeted consumers, and maintain long-term customer relationships.
There are several forms of direct marketing, including telephone marketing, direct mail marketing, catalog marketing, direct response television marketing, and kiosk marketing. A very powerful approach for many companies is integrated direct marketing, which involves using carefully coordinated multiple-media, multiple-stage campaigns.
Direct marketers and their customers usually enjoy mutually rewarding relationships. Sometimes, however, a darker side emerges. The aggressive and sometimes shady tactics of a few direct marketers can bother or harm consumers, giving the entire industry a black eye. Direct marketers know that, left untended, such problems will lead to increasingly negative consumer attitudes, lower response rates, and calls for more restrictive state and federal legislation.
Chapter Outline
Introduction
A stereotype of a salesperson is one of a fast-talking, ever-smiling peddler who travels his territory foisting his wares on reluctant customers.
Today, most professional salespeople are well-educated, well-trained men and women who work to build long-term, value-producing relationships with their customers.
Lear Corporation is one of the largest, fastest-growing automotive suppliers in the world. It attributes its success to many factors, including its 145-person sales force.
Lear’s limited customer base, consisting of only a few dozen customers in all, allows Lear’s sales teams to get very close to their customers. Lear often locates its sales offices in customers’ plants.
Personal Selling
Sales forces are found not only in business organizations that sell products and services, but also in many other kinds of organizations.
Colleges use recruiters to attract new students.
Churches use membership committees to attract new members.
Hospitals and museums use fund-raisers to contact donors and raise money.
The . Postal Service uses a sales force to sell Express Mail and other services to corporate customers.
Applying the Concept
Do student groups on campus have a sales force? How do they gain new members considering that one-quarter of them leave every year?
The Nature of Personal Selling
The people who do the selling go by many names: salespeople, sales representative, account executive, sales consultants, sales engineers, agents, district managers, marketing representatives, and account develop-ment reps are a few of the names.
The term salesperson covers a wide range of positions.
At one extreme, a salesperson might be largely an order taker, such as the department store salesperson standing behind the counter.
At the other extreme are order getters, whose positions demand the creative selling of products and services.
Use Key Term Salesperson here.
The Role of the Sales Force
Personal selling is the interpersonal arm of the promotion mix. It involves two-way, personal communication between salespeople and individual customers.
It can be more effective than advertising in more complex selling situations.
The sales force serves as a critical link between a company and its customers.
They represent the company to customers.
The salespeople also represent customers to the company, acting inside the firm as champions of customers’ interests and managing the buyer-seller relationship.
Salespeople need to be concerned with more than just producing sales—they should work with others in the company to produce customer satisfaction and company profit.
Use Key Term Sales Force Management here.
Use Chapter Objectives 1 here.
Use Discussing the Issues 1 here.
Managing the Sales Force
Sales force management is the analysis, planning, implementation, and control of sales force activities. The major sales force management decisions are shown in Figure 13-1.
Use Chapter Objectives 2 here.
Use Figure 13-1 here.
Designing Sales Force Strategy and Structure
A company can divide sales responsibilities along any of several lines.
In the territorial sales force structure, each salesperson is assigned to an exclusive geographic area and sells the company’s full line of products or services to all customers in that territory.
This organization clearly defines each salesperson’s job and fixes accountability.
This sales method increases the salesperson’s desire to build local business relationships that improve selling effectiveness.
This type of organization is often supported by many levels of sales management positions.
In the product sales force structure, the sales force sells along product lines.
The product structure can lead to problems if a single large customer buys many different company products.
In a customer sales force structure, the sales force is organized along customer or industry lines.
Separate sales forces may be set up for different industries, for serving current customers versus finding new ones, and for major accounts versus regular accounts.
Organizing the sales force around customers can help a company to become more customer focused and build closer relationships with important customers.
A complex sales force structure is often used when a company sells a wide variety of products to many types of customers over a broad geographic area.
Salespeople can be specialized by customer and territory, by product and territory, by product and customers, or by territory, product, and customer.
No single structure is best for all companies and all situations.
Use Key Terms Territorial Sales Force Structure, Product Sales Force Structure, and Customer Sales Force Structure here.
Use Discussing the Issues 2 here.
Once the company has set its structure, it is ready to consider sales force size.
Many companies use some form of workload approach to set sales force size.
Using this approach, a company first groups accounts into different classes according to size, account status, or other factors that relate to the amount of effort required to maintain them.
The company then determines the number of salespeople needed to call on each class of accounts the desired number of times.
Applying the Concept
What components of a salesperson’s day go into calculating his or her workload? List the components and estimate the amount of time a salesperson located in New York City, who can walk or take the subway to each client, will spend doing each task.
Sales management must also decide who will be involved in the selling effort and how various sales and sales support people will work together.
The company may have an outside sales force, an inside sales force, or both.
Outside salespeople travel to call on customers.
Inside salespeople conduct business from their offices via telephone or visits from prospective buyers.
Inside salespeople include support people, sales assistants, and telemarketers.
Use Key Terms Outside Sales Force, Inside Sales Force here.
Use Marketing at Work 13-1 here.
Most companies are now using team selling to service large, complex accounts.
Teams might include experts from any area or level of the selling firm, including sales, marketing, technical and support services, R&D, engineering, operations, finance, and others.
The move to team selling mirrors similar changes in customers’ buying organizations.
Team selling does have some pitfalls. Selling teams can confuse or overwhelm customers who are used to working with only one salesperson. Salespeople who are used to having customers all to themselves may have trouble learning to work with and trust others on a team. Difficulties in evaluating individual contributions to the team selling effort can create some compensation issues.
Use Key Term Team Selling here.
Recruiting and Selecting Salespeople
At the heart of any successful sales force operation is the recruitment and selection of good salespeople.
According to the Gallup Management Consulting Group’s research, the best salespeople possess four key talents: intrinsic motivation, disciplined work style, the ability to close sales, and the ability to build relationships with customers.
When recruiting, companies should analyze the sales job itself and the characteristics of its most successful salespeople to identify the traits needed by a successful salesperson in their industry.
Recruiting will attract many applicants from whom the company must select the best.
The selection process can vary from a single informal interview to lengthy testing and interviewing.
Many companies give formal tests to sales applicants.
Tests typically measure sales aptitude, analytical and organiza-tional skills, personality traits, and other characteristics.
Use Application Questions 1 here.
Use Focus on Ethics here.
Training Salespeople
New salespeople may spend anywhere from a few weeks or months to a year or more in training.
The average initial training period is 4 months. Then, most companies provide continuing sales training via seminars, sales meetings, and the web throughout the salesperson’s career.
Training programs have several goals.
Salespeople need to know and identify with the company, so most training programs begin by describing the company’s history and objectives, its organization, its financial structure and facilities, and its chief products and markets.
Salespeople also need to know customers’ and competitors’ characteristics, so the training program teaches them about competitors’ strategies and about different types of customers and their needs, buying motives, and buying habits.
Because salespeople must know how to make effective presenta-tions, they are trained in the principles of selling.
Finally, salespeople need to understand field procedures and responsibilities.
Compensating Salespeople
Compensation is made up of several elements: a fixed amount, a variable amount, expenses, and fringe benefits.
The fixed amount, usually a salary, gives the salesperson some stable income.
The variable amount, which might be commissions or bonuses based on sales performance, rewards the salesperson for greater effort.
Expense allowances, which repay salespeople for job-related expenses, let salespeople undertake needed and desirable selling efforts.
Fringe benefits, such as paid vacations, sick leave, accident benefits, pensions, and life insurance, enhance job satisfaction.
Management must decide what mix of these compensation elements makes the most sense for each sales job.
Different combinations of fixed and variable compensation give rise to four basic types of compensation plans.
Straight salary.
Straight commission.
Salary plus bonus.
Salary plus commission.
Compensation should direct the sales force toward activities that are consistent with overall marketing objectives. Table 13-1 shows an illustration of a compensation plan.
Use Table 13-1 here.
Supervising Salespeople
Through supervision, the company directs and motivates the sales force to do a better job.
Companies vary in how closely they supervise their salespeople. They use various tools.
An annual call plan shows which customers and prospects to call on in which months and which activities to carry out.
A time-and-duty analysis could be performed. Figure 13-2 shows how salespeople spend their time.
Use Figure 13-2 here.
Many firms have adopted sales force automation systems, computerized sales force operations for more efficient order-entry transactions, improved customer service, and better salesperson decision-making support.
Sales managers must also motivate salespeople.
Management can boost sales force morale and performance through its organizational climate, sales quotas, and positive incentives.
Organizational climate describes the feeling that sales-people have about their opportunities, value, and rewards for good performance.
Many companies adopt sales quotas, which are standards stating the amount they should sell and how sales should be divided among the company’s products. Compensation is often related to how well salespeople meet their quotas.
Various positive incentives, such as sales meetings, sales contests, and honors, merchandise and cash awards, trips, and profit-sharing, are also used to motivate sales forces.
Use Key Term Sales Quotas here.
Use Under the Hood/Focus on Technology here.
Evaluating Salespeople
Management gets information about its salespeople in many ways.
Sales reports are weekly or monthly work plans and longer-term territory marketing plans.
Call reports are based on salespeople’s completed activities.
Expense reports show what salespeople will be partly or wholly repaid.
Formal evaluation forces management to develop and communicate clear standards for judging performance.
Use Speed Bump: Linking the Concepts here.
Use Application Questions 2 here.
The Personal Selling Process
The selling process consists of several steps that the salesperson must master. These steps focus on the goal of getting new customers and obtaining orders from them.
Use Key Term Selling Process here.
Steps in the Selling Process
Figure 13-3 shows the selling process consisting of seven steps.
Use Figure 13-3 here.
The first step is prospecting, which is identifying qualified potential customers.
Salespeople must often approach many prospects to get just a few sales.
Although the company supplies some leads, salespeople need skill in finding their own.
Salespeople also need to know how to qualify leads—identifying the good ones and screening out the poor ones.
Prospects can be qualified by looking at their financial ability, volume of business, special needs, location, and possibilities for growth.
Let’s Discuss This
How would you qualify a prospect for Mary Kay Cosmetics? For a new Dell laptop?
The preapproach step is where salespeople learn as much as possible about an organization and its buyers.
Salespeople can consult standard industry and online sources, acquaintances, and others to learn about a company.
Salespeople should set call objectives, which may be to qualify a prospect, to gather information, or to make an immediate sale.
The approach step is where salespeople meet and greet a buyer to get a relationship off to a good start.
This step involves salespeople’s appearance, opening lines, and the follow-up remarks.
During the presentation step of the selling process, salespeople tell the product “story” to a buyer, presenting customer benefits and showing how the product solves the customer’s problems.
The need-satisfaction approach calls for good listening and problem-solving skills.
The qualities that buyers dislike most in salespeople include being pushy, late, deceitful, and unprepared or disorganized.
The qualities buyers value most include empathy, good listening, honesty, dependability, thoroughness, and follow-through.
In handling objections, salespeople should use a positive approach, seek out hidden objections, ask the buyer to clarify any objections, take objections as opportunities to provide more information, and turn the objections into reasons for buying.
Closing is the process of getting the order.
Salespeople should know how to recognize closing signals from the buyer, including physical actions, comments, and questions.
Salespeople can use one of several closing techniques.
They can ask for the order.
They can review points of agreement.
They can offer to help write up the order.
They can ask whether the buyer wants this model or that one.
They can note that the buyer will lose out if the order is not placed now.
The last step in the selling process is follow-up. This is necessary if salespeople want to ensure customer satisfaction and repeat business.
Use Key Terms Prospecting, Preappraoch, Approach, Presentation, Handling Objections, Closing, and Follow-Up here.
Use Discussing the Issues 3 here.
Use Application Questions 3 here.
Personal Selling and Customer Relationship Management
The principles of personal selling as just described are transaction- oriented; their aim is to help salespeople close a specific sale with a customer.
In many cases, companies want profitable long-term relationships with customers they can win and keep.
The sales force usually plays an important role in building and managing profitable customer relationships.
Today’s large customers favor suppliers who can sell and deliver a coordinated set of products and services to many locations and who can work closely with customer teams to improve products and processes.
Use Chapter Objectives 3 here.
Direct Marketing
With the trend toward more narrowly targeted or one-to-one marketing, many companies are adopting direct marketing, either as a primary marketing approach or as a supplement to other approaches.
Direct marketing consists of direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships.
Use Key Term Direct Marketing here.
Use Chapter Objectives 4 here.
The New Direct-Marketing Model
Most companies still use direct marketing as a supplementary channel or medium for marketing their goods.
For many companies today, however, direct marketing is more than just a supplementary channel or medium.
Especially in its newest transformation—Internet marketing and e-commerce—direct marketing constitutes a new and complete model for doing business.
This new direct model is rapidly changing the way companies think about building relationships with customers.
Use Marketing at Work 13-2 here.
Benefits and Growth of Direct Marketing
For buyers, direct marketing is convenient, easy to use, and private.
Direct marketing gives buyers ready access to a wealth of products and information, both at home and around the globe.
Direct marketing is immediate and interactive—buyers can interact with sellers by phone or on the seller’s website to create exactly the configuration of information, products, or services they desire, and then order them on the spot.
For sellers, direct marketing is a powerful tool for building customer relationships.
Using database marketing, today’s marketers can target small groups or individual consumers, tailor offers to individual needs, and promote these offers through personalized communications.
Direct marketing can be timed to reach prospects at just the right moment.
Direct marketing gives access to buyers that the company could not reach through other channels.
Direct marketing offers a low-cost, efficient alternative for reaching their markets.
As a result of these advantages to both buyers and sellers, direct marketing has become the fastest-growing form of marketing.
Use Discussing the Issues 4 here.
Customer Databases and Direct Marketing
A customer database is an organized collection of comprehensive data about individual customers or prospects, including geographic, demo-graphic, psychographic, and behavioral data.
The database can be used to locate good potential customers, tailor products and services to the special needs of targeted consumers, and maintain long-term customer relationships.
A customer mailing list, in contrast, is simply a set of names, addresses, and telephone numbers.
Use Key Term Customer Database here.
Companies use their databases in many ways.
They can use a database to identify prospects and generate sales leads by advertising products or offers.
They can use a database to deepen customer loyalty.
Or they can use the database to profile customers based on previous purchasing and to decide which customers should receive particular offers.
Use Figure 13-4 here.
Use Chapter Objectives 5 here.
Forms of Direct Marketing
The major forms of direct marketing are shown in Figure 13-4.
Telephone marketing uses the telephone to sell directly to con-sumers and business customers.
It has become the major direct-marketing communication tool.
Telephone marketing now accounts for more than 39% of all direct-marketing media expenditures and 36% of direct-marketing sales.
Marketers use outbound telephone marketing to sell directly to consumers and businesses.
Inbound toll-free 800 numbers are used to receive orders from television and print ads, direct mail, or catalogs.
Properly designed and targeted telemarketing provides many benefits, including purchasing convenience and increased product and service information.
However, the recent explosion in unsolicited telephone marketing has annoyed many consumers.
When the FTC opened registration for its “Do Not Call List” in mid-2003, nearly 10 million consumers registered 13 million phone numbers in the first three days.
Direct-mail marketing involves sending an offer, announcement, reminder, or other item to a person at a particular address.
Using highly selective mailing lists, direct marketers send out millions of mail pieces each year.
Direct mail accounts for nearly 23% of all direct-marketing media expenditures and 31% of direct-marketing sales.
Direct mail is well suited to direct, one-to-one communi-cation.
Direct mail permits high target-market selectivity, can be personalized, is flexible, and allows easy measurement of results.
Three new forms of mail delivery have become popular.
Fax mail: Marketers now routinely send fax mail announcing special offers, sales, and other events to prospects and customers with fax machines.
Email: Many marketers now send sales announce-ments, offers, product information, and other mes-sages to email addresses.
Voice mail: Some marketers have set up automated programs that exclusively target voice mailboxes and answering machines with prerecorded mes-sages.
Use Marketing at Work 13-3 here.
Catalog marketing has grown explosively during the past 25 years.
Annual catalog sales are expected to grow to more than $176 billion in 2008.
Ninety-seven percent of all catalog companies now present merchandise and take orders over the Internet.
Web-based catalogs present some challenges. They are passive and must be marketed. Attracting customers is much more difficult for a Web catalog than for a print catalog.
Direct-response television marketing takes one of two major forms.
Direct-response advertising is where direct marketers air television spots, often 60 or 120 seconds long, that persuasively describe a product and give customers a toll-free number for ordering.
Infomercials are 30-minute advertising programs for a single product.
For years, infomercials have been associated with somewhat questionable pitches.
But major corporations have been using info-mercials to sell their wares.
With widespread distribution on cable and satellite television, the top three shopping networks combined now reach 248 million homes worldwide, selling more than $4 billion of goods each year.
Kiosks are information and ordering machines in stores, airports, and other locations.
Use Key Terms Telephone Marketing, Direct-Mail Marketing, Catalog Marketing, and Direct-Response Television Marketing here.
Use Marketing at Work 13-4 here.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 5 here.
Integrated Direct Marketing
Too often, a company’s individual direct-marketing efforts are not well integrated with one another or with elements of its marketing and promotion mixes.
Integrated direct marketing is a power approach that involves using coordinated multiple-media, multiple-stage campaigns.
Use Key Term Integrated Direct Marketing here.
Use Figure 13-5 here.
Public Policy and Ethical Issues in Direct Marketing
The aggressive and sometimes shady tactics of a few direct marketers can bother or harm consumers, giving the industry a black eye.
Direct-marketing excesses sometimes annoy or offend consumers.
Dinner-time or late-night phone calls are especially bothersome.
So-called heat merchants design mailers and write copy intended to mislead buyers.
Some direct marketers pretend to be conducting research surveys when they are actually asking leading questions to screen or persuade customers.
Invasion of privacy is perhaps the toughest public policy issue now confronting the direct-marketing industry.
It seems that almost every time consumers enter a sweepstakes, apply for a credit card, take out a magazine subscription, or order products by mail, telephone, or the Internet, their names are entered into some company’s already bulging database.
Although consumers often benefit from database marketing, many critics worry that marketers may know too much about consumers’ lives.
The direct marketing industry is addressing issues of ethics and public policy.
Direct marketers know that, left untended, such problems will lead to increasingly negative consumer attitudes, lower response rates, and calls for more restrictive state and federal legislation.
Most direct marketers want the same things that consumers want: honest and well-designed marketing offers targeted only toward consumers who will appreciate and respond to them.
Travel Log
Discussing the Issues
What is meant by “personal selling is the interpersonal arm of the promotion mix”? What advantages and disadvantages does the personal selling function have relative to advertising in convincing consumers to make a purchase?
Advertising consists of one-way, nonpersonal communication with target consumer groups. In contrast, personal selling involves two-way, personal communication between salespeople and individual customers—whether face-to-face, by telephone, through video or web conferences, or by other means. Personal selling can be more effective than advertising in more complex selling situations. Salespeople can probe customers to learn more about their problems, then adjust the marketing offer to fit the special needs of each customer and negotiate terms of sale. They can build long-term personal relationships with key decision makers.
Compare and contrast a territorial sales force structure, a product sales force structure, and a customer sales force structure. Under what circumstances might a company want to use each one?
In the territorial sales force structure, each salesperson is assigned to an exclusive geographic area and sells the company’s full line of products or services to all customers in that territory. Salespeople must know their products—especially when the products are numerous and complex. This need, together with the growth of product management, has led many companies to adopt a product sales force structure, in which the sales force sells along product lines. More and more companies are now using a customer sales force structure, in which they organize the sales force along customer or industry lines. Separate sales forces may be set up for different industries, for serving current customers versus finding new ones, and for major accounts versus regular accounts.
In the selling process, the activities that occur before the potential client is contacted are of vital importance. Discuss the role of prospecting, qualifying, and the preapproach activities in making the actual sales presentations more successful.
Prospecting is identifying qualified potential customers. Qualifying is identifying potentially good customers and screening out poor ones. Prospects can be qualified by looking at their financial ability, volume of business, special needs, location, and possibilities for growth. Before calling on a prospect, the salesperson should learn as much as possible about an organization (what it needs, who is involved in the buying) and its buyers (its characteristics and buying styles). This step is known as the preapproach. If these three steps are done correctly, then the salesperson is much more likely to be calling on individuals who need his or her products, and thus has a better chance to ultimately make a sale.
Direct marketing is the fastest growing form of marketing. What benefits do buyers and sellers receive from this marketing communications mix element that has led to its growth?
For buyers, direct marketing is convenient, easy to use, and private. Direct marketing gives buyers ready access to a wealth of products and information, both at home and around the globe. Also, direct marketing is immediate and interactive—buyers can interact with sellers by phone or on the seller’s website to create exactly the configuration of information, products, or services the buyer desires, then order them on the spot. For the sellers, direct marketing allows them to target small groups or individual consumers, tailor offers to individual needs, and promote these offers through personalized communications. Direct marketing can also be timed to reach prospects at just the right moment. Direct marketing also gives sellers access to buyers that they could not reach through other channels.
Study the direct marketing forms of telephone marketing, direct-mail marketing, catalog marketing, direct-response television marketing, and kiosk marketing presented in this chapter. Identify products or services that would be appropriate for each of these forms of direct marketing. What is it about the products or services you selected that make them appropriate for these forms?
Student responses to this question will vary with the types of products they select. Instructors may wish to point out how the degree to which the customer wants immediate delivery of the product/service, the consumer’s desire to “touch” the product before purchase, and the risk (financial and social) associated with the product may be factors that account for the appropriateness of products for particular forms of direct marketing.
Application Questions
In a small group, discuss entry-level sales positions appropriate for someone graduating from college with a marketing degree. Your discussion should include what a typical day would be like for this salesperson and your group should identify the traits an individual should possess to be a successful salesperson in this industry. Write a newspaper advertisement for recruiting an individual for this position.
Be sure that students list the specific attributes they would like the new hire to have in the advertisement. This would also be a good opportunity to review diversity and gender issues related to hiring.
Building on the sales position advertisement developed in the prior question, you are now asked to evaluate potential applicants for the job. Each group member should bring a resume to class with the individual’s name removed. The group should then discuss what they will look for in a job candidate’s resume that will allow them to screen for the traits they discussed in the development of the advertisement. The group should then review the resumes and select the top two candidates they would invite to interview.
Another twist for this exercise is to bring in a sales manager as a guest speaker and have the sales manager perform the same task and then debrief with the students. For more ideas on this type of exercise see “An Experiential Exercise for Enlightening Sales Students about the Screening and Selection Process for Sales Jobs” by James G. Lollar, Thomas W. Leigh in the Journal of Marketing Education, Volume 17, Number 3, Fall 1995.
Select a product with which you are familiar and conduct a sales presenta-tion/demonstration. Pair with another student and take turns role-playing the “salesperson” and the “prospect.” The salesperson should tell the product story to the prospect, present customer benefits, and show how the product solves the customer’s problems. The prospect should raise objections to the sale so that the salesperson can practice handling objections. The selling role-play should end with the salesperson attempting to close the sale. Several other students can observe the interaction and offer a critique of the salesperson.
Instructors may also desire to have the role play interaction videotaped and later go back with the entire class to critique the positive actions and improve the poorer performances. Alternatively, students might be asked to develop two tapes, one showing a poor salesperson-client interaction and the other showing a good one.
Under the Hood/Focus on Technology
Many companies offer sales force automation products to assist salespeople in managing their clients. Visit the websites of these three sales force automation vendors (, and ), and read about their products. Next respond to the following questions.
What activities can sales force automation products help salespeople perform better?
Students are likely to respond with scheduling tasks, keeping track of where the client is in the decision-making process, knowing what the customer has purchased in the past, and keeping track of personal information about specific clients (., favorite food, birthday, etc.).
What kinds of questions would you ask a sales force automation vendor if you were in charge of purchasing a system for your company?
Cost versus benefit questions would be appropriate. The company purchasing the automation system will want to know how revenues will increase as a result of using this system and how long it will take to recoup the cost of the investment.
What concerns might salespeople have to their company implementing a new sales force automation tool? What could be done to overcome these objections?
Salespeople may be used to doing things the “old” way and be reluctant to embrace new technology, especially if they don’t see any immediate benefit to the added time they are now giving to entering information into the system. Having a successful salesperson act as a champion for the new system may help win over other salespeople. Of course, adequate training and support must be provided to make sure the system is being used to its fullest potential.
Focus on Ethics
Recruitment and selection are a big part of the sales management function. There are a variety of state and federal laws dictating what a sales manger can and cannot ask an applicant during the job interview. Generally, a sales manager should focus on questions that directly relate to knowing if the job candidate can or cannot perform the functions required of the job. Questions should not be asked that may lead to the potential for discrimination on the basis of age, disability, gender, national origin, race, or religion. Examples of inappropriate questions include: Are you married? How old are you? Where were you born? Do you attend church regularly? Have you ever been arrested? Are you planning on having children? Have you ever filed for bankruptcy?
Why are laws in place that make it illegal to ask the types of questions listed above?
These laws protect job applicants from being unfairly denied employment. The fact that an individual will have children, for example, should not disqualify him or her from a job.
If you were asked one of these questions in an interview how would you handle it? What response options would you have?
One way to react would be to be defensive and tell the interviewer that the question is inappropriate. However, often times these questions are not asked for the purpose of discrimination, but are more often naively asked as a way to get to know the applicant better. In such cases, getting defensive may harm the chances of the firm hiring the applicant. Students might be advised to try and assess the motivation or reason behind the question being asked and then respond appropriately. One could also choose to deflect the question and answer it only partially.
What steps might a sales organization take to help reduce the possibility that inappropriate questions are asked during job interviews?
Firms should provide training and/or information to those involved in the hiring process with regard to the types of questions that should and should not be asked. Role-playing might be a useful exercise in this regard.
Great Ideas
Barriers to Effective Learning
The issues surrounding managing the sales force can be difficult for some students. Individually, each of the decisions a sales manager needs to make seem reasonable enough, but bringing them all together to actually plan how to develop and manage the sales force appears complicated to most undergraduates. These issues can be made simpler by going through each of the concepts carefully and thoroughly. You may also want to have the students design their own sales force for a product or service idea they have. This will really drive home the concepts of how you design the sales force, as well as all the management processes.
Sales to most students equates to retail sales, a field that many people dislike. Therefore, many students will not be planning on going into sales as a career, and this could cause them to “tune out” during this section. You can bring them back by talking about the nature of selling in various kinds of service firms, such as accounting firms, that many students may be heading toward after graduation. Also, a discussion of the sophistication and professionalism of the salespeople in companies such as IBM and other business-to-business companies can generate some enthusiasm for this important field.
The personal selling process will be a surprise to many students, again because they typically think of retail sales, if they’ve thought about sales at all. The importance of all of these steps in the sales process can be highlighted in the discussion of business-to-business sales.
Direct marketing is a hot topic these days because of the national Do Not Call list and the recently passed federal legislation on anti-spamming. The students should be able to maintain their interest in this topic, but they may well be surprised that direct marketing is not just for underfunded or shady enterprises. Highlight the section on customer databases to get across the analytics required for successful direct marketing, as well as all the forms of direct marketing listed in the text.
Student Projects
Research several companies to decide how their sales forces are structured (., territorial, product, customer, or complex).
List and briefly describe the steps in the personal selling process. Which do you think are most difficult? Which step is most critical to successful selling?
Analyze your own potential to be a salesperson in your chosen field. List your strengths and weaknesses as they apply to a career in sales. How would you play up your strengths and compensate for your weaknesses?
Select one of the direct marketing methods and discuss the decisions that are necessary in developing a strategy for using the method.
Classroom Exercise/Homework Assignment
The Direct Marketing Association () was established in 1917 and is the largest trade association for businesses involved in direct marketing, database marketing, and interactive global marketing. Its membership includes about 4,700 companies in the United States alone.
The DMA provides its members with education, the latest industry knowledge and techniques, representation to both federal and state legislatures, and can even provide some targeted marketing opportunities.
Review the website for the DMA. What functions impress you the most? Worry you the most?
Student responses will vary. On the impressive side, the DMA does provide a host of educational services for its members, which could help stem abuses by direct marketers. On the other side, the DMA also argues vociferously for sharing marketing data in the debate over consumer privacy. Although the association has always supported the ability of consumers to “opt-out,, they feel strongly that companies should be able to use the data they collect to their benefit and share the data with others. There is also content on the site that is restricted to members; what might they be trying to hide?
The Member Directory for the DMA is restricted. How do you feel about this?
Again, student responses will vary. Some will point out that the vast majority of associations restrict their membership lists. Others will argue that, given the mission of the DMA, it might be helpful for consumers to be able to check to see if a given company is a member, thus giving it a kind of “seal of approval.”
When considering purchasing a product from a direct marketing company, would it make a difference to you if that company noted that they were a member of the Direct Marketing Association?
Student responses will vary. Many will point out that any company can claim to be a member, and because you can’t check on the DMA website, you will have no way of knowing if a company really is a member. And if it were, it doesn’t necessarily mean that their business practices are totally on the up and up; it would make more sense to check with the Better Business Bureau. However, others will say that it is at least a step in the right direction, and they will believe that the DMA will police those who say they are members.
Classroom Management Strategies
This chapter continues the discussion begun in Chapter 12; it describes the final two communications methods for integrated marketing communications. Most of the chapter is spent on the sales process, and then direct marketing is discussed.
The introduction and Personal Selling section can be covered in 5 minutes. These sections set the stage for the next two sections, and for that reason should not be rushed through.
Spend 20 minutes going over the section entitled Managing the Sales Force. This is critical information that the students will need to learn. Figure 13-1 provides an introduction to the steps in sales force management. Marketing at Work 13-1 shows how sales forces are changing with the introduction of new technology. Finally, review Table 13-1 to show the connection between marketing strategy and sales force compensation.
The Personal Selling Process can be covered in 15 minutes. Be sure to work with the students to ensure their understanding of each step of the process. Having them team up to “sell” something to other teams is often helpful in this section, ensuring that they “prospect,” develop their preapproach and approach, and then present, close, and follow-up. Figure 13-3 shows the complete selling process.
Direct Marketing is a packed section. Spend 20 minutes here, paying particular attention to the subsections on customer databases and the forms of direct marketing. Most students will come into this thinking only of telemarketing calls. Others will have trouble distinguishing between direct marketing and advertising. Marketing at Work 13-2 talks about Dell’s direct process. Because most students are familiar with Dell, this can really help them understand the benefits of direct marketing.
Public policy as it relates to direct marketing is ever changing. Have the students investigate the current status of laws and proposals as it pertains to telemarketing and email marketing campaigns, and report back to the class. A discussion of the implication of these laws and proposals will drive home the complexity of the issues.
Chapter 14
Marketing in the Digital Age
Previewing the Concepts: Chapter Objectives
Identify the major forces shaping the new digital age.
Explain how companies have responded to the Internet and other powerful new technologies with e-business strategies, and how these strategies have resulted in benefits to both buyers and sellers.
Describe the four major e-commerce domains.
Discuss how companies go about conducting e-commerce to profitably deliver more value to customers.
Give an overview the promise and challenges that e-commerce presents for the future.
Just the Basics
Chapter Overview
Some say the new digital technologies have created a new economy. Few would disagree that the Internet and other powerful new connecting technologies are having a dramatic impact on marketers and buyers. There are four forces that underlie the new digital age. These include digitalization and connectivity; the explosion of the Internet; new types of intermediaries; and customization and customerization.
Much of the world’s business today is carried out over networks that connect people and companies. Intranets, extranets, and the Internet itself have all changed the way companies do business, and customers find the products and services they want. The explosive worldwide growth in Internet usage forms the heart of the so-called new economy. But the Internet has also allowed new companies to compete, and the formation of new types of intermediaries and new forms of channel relationships caused existing firms to re-examine how they served their markets. Finally, the new technologies have allowed companies to customize both their products and their messages to consumers, but more importantly, they have introduced the concept of customerization, in which the company leaves it to individual customers to design the offering they want.
Conducting business in the new digital age will call for a new model for marketing strategy and practice. Some strategists envision a day when all buying and selling will involve direct electronic connections between companies and their customers. But the fact is that today’s marketing requires a mixture of old economy and new economy thinking and action.
E-business involves the use of electronic platforms such as intranets, extranets, and the Internet to conduct a company’s business. E-commerce is more specific than e-business. E-commerce involved buying and selling processes supported by electronic means, primarily the Internet. E-marketing is the marketing side of e-commerce.
There are several e-marketing domains, including business-to-consumer (B2C), business-to-business (B2B), consumer-to-consumer (C2C), and consumer-to-business (C2B). Each of these domains meets specific needs of each of the segments addressed, and they all continue to grow.
E-commerce is conducted in many ways. Companies can be “click-only” in that they are located only on the Internet. They include e-tailers, search engines and portals, Internet Service Providers (ISPs), transaction sites, content sites, and enabler sites. Many companies today, however, are “click-and-mortar” companies, because they maintain their traditional channels of distribution while simultaneously providing an Internet channel.
There are various types of websites. Corporate websites typically offer a rich variety of information and other features in an effort to answer customer questions, build closer customer relationships, and generate excitement about the company. Marketing websites engage consumers in an interaction that will move them closer to a direct purchase or other marketing outcome. Online advertising includes such things as banner ads and tickers; skyscrapers, which are tall, skinny ads at the side of a web page; rectangles; and interstitials—online ads that pop up between changes on a website. Viral marketing involves creating an email message or other marketing event that is so infectious that customers will want to pass it along to their friends.
E-commerce continues to offer both great promise and many challenges for the future. Online marketing will become a successful model for some companies. However, there is a darker side to Internet marketing. One major concern is profitability, especially for B2C dot-coms. Although expanding rapidly, online marketing still reaches only a limited marketplace.
There are also broader ethical and legal questions. Online privacy is perhaps the number one e-commerce concern. Many consumers also worry about online security, as well as the privacy rights of children. Many companies have responded to consumer privacy and security concerns with actions of their own. Still, examples of companies aggressively protecting their customers’ personal information are too few and far between.
Chapter Outline
Introduction
Office Depot’s store sales have flattened recently, but its online sales have soared, more than doubling in just the last two years. The retailer’s web unit booked $ billion in online revenues last year, accounting for % of total sales.
The combination of online and in-store selling gives Office Depot customers anywhere, anytime access to the retailer’s wares, along with piles of helpful information.
Selling on the web lets Office Depot build deeper, more personalized relationships with customers, both large and small.
Office Depot has formed more than two dozen online partnerships to bring additional services to small business customers. Such services range from Internet postage, web hosting, and sales intelligence data, to online incorporation for new businesses.
Importantly, Office Depot’s web operations don’t detract from store sales. Instead, Office Depot has created synergy between the “clicks” and the “bricks” by carefully connecting the online and store’s side of its business.
Integrated click-and-mortar companies such as Office Depot now capture a greater share of online sales than their Internet-only competitors.
Recent technological advances, including the widespread use of the Internet, have created what some have called a new economy.
Few would disagree that the Internet and other powerful new connecting technologies are having a dramatic impact on marketers and buyers.
Major Forces Shaping the Digital Age
There are four specific forces that underlie the new digital age. These are shown in Figure 14-1.
Use Figure 14-1 here.
Use Chapter Objectives 1 here.
Digitalization and Connectivity
Much of the world’s business today is carried out over networks that connect people and companies.
Intranets are networks that connect people within a company to each other and to the company network.
Extranets connect a company with its suppliers, distributors, and other outside partners.
The Internet is a vast public web of computer networks; it connects users of all types all around the world to each other and to an amazingly large “information repository.”
Use Key Terms Intranet, Extranet, and Internet here.
Use Discussing the Issues 1 here.
Internet Explosion
With the creation of the World Wide Web and web browsers in the 1990s, the Internet was transformed from a mere communication tool into a certifiably revolutionary technology.
The explosive worldwide growth in Internet usage forms the heart of the so-called new economy. The Internet has been the revolutionary technology of the new millennium, empowering consumers and businesses alike with blessings of connectivity.
The average . Internet user visits the web 30 times a month at home and 66 times a month at work, spending more than 30 minutes per visit.
Let’s Discuss This
How much time do you spend on the web each day? How much money do you spend ordering goods and services online? How does this compare to your parents’ usage and money spent?
New Types of Intermediaries
The formation of new types of intermediaries and new forms of channel relationships caused existing firms to re-examine how they served their markets.
At first, the established brick-and-mortar firms dragged their feet hoping that the aggressive click-only firms would falter or disappear.
Then they wised up and started their own online sales channels, becoming click-and-mortar competitors.
Customization and Customerization
The old economy revolved around manufacturing companies that mainly focused on standardizing their production, products, and business processes.
In contrast, the new economy revolves around information businesses. Information has the advantages of being easy to differentiate, customize, personalize, and send at incredible speeds over networks.
Customization differs from customerization.
Customization involves taking the initiative to customize the market offering.
In customerization, the company leaves it to individual customers to design the offering.
Use Key Term Customerization here.
Use Application Questions 3 here.
Marketing Strategy in the Digital Age
Conducting business in the new digital age will call for a new model for marketing strategy and practice.
Some strategists envision a day when all buying and selling will involve direct electronic connections between companies and their customers.
The new model has fundamentally changed customers’ notions of conve-nience, speed, price, product information, and service.
The fact is that today’s marketing requires a mixture of old economy and new economy thinking and action.
Companies need to retain most of the skills and practices that have worked in the past.
But they will also need to add major new competencies and practices if they hope to grow and prosper in the new environment.
E-Business, E-Commerce, and E-Marketing in the Digital Age
E-business involves the use of electronic platforms—intranets, extranets, and the Internet—to conduct a company’s business.
Countless companies have set up websites to inform about and promote their products and services.
Most companies have also created intranets to help employees communicate with each other and to access information found in the company’s computers.
Companies also set up extranets with their major suppliers and distributors to enable information exchange, orders, transactions, and payments.
Applying the Concept
How might a company use an intranet to help their sales force be more efficient? Could it offer any help to the manufacturing plants?
E-commerce is more specific than e-business.
E-business includes all electronics-based information exchanges within or between companies and customers.
In contrast, e-commerce involves buying and selling processes supported by electronic means, primarily the Internet.
E-markets are “marketspaces” rather than physical marketplaces.
Sellers use e-markets to offer their products and services online.
Buyers use them to search for information, identify what they want, and place orders using credit or other means of electronic payment.
E-commerce includes e-marketing and e-purchasing.
E-marketing is the marketing side of e-commerce. It consists of company efforts to communicate about, promote, and sell products and services over the Internet.
E-purchasing is the flip side of e-marketing. It is the buying side of e-commerce. It consists of companies purchasing goods, services, and information from online suppliers.
Use Key Terms E-Business, E-Commerce, and E-Marketing here.
Benefits to Buyers
Internet buying benefits both final buyers and business buyers in many ways.
It can be convenient.
Buying is easy and private.
The Internet often provides buyers with greater product access and selection.
E-commerce channels also give buyers access to a wealth of comparative information about companies, products, and compet-itors.
Online buying is interactive and immediate.
Benefits to Sellers
There are also many benefits to sellers.
The Internet is a powerful tool for customer relationship building.
The Internet and other electronic channels can also reduce costs and increase speed and efficiency.
E-marketing can also offer greater flexibility, allowing the marketer to make ongoing adjustments to its offers and programs.
The Internet is a truly global medium that allows buyers and sellers to click from one country to another in seconds.
Use Chapter Objectives 2 here.
Use Discussing the Issues 2 here.
E-Marketing Domains
The four major e-marketing domains are shown in Figure 14-2.
Use Figure 14-2 here.
Use Chapter Objectives 3 here.
B2C (Business-to-Consumer)
The popular press has paid the most attention to B2C (business-to-consumer) e-commerce—the online selling of goods and services to final consumers.
Use Key Term B2C (Business-to-Consumer) E-Commerce here.
Online consumer buying continues to grow at a healthy rate.
Today, almost two-thirds of . households surf the Internet. Increas-ingly, the Internet provides e-marketers with access to a broad range of demographic segments.
Internet consumers differ from traditional offline consumers in their approaches to buying and in their responses to marketing.
People who use the Internet place greater value on information and tend to respond negatively to messages aimed only at selling.
E-marketing targets people who actively select which websites they will visit and what marketing information they will receive about which products and under what conditions.
The Internet is most useful for products and services when the shopper seeks greater ordering convenience or lower costs. The Internet also provides great value to buyers looking for information about differences in product features and value.
B2B (Business-to-Business)
Consumer goods sales via the web are dwarfed by B2B (business-to-business) e-commerce.
Use Key Term B2B (Business-to-Business) E-Commerce here.
Most major business-to-business marketers now offer product information, customer purchasing, and customer support services online.
Some B2B e-commerce takes place in open trading exchanges, which are huge e-marketspaces in which buyers and sellers find each other online, share information, and complete transactions efficiently.
Increasingly, online sellers are setting up their own private trade exchanges. These exchanges link a particular seller with its own trading partners.
Private exchanges give sellers greater control over product presentation and allow them to build deeper relationships with buyers and sellers by providing value-added services.
Use Key Terms Open Trading Exchanges, Private Trading Exchanges here.
C2C (Consumer-to-Consumer)
Much C2C (consumer-to-consumer) e-commerce and communication occurs on the web between interested parties over a wide range of products and subjects.
Use Key Term C2C (Consumer-to-Consumer) E-Commerce here.
C2C involves interchanges of information through forums and Internet newsgroups that appeal to specific special-interest groups.
Forums are discussion groups located on commercial online services such as AOL and CompuServe.
Newsgroups are the Internet version of forums.
C2C means that online visitors don’t just view consumer product information. Increasingly, they create it. They join Internet interest groups to share information, with the result that “word of web” is joining “word of mouth” as an important buying influence.
C2B (Consumer-to-Business)
C2B (consumer-to-business) e-commerce allows today’s consumers to communicate more easily with companies.
Most companies now invite prospects and customers to send in suggestions and questions via company websites.
Use Key Term C2B (Consumer-to-Business) E-Commerce here.
Conducting E-Commerce
Companies of all types are now engaged in e-commerce. The different types of e-marketers are shown in Figure 14-3.
Use Figure 14-3 here.
Use Chapter Objectives 4 here.
Click-Only versus Click-and-Mortar E-Marketers
The Internet gave birth to a new species of e-marketers—the click-only dot-coms—which operate only online without any brick-and-mortar market presence.
Brick-and-mortar companies have now added e-marketing operations, transforming themselves into click-and-mortar competitors.
Click-only companies come in many shapes and sizes.
E-tailers are dot-coms that sell products and services directly to final buyers via the Internet.
This group includes search engines and portals.
Internet service providers (ISPs) are click-only companies that provide Internet and email connections for a fee.
Transaction sites take commissions for transactions con-ducted on their sites.
Content sites provide financial, research, and other infor-mation.
Enabler sites provide the hardware and software that enable Internet communication and commerce.
Table 14-1 shows that a dot-com’s revenues may come from any of several sources.
Use Key Term Click-Only Companies here.
Use Table 14-1 here.
Use Application Questions 2 here.
Many established companies moved quickly to open websites providing information about their companies and products.
Most resisted adding e-commerce to their sites. They worried that this would produce channel conflict—that selling their products or services online would be competing with their offline retailers and agents.
However, they soon realized that the risks of losing business to online competitors were even greater than the risks of angering channel partners.
Most established brick-and-mortar companies are now prospering as click-and-mortar companies.
Most of these click-and-mortar companies have found ways to resolve channel conflicts.
Established companies have known and trusted brand names and greater financial resources. They have large customer bases, deeper industry knowledge and experience, and good relationships with key suppliers. By combining online marketing and established brick-and-mortar operations, they can offer customers more op-tions.
Use Key Term Click-and-Mortar Companies here.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 3 here.
Let’s Discuss This
Would you rather buy online from a company whose name you know? Are you willing to buy online, giving out your credit card number, to someone you never heard of before? How do you decide?
Setting Up an E-Marketing Presence
Companies can conduct e-marketing in any of the four ways shown in Figure 14-4.
Use Figure 14-4 here.
The first step in conducting e-marketing is to create a website.
The most basic type is a corporate website.
These sites are designed to build customer goodwill and to supplement other sales channels, rather than to sell the company’s products directly.
Corporate websites typically offer a rich variety of infor-mation and other features in an effort to answer customer questions, build closer customer relationships, and generate excitement about the company.
These sites generally provide information about the com-pany’s history, its mission and philosophy, and the products and services it offers.
Use Key Term Corporate Website here.
Other companies create a marketing website.
These sites engage consumers in an interaction that will move them closer to a direct purchase or other marketing outcome.
Such sites might include a catalog, shopping tips, and promotional features such as coupons, sales events, or contests.
Use Key Term Marketing Website here.
Creating a website is one thing; getting people to visit the site is another.
The key is to create enough value and excitement to get consumers to come to the site, stick around, and come back again.
This means that companies must constantly update their sites to keep them current, fresh, and exciting.
A key challenge is designing a website that is attractive on first view and interesting enough to encourage repeat visits.
To attract new visitors and to encourage revisits, one expert suggests playing close attention to the seven Cs of effective website design.
Context—the site’s layout and design.
Content—the text, pictures, sound, and video that the website contains.
Community—the ways that the site enables user-to-user communication.
Customization—the site’s ability to tailor itself to different users or to allow users to personalize the site.
Communication—the ways the site enables site-to-user, user-to-site, or two-way communication.
Connection—the degree that the site is linked to other sites.
Commerce—the site’s capabilities to enable commercial transactions.
Ultimately, it is the value of the site’s content that will attract visitors, get them to stay longer, and bring them back for more.
Use Discussing the Issues 4 here.
Use Application Questions 1 here.
E-marketers can use online advertising to build their Internet brands or to attract visitors to their websites.
Use Key Term Online Advertising here.
Online ads that pop up while Internet users are surfing online include banner ads and tickers.
Skyscrapers are tall, skinny ads at the side of a web page, while rectangles are boxes that are much larger than a banner.
Interstitials are online ads that pop up between changes on a website.
Content sponsorships are another form of Internet promotion. Many companies gain name exposure on the Internet by sponsoring special content on various websites, such as news or financial information.
E-marketers can also go online with microsites, limited areas on the web managed and paid for by an external company.
Online marketers use viral marketing, the Internet version of word-of-mouth marketing. Viral marketing involves creating an email message or other marketing event that is so infectious that customers will want to pass it along to their friends.
Use Key Term Viral Marketing here.
Use Marketing at Work 14-1 here.
Use Discussing the Issues 5 here.
Use Under the Hood/Focus on Technology here.
Although online advertising serves a useful purpose, many marketers still question the value of Internet advertising as an effective tool.
Web surfers can easily ignore the advertising, and often do.
Still, online advertising is playing an increasingly important role in the marketing mixes of many advertisers.
The popularity of forums and newsgroups has resulted in a rash of commercially sponsored websites called web communities, which take advantage of the C2C properties of the Internet.
Use Key Term Web Communities here.
Such sites allow members to congregate online and exchange views on issues of common interest.
Visitors to these Internet neighborhoods develop a strong sense of community.
Such communities are attractive to advertisers because they draw consumers with common interests and well-defined demographics.
Cyberhood consumers visit frequently and stay online longer, increasing the chance of meaningful exposure to the advertiser’s message.
Web communities can be either social or work related.
Email has exploded onto the scene as an important e-marketing tool.
To compete effectively in this ever-more-cluttered email environ-ment, marketers are designing “enriched” email messages that are animated, interactive, and personalized messages full of streaming audio and video.
The recent explosion of spam—unsolicited, unwanted commercial email messages that clog up your emailboxes—has produced consumer frustration and anger.
Use Key Term Spam here.
Use Marketing at Work 14-2 here.
The Promise and Challenges of E-Commerce
E-commerce continues to offer both great promise and many challenges for the future.
Use Chapter Objectives 5 here.
The Continuing Promise of E-Commerce
Its most ardent apostles still envision a time when the Internet and e-commerce will replace magazines, newspapers, and even stores as sources of information and buying.
Online marketing will become a successful business model for some companies. However, for most companies, online marketing will remain just one important approach to the marketplace that works alongside other approaches in a fully integrated marketing mix.
Eventually, as companies become more adept at integrating e-commerce with their everyday strategy and tactics, the “e” will fall away from e-business or e-marketing.
The Web’s Darker Side
Along with its considerable promise, there is a “darker side” to Internet marketing.
One major concern is profitability, especially for B2C dot-coms.
Surprisingly few Internet companies are profitable.
One problem is that, although expanding rapidly, online marketing still reaches only a limited marketspace.
The web audience is becoming more mainstream, but online users still tend to be somewhat more upscale and better educated than the general population.
From a broader societal viewpoint, Internet marketing practices have raised a number of ethical and legal questions.
Online privacy is perhaps the number one e-commerce concern.
Most online marketers have become skilled at collecting and analyzing detailed consumer information.
This may leave consumers open to information abuse if companies make unauthorized use of the information in marketing their products or exchanging databases with other companies.
Many consumers worry about online security.
Consumers fear that unscrupulous snoopers will eavesdrop on their online transactions or intercept their credit card numbers and make unauthorized purchases.
Companies doing business online fear that others will use the Internet to invade their computer systems for the purposes of commercial espionage or even sabotage.
Of special concern are the privacy rights of children.
Many companies have responded to consumer privacy and security concerns with actions of their own.
Still, examples of companies aggressively protecting their customers’ personal information are too few and far between.
Applying the Concept
What kind of privacy concerns would a company confront when setting up a website that offers information? One that allows consumers to transact business? How should they respond to consumer concerns?
Consumers are also concerned about Internet fraud, including identity theft, investment fraud, and financial scams.
There are also concerns about segmentation and discrimination on the Internet.
Some social critics and policy makers worry about the so-called digital divide—the gap between those who have access to the latest Internet and information technologies and those who don’t.
A final Internet marketing concern is that of access by vulnerable or unauthorized groups.
As it continues to grow, online marketing will prove to be a powerful tool for building customer relationships, improving sales, communicating company and product information, and delivering products and services more efficiently and effectively.
Use Focus on Ethics here.
Travel Log
Discussing the Issues
Discuss the differences among intranets, extranets, and the Internet. What purpose does each serve for businesses?
Intranets are networks that connect people within a company to each other and to the company network. Extranets connect a company with its suppliers, distributors, and other outside partners. And the Internet, a vast public web of computer networks, connects users of all types all around the world to each other and to an amazingly large “information repository.”
How does e-commerce benefit both buyers and sellers? Can you think of any disadvantages for either buyers or sellers that are a result of e-commerce?
Internet buying benefits both final buyers and business buyers in many ways. It can be convenient: Customers don’t have to battle traffic, find parking spaces, and trek through stores and aisles to find and examine products. Buying is easy and private: Customers encounter fewer buying hassles and don’t have to face salespeople or open themselves up to persuasion and emotional pitches. In addition, the Internet often provides buyers with greater product access and selection. Beyond a broader selection of sellers and products, e-commerce channels also give buyers access to a wealth of comparative information about companies, products, and competitors. Finally, online buying is interactive and immediate. Buyers often can interact with the seller’s site to create exactly the configuration of information, products, or services they desire, then order or download them on the spot.
For sellers, the Internet is a powerful tool for customer relationship building. Because of its one-to-one, interactive nature, companies can interact online with customers to learn more about specific needs and wants. The Internet and other electronic channels can also reduce costs and increase speed and efficiency. E-marketing can also offer greater flexibility, allowing the marketer to make ongoing adjustments to its offers and programs. Finally, the Internet is a truly global medium that allows buyers and sellers to click from one country to another in seconds.
What channel conflict issues might a click-and-mortar company experience? How could the conflict be minimized? Use a specific company as an example.
Student responses will vary depending upon the company selected. As an example, conflicts might occur with regard to pricing, where prices are different online versus in the physical retail location. How should each channel then be evaluated if they are selling at different prices?
How can the seven Cs encourage revisits to a company website? Are some of these factors more important than others? Why or why not?
To attract new visitors and to encourage revisits, suggests one expert, e-marketers should pay close attention to the seven Cs of effective website design:
Context—the site’s layout and design.
Content—the text, pictures, sound, and video that the website contains.
Community—the ways that the site enables user-to-user communication.
Customization—the site’s ability to tailor itself to different users or to allow users to personalize the site.
Communication—the ways the site enables site-to-user, user-to-site, or two-way communication.
Connection—the degree that the site is linked to other sites.
Commerce—the site’s capabilities to enable commercial transactions.
The relative importance of the 7Cs may vary depending upon the type of website or the product being sold. For example, the ability to customize/personalize a site may be more important for a site offering information than it is for a site selling televisions.
Distinguish between the different forms of online advertising and promotion. What factors should a company consider in deciding between these different forms?
Online ads include banner ads (advertisements located across a web page—often at the top) and tickers (banners that move across the screen). Other online ad formats include skyscrapers (tall, skinny ads at the side of a web page) and rectangles (boxes that are much larger than a banner). Interstitials are online ads that pop up between changes on a website. Content sponsorships are another form of Internet promotion. Many companies gain name exposure on the Internet by sponsoring special content on various websites, such as news or financial information. E-marketers can also go online with microsites (limited areas on the web managed and paid for by an external company). Firms should consider the exposure rate to their targeted audience when selecting between the different forms. Also which will be noticed by the target market and is the information to be communicated appropriate for that ad form?
Application Questions
Getting consumers to come spend time at a company’s website and come back again are critical goals in website design. What design options or features can a company use to get consumers to visit and explore their website? Identify a website that you feel does a good job at this and one that does not. What can the website doing the poor job learn from the one doing a good job?
Student responses to this question will vary depending upon the websites selected. Instructors may wish to assign this question when they want to get students to think more deeply about web design issues. An interesting (but potentially more difficult task for students) is to make the good-poor website comparison between companies in the same industry.
Go to . Browse the website and review the features and products offered. What would lead a consumer to purchase through this distribution outlet rather than going to their brick-and-mortar retail location? What fears might consumers purchasing online have that they would not be concerned with in a traditional retail store?
Issues of convenience are likely to drive individuals to the website over the brick-and-mortar store. Concerns for buyers in the online store include the perceived risk of supplying credit card information online and the delay in receiving the product as compared to walking out with the good in the brick-and-mortar location.
Customization involves the company taking the initiative to customize the market offering for consumers, while in customerization, the company leaves it up to individual customers to design the offering. What types of products do you think would lend themselves well to customerization and which would not? Could customerization be designed into an Internet-based web ordering system for a consumer good? What obstacles would need to be overcome?
For customerization to be successful customers must have adequate knowledge of how to customize and the technology must be easy to use. Already there are several examples of customerization available on the Internet (for an example see the Nike shoe Under the Hood question in Chapter 8). Customer resistance to change and their fear of “doing it wrong” may be obstacles to implementing customerization of a product.
Under the Hood/Focus on Technology
Adware programs monitor the websites that a consumer visits and can be programmed to launch the websites of rival companies when a particular website is visited. Many consumers do not know they have these programs on their computers because they are typically bundled with other software that the consumer has downloaded. Recently, the moving company U-Haul lost a court decision to stop from displaying the websites of rival moving companies when consumers visited the U-Haul website. It is estimated that 30 million computers have ’s software installed.
How do you feel about pop-up advertising on the Internet? Do you find it useful or a burden?
Student response to this question will vary depending on their personal attitude. Instructors may wish to discuss “pop-up blocking” technology that is being developed to stop these ads from appearing on the user’s computer screen.
Should adware programs be allowed to offer alternative purchase options to consumers? Do you think that this software gives more consumer choice or is it infringing on the rights of companies?
Adware companies will argue that customers agree to have this software on their computer when they agree to download programs and that they are offering a valuable service to customers by giving them more options to select from.
What form of online advertising do you find most and least objectionable? Do you feel that there might be a negative backlash against those companies using more objectionable forms of online advertising?
Student response to this question will vary.
Focus on Ethics
As noted in the chapter, concern over the security and privacy of sensitive personal information is a big issue for many consumers. Indeed it may lead some consumers to avoid online transactions. In an attempt to put consumers at ease with regard to how the company will and will not use their information, many have posted their privacy policies at their website. Visit and read their privacy policy (scroll to the bottom of the page and click “privacy notice”). Be sure to read about the specific types of information they collect from you automatically, the information they capture with your consent, and the information they gather about you from third parties. After you have read their policies, respond to the following questions.
What is your reaction to this privacy policy? Do you think it would give peace of mind to an individual concerned about others using his or her personal infor-mation?
The students’ response to this question will depend upon how sensitive they are to online security of their personal information. Instructors may wish to probe deeper into this question by asking students if they were aware of the types of information being collected and if its collection would change their buying behavior.
As mentioned in the text, TRUSTe provides a seal of approval for those websites meeting its security and privacy standards. Go to the TRUSTe website ( and read about their four principles for online privacy. How does the privacy policy measure on these four principles?
The four principles on the TRUSTe website are: (1) adoption and implementation of a privacy policy that takes into account consumer anxiety over sharing personal information online, (2) notice and disclosure of information collection and use practices, (3) choice and consent, giving users the opportunity to exercise control over their information, and (4) data security and quality and access measures to help protect the security and accuracy of personally identifiable information.
Do you feel that extra privacy measures should be taken to protect the privacy of those individuals under the age of 18? What extra steps would you suggest?
Student opinions will vary on this question. It should be pointed out that children may not fully understand the ramifications of supplying personal information over the Internet and therefore might deserve special consideration and extra steps.
Great Ideas
Barriers to Effective Learning
The students will have grown up with the Internet, so there are few concepts in this chapter that will be totally new to them. However, the vocabulary and terminology could be new to them, so you will want to go through all the Key Terms carefully.
Students will largely not have thought of e-commerce as having spawned new intermediaries, largely because they will not have even heard of that term prior to this class. Therefore, spend some time talking about the differences between click-only and click-and-mortar companies. Also explain the problems brick-and-mortar companies faced when the dot-com explosion first hit—should they develop their own websites and e-commerce facilities? If they did, should they separate them or keep them integrated into the rest of the business? This was a true period of disruptive technology, and many firms simply did not know how to respond.
Most students will have known the terms and concepts B2B and B2C, but C2C and C2B may be new to them, at least in terminology. Applying the C2C concept to the rise (and fall) of Napster will drive the point home, as will the various chat rooms and other cyber-communities. For C2B, ask if anyone has ever contacted a company via email to ask a question, lodge a complaint, or send a compliment. If not, have them send email to Snapple, a company that is known for responding to customers.
Many students will have their own websites, either for personal use or through their college activities. They will understand the nuances of web design, but may not understand some of the key concepts of attracting and retaining customers through effective design decisions. Discussing websites that they enjoy using, as well as those they think are poorly designed, will help with these concepts.
Student Projects
Find five websites that are transaction-oriented (., you can order products or services) and five websites that just give information. What are the differences? What are the similarities?
Send an information request to a chosen company via its website. Did the company respond in a reasonable amount of time? If it did, did a human respond, or did you get an automated response? If not, how does that make you feel about your relationship to the company?
Discuss the types of online ads you pay attention to. What gets your attention? How often to you “click through” when an ad has gained your attention?
Discuss the types of online ads you ignore or that annoy you. What is it about them that you dislike? How are they different from the ones you do like? What makes an online ad effective or ineffective?
Classroom Exercise/Homework Assignment
Online communities are becoming more and more important. Chat rooms are proliferating, but community-building on the web is going far beyond that. New sites such as and are becoming the hot new way to make new friends, find old associates, and establish new business contacts. Visit to see a site that is dedicated to helping people increase their business through effective use of online networking.
, like most other social networking sites, is still in the beta stage of development. That means that their service is currently free. Would you be willing to pay for a service such as this? Or would you use it only if it continued to be free?
Student responses will vary. Some may be willing to pay for a business networking site, but not for a purely social networking site. Some may not be willing to pay for either kind of site, because so much of the Internet is still currently free. Others will see business benefits, and will note that many in-person networking events have to be paid for, and will likely yield fewer results.
As a business person, how would you feel about providing your list of contacts to a site such as this?
Again, student responses will vary. Because , in particular, makes sure that you get an opportunity to vet a networker before passing him or her along to one of your contacts, many students might be willing to share their contacts. Others might want to jealously guard them, as is frequently done in business today. Privacy concerns are paramount here, and it is up to the individual user to decide how much of his privacy and contacts, he is willing to give up.
is a form of rival to , although this site currently only allows you to keep your contacts up to date. uses a viral marketing campaign to get new members, because when you send emails to all your contacts to allow them to update their information, invites them to join as well. The company claims on its website to have more than one million members currently. Have you ever received an email from ? Have you updated your contact information? Did you join?
Student responses will vary.
How easy would it be for to become a full-fledged competitor of ?
Student responses will vary, but the fact that already has one million members, and the contact information is already being exchanged—when a contact also joins , as his or her information changes automatically updates everyone’s address book in which the person’s name appears—means that the logical next step will be to act as a business networking tool.
Classroom Management Strategies
As was noted previously, students today have grown up with the Internet and e-commerce. This chapter should not be difficult for them, although stressing the Key Terms will be important for them to be able to have intelligent business discussions about the uses of the Internet.
Spend 10 minutes each on the first two sections regarding the forces shaping the digital age and the strategies for responding. Figure 14-1, showing the forces that underlie the digital age, will be of great assistance in getting this topic across.
E-Marketing Domains and Conducting E-Commerce should each receive 15 minutes. Again, although this material may well be familiar to students, they have not considered it from a business-building perspective and may not know all of the Key Terms. The figures, tables, and Speed Bump will help here, as will the Marketing at Work.
The final section, on the promise and challenges of e-commerce, can be covered in 15 minutes. Continue the discussion from Chapter 13 on the Do Not Call laws being passed at the Federal level, and the effect they will have on email marketers.
Chapter 15
The Global Marketplace
Previewing the Concepts: Chapter Objectives
Discuss how the international trade system, economic, political-legal, and cultural environments affect a company’s international marketing decisions.
Describe three key approaches to entering international markets.
Explain how companies adapt their marketing mixes for international markets.
Identify the three major forms of international marketing organization.
Just the Basics
Chapter Overview
This chapter looks at the special considerations that companies face when they market their brands globally. Advances in communication, transportation, and other technologies have made the world a much smaller place. Almost every firm, large or small, faces international marketing issues.
International trade is booming. Since 1969, the number of multinational corporations in the world’s 14 richest countries has more than tripled, from 7,000 to 24,000. Global competition is intensifying. Foreign firms are expanding aggressively into new international markets, and home markets are no longer as rich in opportunity. If companies delay taking steps toward internationalizing, they risk being shut out of growing markets.
Before deciding to operate internationally, a company must thoroughly understand the international marketing environment. There are many issues to understand regarding the international trade system, such as tariffs, quotas, embargoes, and other barriers to entry. The World Trade Organization was established in the latest round of GATT negotiations. The WTO acts as an umbrella organization, overseeing GATT, the General Agreement on Trade in Services, and a similar agreement government intellectual property. In addition, the WTO mediates global disputes and imposes trade sanctions.
Two factors reflect a country’s attractiveness as a market—the country’s industrial structure and its income distribution. There are also several factors to contend with in the political-legal environment, as well as the cultural environment.
There are several factors that draw a company into the international arena. Global competitors might attack the company’s domestic market by offering better products or lower prices. The company might want to counterattack these competitors in their home markets to tie up their resources. Or the company might discover foreign markets that present higher profit opportunities than the domestic market does. Before going abroad, the company must weigh several risks and answer many questions about its ability to operate globally.
Before going abroad, the company should try to define its international marketing objectives and policies. The company needs to choose how many countries it wants to market in, and it needs to decide on the types of countries to enter. Once the decision has been made to sell in a foreign country, the company must determine the best mode of entry.
Most companies start with exporting, using either indirect or direct exporting. Or it could go into a joint venture, through such means as licensing, contract manufacturing, management contracting, or joint ownership. Finally, the company could make a direct investment by developing assembly or manufacturing facilities. Each form of entry carries its own risks and rewards; the company must weigh these carefully before making final decisions.
Companies that operate in one or more foreign markets must decide how much, if at all, to adapt their marketing mixes to local conditions. At one extreme are global companies that use a standardized marketing mix, selling largely the same products and using the same marketing approaches worldwide. At the other extreme is an adapted marketing mix. In this case, the producer adjusts the marketing mix elements to each target market, bearing more costs but hoping for a larger market share and return. However, global standardization is not an all-or-nothing proposition. Rather, it is a matter of degree.
Finally, companies can manage their international marketing activities in at least three different ways: Most companies first organize an export department, then create an international division, and finally become a global organization.
Chapter Outline
Introduction
Coca-Cola is a brand that is as American as baseball and apple pie. But from the beginning, Coke was destined to be more than just America’s soft drink.
First introduced in 1893, by 1900 Coca-Cola had already ventured beyond America’s borders into numerous countries.
Coca-Cola’s worldwide success results from a skillful balancing of global standardization and brand building with local adaptation. For years, the company adhered to the mantra “Think globally, act locally.” The company carefully adapts its mix of brands and flavors, promotions, price, and distribution to local customs and preferences in each market.
As a result of its international marketing prowess, Coca-Cola dominates the global soft drink market.
Global Marketing in the Twenty-first Century
The world is shrinking rapidly with the advent of faster communication, transportation, and financial flows. Products developed in one country are finding enthusiastic acceptance in other countries.
International trade is booming.
Since 1969, the number of multinational corporations in the world’s 14 richest countries has more than tripled, from 7,000 to 24,000.
Imports of goods and services now account for 24% of gross domestic product (GDP) worldwide, twice the levels of 40 years ago.
If companies delay taking steps toward internationalizing, they risk being shut out of growing markets.
Although the need for companies to go abroad is greater today than in the past, so are the risks.
High debt, inflation, and unemployment in many countries have resulted in highly unstable governments and currencies, which limit trade and expose . firms to many risks.
Governments are placing more regulations on foreign firms, such as requiring joint ownership with domestic partners, mandating the hiring of nationals, and putting limits on the profits that can be taken from the country.
Foreign governments often impose high tariffs or trade barriers in order to protect their own industries.
Corruption is an increasing problem—officials in several countries often award business not to the best bidder but to the highest briber.
A global industry is one in which the competitive positions of firms in given local or national markets are affected by their global positions.
A global firm is one that, by operating in more than one country, gains marketing, production, R&D, and financial advantages that are not available to purely domestic competitors.
The global company sees the world as one market. It minimizes the importance of national boundaries and develops “supranational” brands.
Use Key Term Global Firm here.
Use Figure 15-1 here.
Use Application Questions 1 here.
Looking at the Global Marketing Environment
Before deciding whether to operate internationally, a company must thoroughly understand the international marketing environment.
Use Chapter Objectives 1 here.
The International Trade System
When selling to another country, the . firm faces various trade restrictions.
A tariff is a tax levied by a foreign government against certain imported products. It may be designed either to raise revenue or to protect domestic firms.
A quota sets limits on the amount of goods the importing country will accept in certain product categories. The purpose of the quota is to conserve on foreign exchange and to protect local industry and employment.
An embargo, or boycott, totally bans some kinds of imports. It is the strongest form of quota.
Exchange controls limit the amount of foreign exchange and the exchange rate against other currencies.
Nontariff trade barriers are such things as biases against . company bids or restrictive product standards or other rules that go against American product features.
Use Key Terms Tariff, Quota, Embargo, Exchange Controls, and Nontariff Trade Barriers here.
Use Discussing the Issues 1 here.
The General Agreement on Tariffs and Trade (GATT) is a 56-year-old treaty designed to promote world trade by reducing tariffs and other international trade barriers.
Since its inception in 1948, there have been eight rounds of GATT negotiations to reassess trade barriers and set new rules for international trade.
The first seven rounds reduced the average worldwide tariffs on manufactured goods from 45% to just 5%.
The Uruguay round, the most recent, lasted seven years.
It reduced the world’s remaining merchandise tariffs by 30%, boosting global merchandise trade by as much as 10%.
It extended GATT to cover trade in agriculture and a wide range of services.
It toughened international protection of copyrights, patents, trademarks, and other intellectual property.
It established the World Trade Organization (WTO) to enforce GATT rules. The WTO mediates global disputes and imposes trade sanctions.
Certain countries have formed free trade zones or economic communities, which are groups of nations organized to work toward common goals in the regulation of international trade.
Use Key Term Economic Community here.
The European Community was formed in 1957.
European unification offers tremendous trade opportunities for . and other non-European firms.
It also poses threats.
European companies will grow bigger and more competitive.
Lower trade barriers inside Europe will create only thicker outside walls.
In North America, the United States and Canada phased out trade barriers in 1989.
In January 1994 the North American Free Trade Agreement (NAFTA) established a free trade zone among the United States, Mexico, and Canada.
Given the apparent success of NAFTA, talks are underway to investigate establishing a Free Trade Area of the Americas (FTAA). This free trade zone would include 34 countries stretching form the Bering Strait to Cape Horn, with a population of 800 million.
Other free trade areas have formed in Latin America and South America.
Let’s Discuss This
Why would the United States want to enter into free trade agreements? What benefit does it offer? What might be the disadvantages?
The trend toward free trade zones has raised some concerns.
In the United States, unions fear that NAFTA will lead to the further exodus of manufacturing jobs to Mexico, where wage rates are much lower.
Environmentalists worry that companies that are unwilling to play by the strict rules of the . Environmental Agency will relocate to Mexico, where pollution regulation has been lax.
Economic Environment
The international marketer must study each country’s economy.
Two economic factors reflect the country’s attractiveness as a market: the country’s industrial structure and its income distribution.
The country’s industrial structure shapes its product and service needs, income levels, and employment levels.
Subsistence economies are those where the vast majority of people engage in simple agriculture.
Raw material exporting economies are countries that are rich in one or more natural resources, but poor in other ways.
Industrializing economies are those where manufacturing accounts10% to 20% of the country’s economy.
Industrialized economies are major exporters of manu-factured goods and investment funds.
Applying the Concept
What kind of goods or services might the United States provide to countries that have a subsistence economy? How about an industrializing economy?
The second economic factor is the country’s income distribution.
Countries with subsistence economies may consist mostly of households with very low family incomes.
Industrialized nations may have low-, medium-, and high-income households.
In many cases, poorer countries may have small but wealthy segments of upper-income consumers.
Even in low-income and developing countries, people may find ways to buy products that are important to them.
Political-Legal Environment
Nations differ greatly in their political-legal environments.
At least four political-legal factors should be considered in deciding whether to do business in a given country.
In their attitudes toward international buying, some nations are quite receptive to foreign firms, and others are quite hostile.
The government bureaucracy reflects the extent to which the host government runs an efficient system for helping foreign com-panies—efficient customs handling, good market information, and other factors that aid in doing business.
Political stability is another issue.
Governments change hands, sometimes violently.
Even without a change, a government may decide to respond to new popular feelings.
Monetary regulations need to be studied.
Nations with too little hard currency may want to pay with other items instead of cash, which has led to the growing practice called countertrade. It takes several forms.
Barter involves the direct exchange of goods or services.
Compensation, or buyback, is where the seller sells a plant, equipment, or technology to another country and agrees to take payment in the resulting products.
Counterpurchase is where the seller receives full payment in cash but agrees to spend some portion of the money in the other country within a stated time period.
Use Key Term Countertrade here.
Cultural Environment
Each country has its own folk-ways, norms, and taboos. When designing global strategies, companies must understand how culture affects con-sumer reactions in each of its world markets. In turn, they must also understand how their strategies affect local cultures.
The seller must examine the ways consumers in different countries think about and use certain products before planning a marketing campaign.
Business norms and behaviors vary from country to country.
Some critics argue that “globalization” really means “Americanization.”
These critics contend that exposure to American values and prod-ucts erode other cultures and westernize the world.
Use Marketing at Work 15-1 here.
Use Focus on Ethics here.
Deciding Whether to Go International
Any of several factors might draw a company into the international arena.
Global competitors might attack the company’s domestic market by offering better products or lower prices.
The company might want to counterattack those competitors in their home markets to tie up their resources.
The company might discover foreign markets that present higher profit opportunities than the domestic market does.
The company might want to reduce its dependence on any one market so as to reduce its risk.
The company’s customers might be expanding abroad and require international servicing.
Before going abroad, the company must weigh several risks and answer many questions about its ability to operate globally.
Because of the risks and difficulties of entering international markets, most companies do not act until some situation or event thrust them into the global arena.
Deciding Which Markets to Enter
Before going abroad, the company should try to define its international marketing objectives and policies.
The company also needs to choose how many countries it wants to enter.
Companies must be careful not to spread themselves too thin or to expand beyond their capabilities in too many countries too soon.
The company needs to decide on the type of countries to enter.
A country’s attractiveness depends on the product, geographic factors, income and population, political climate, and other factors.
After listing possible international markets, the company must screen and rank each one.
Possible global markets should be ranked on several factors, including market size, market growth, cost of doing business, competitive advantage, and risk level.
The goal is to determine the potential of each market, using indicators such as those shown in Table 15-1.
Use Table 15-1 here.
Use Application Questions 3 here.
Use Under the Hood/Focus on Technology here.
Deciding How to Enter the Market
Once a company has decided to sell in a foreign country, it must determine the best mode of entry.
Figure 15-2 shows three market entry strategies, along with the options each one offers.
Each succeeding strategy involves more commitment and risk, but also more control and potential profits.
Use Figure 15-2 here.
Use Chapter Objectives 2 here.
Exporting
The simplest way to enter a foreign market is through exporting.
The company may passively export its surpluses from time to time, or it may make an active commitment to expand exports to a particular market.
In either case, the company produces all its goods in its home country.
It may or may not modify them for the export market.
Companies typically start with indirect exporting, working through independent international marketing intermediaries.
Indirect exporting involves less investment because the firm does not require an overseas sales force or set of contacts.
It also involves less risk.
Sellers may eventually move into direct exporting.
The investment and risk are somewhat greater in this strategy, but so is the potential return.
A company can set up a domestic export department that carries out export activities.
The company can set up an overseas sales branch that handles sales, distribution, and perhaps promotion.
The company can also send home-based salespeople abroad at certain times in order to find business.
The company can do its exporting either through foreign-based distributors who buy and own the goods or through foreign-based agents who sell the goods on behalf of the company.
Use Key Term Exporting here.
Joint Venturing
Joint venturing is where the company joins with foreign companies to produce or market products or services.
It differs from exporting in that the company joins with a host country partner to sell or market abroad.
It differs from direct investment in that an association is formed with someone in the foreign country.
There are four types of joint ventures.
Licensing is a simple way for a manufacturer to enter international marketing.
For a fee or royalty, the licensee buys the right to use the company’s manufacturing process, trademark, patent, trade secret, or other item of value.
The company thus gains entry into the market at little risk; the licensee gains production expertise or a well-known product or name without having to start from scratch.
Disadvantages include the firm having less control over the licensee than it would over its own production facilities; if the licensee is very successful, the firm has given up these profits, and if and when the contract ends, it may find it has created a competitor.
In contract manufacturing, the company contracts with manu-facturers in the foreign market to produce its product or provide its service.
The drawbacks of contract manufacturing are decreased control over the manufacturing process and loss of potential profits on manufacturing.
The benefits are the chance to start faster, with less risk, and the later opportunity either to form a partnership with or to buy out the local manufacturer.
Under management contracting, the domestic firm supplies man-agement know-how to a foreign company that supplies the capital.
Management contracting is a low-risk method of getting into a foreign market, and it yields income from the beginning.
The arrangement is not sensible if the company can put its scarce management talent to better uses or if it can make greater profits by undertaking the whole venture.
Management contracting also prevents the company from setting up its own operations for a period of time.
Joint ownership ventures consist of one company joining forces with foreign investors to create a local business in which they share joint ownership and control.
A company may buy an interest in a local firm, or the two parties may form a new business venture.
Joint ownership may be needed for economic or political reasons.
The firm may lack the financial, physical, or managerial resources to undertake the venture alone.
Or a foreign government may require joint ownership as a condition for entry.
The drawbacks include the fact that the partners may disagree over investment, marketing, or other policies.
Use Key Terms Joint Venturing, Licensing, Contract Manufacturing, Management Contracting, and Joint Ownership here.
Use Discussing the Issues 2 here.
Direct Investment
The biggest involvement in a foreign market comes through direct investment—the development of foreign-based assembly or manufacturing facilities.
Foreign product facilities offer many advantages.
The firm may have lower costs in the form of cheaper labor or raw materials, foreign government investment incentives, and freight savings.
The firm may improve its image in the host country because it creates jobs.
Generally, a firm develops a deeper relationship with government, customers, local suppliers, and distributors.
The firm keeps control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives.
The main disadvantage of direct investment is that the firm faces many risks, such as restricted or devalued currencies, falling markets, or government changes.
Use Key Term Direct Investment here.
Use Application Questions 2 here.
Deciding on the Global Marketing Program
Companies that operate in one or more foreign markets must decide how much, if at all, to adapt their marketing mixes to local conditions.
At one extreme is a standardized marketing mix, selling largely the same products and using the same marketing approaches world-wide.
At the other extreme is an adapted marketing mix. In this case, the producer adjusts the marketing mix elements to each target market, bearing more costs but hoping for a larger market share and return.
Use Key Terms Standardized Marketing Mix, Adapted Marketing Mix here.
Use Chapter Objectives 3 here.
Use Discussing the Issues 3 here.
Global standardization is not an all-or-nothing proposition but rather a matter of degree.
Companies should look for ways to standardize to help keep down costs and prices and to build greater global brand power.
But they must not replace long-run marketing thinking with short-run financial thinking. Although standardization saves money, marketers must make certain that they offer what consumers in each country want.
Many possibilities exist between the extremes of standardization and complete adaptation.
Most international marketers suggest that companies should “think globally but act locally”—that they should seek a balance between standardization and adaptation. These marketers advocate a “glocal” strategy in which the firm standardizes certain core marketing elements and localizes others.
Product
Five strategies allow for adapting product and promotion to a global market. See Figure 15-3. Three are product-related strategies and two are promotion-related strategies.
Use Figure 15-3 here.
Use Marketing at Work 15-2 here.
Use Discussing the Issues 4 here.
Straight product extension means marketing a product in a foreign market without any change.
The first step should be to find out whether foreign consumers use that product and what form they prefer.
Product adaptation involves changing the product to meet local conditions or wants.
In some instances, products must be adapted to local customs or spiritual beliefs.
Product invention consists of creating something new for a specific country market. This strategy can take two forms.
It might mean reintroducing earlier product forms that happen to be well adapted to the needs of a given country.
Or a company might create a new product to meet a need in a given country.
Use Key Terms Straight Product Extension, Product Adaptation, and Product Invention here.
Promotion
Companies can either adopt the same promotion strategy they used in the home market or change it for each local market.
Some global companies use a standardized advertising theme around the world.
Colors may need to be changed to avoid taboos in other countries.
Some companies use communication adaptation, which is fully adapting their advertising messages to local markets.
Media also need to be adapted internationally because media availability varies from country to country.
Use Key Term Communication Adaptation here.
Use Marketing at Work 15-3 here.
Price
Companies also face many problems in setting their international prices.
Foreign prices will be higher than domestic prices.
Price escalation occurs because of added costs of transportation, tariffs, importer margin, wholesaler margin, and retailer margin. Depending on these costs, the product may have to sell for two to five times as much in another country to make the same profit.
Let’s Discuss This
Godiva chocolates began life as a Belgian business, but was acquired by Campbell’s Soup in the 1970s. What factors would affect the difference in price for Godiva between the United States and Europe?
Setting prices for goods that a company ships to its foreign subsidiaries can be problematic.
If a company charges a foreign subsidiary too much, it may end up paying higher tariff duties even while paying lower income taxes in that country.
If the company charges its subsidiary too little, it can be charged with dumping.
Dumping occurs when a company either charges less than it costs or less than it charges in its home market.
Distribution Channels
The international company must take a whole-channel view of the problem of distributing products to final consumers. Figure 15-4 shows the three major links between the seller and the final buyer.
The seller’s headquarters organization supervises the channels and is part of the channel itself.
The channels between nations move the products to the borders of the foreign nations.
The channels within nations move the products from their foreign entry point to the final consumers.
Channels of distribution vary greatly from nation to nation.
There are large differences in the numbers and types of inter-mediaries serving each foreign market.
The size and character of the retail units abroad also differ.
Use Key Term Whole-Channel View here.
Use Figure 15-4 here.
Use Speed Bump: Linking the Concepts here.
Deciding on the Global Marketing Organization
Companies manage their international marketing activities in at least three different ways.
Use Chapter Objectives 4 here.
A firm normally gets into international marketing by simply shipping out its goods.
If its international sales expand, the company organizes an export department with a sales manager and a few assistants.
As sales increase, the export department can expand to include various marketing services so that it can actively go after business.
An international division or subsidiary will be formed when companies get involved in several international markets and ventures. They can be organized in several ways.
A geographic organization has country managers who are responsible for salespeople, sales branches, distributors, and licensees in their respective countries.
World product groups are each responsible for worldwide sales of different product groups.
International subsidiaries are each responsible for their own sales and profits.
In a truly global organization, the company stops thinking of itself as a national marketer who sells abroad and starts thinking of itself as a global marketer.
The top corporate management and staff plan worldwide manufacturing facilities, marketing policies, financial flows, and logistical systems.
The global operating units report directly to the chief executive or executive committee of the organization, not to the head of an international division.
Use Discussing the Issues 5 here.
Travel Log
Discussing the Issues
Discuss how tariffs, quotas, and nontariff trade barriers can restrict international trade. Why would a government choose to restrict the import of foreign products? How do regional free trade arrangements help to encourage trade between nations?
Tariffs are a tax levied by a foreign government against certain imported products. The tariff may be designed either to raise revenue or to protect domestic firms. Quotas set limits on the amount of goods the importing country will accept in certain product categories. The purpose of the quota is to conserve on foreign exchange and to protect local industry and employment. Nontariff trade barriers include biases against company bids from particular countries or restrictive product standards or other rules that go against foreign products. Certain countries have formed free trade zones, groups of nations organized to work toward common goals in the regulation of international trade. Their purpose is to reduce barriers to the free flow of products, services, finances, and labor among member countries and develop common policies on trade with nonmember nations.
What are the advantages and disadvantages of the following types of joint ventures: licensing, contract manufacturing, management contracting, and joint ownership?
With licensing the company enters into an agreement with a licensee in the foreign market. For a fee or royalty, the licensee buys the right to use the company’s manufacturing process, trademark, patent, trade secret, or other item of value. The company thus gains entry into the market at little risk; the licensee gains production expertise or a well known product or name without having to start from scratch. In contract manufacturing, the company contracts with manufacturers in the foreign market to produce its product or provide its service. The drawbacks of contract manufacturing are decreased control over the manufacturing process and loss of potential profits on manufacturing. The benefits are the chance to start faster, with less risk, and the later opportunity either to form a partnership with or to buy out the local manufacturer.
Under management contracting, the domestic firm supplies management know-how to a foreign company that supplies the capital. The domestic firm exports management services rather than products. Joint ownership ventures consist of one company joining forces with foreign investors to create a local business in which they share joint ownership and control. A company may buy an interest in a local firm, or the two parties may form a new business venture. Joint ownership may be needed for economic or political reasons. The firm may lack the financial, physical, or managerial resources to undertake the venture alone. Or a foreign government may require joint ownership as a condition for entry.
Identify a product that uses a standardized marketing mix and one that uses an adapted marketing mix. Evaluate the appropriateness of that strategy for those products.
Student responses to this question will vary by the products they select. Instructors may wish to use this question to have students evaluate standard-ization strategies for various product types provided by the instructor.
Assume you are responsible for introducing the Ford Explorer into Pakistan. Explain what might be changed to the product and/or promotional strategy to make it fit into each of the five cells in Figure 15-3.
Student responses will vary depending upon the specific promotion or product element they are adapting. Instructors can use this question to explore the idea of the adapted marketing mix.
Explain the difference between organizing the international marketing function as an export department, international division, and a global organization. What drives the evolution from one organizational form to another?
The volume of international sales activity and the type of market entry mode selected will largely drive the evolution between these different organizational forms.
Application Questions
Study the indicators of market potential listed in Table 15-1. Visit your school library and find either a print or online source of data for at least two indicators in each of the six major categories. Which of the information sources you identified seem most and least reliable? What concerns would you have as a marketing manager making market potential evaluations using the least reliable data?
Instructors may desire to combine this assignment with a field trip to the school library, where a reference librarian can spend time helping the class understand the types of information available.
You have been asked by your boss to advise her on the best way to enter the Italian market with your company’s new brand of sugar-free ice cream. What mode of entry would you recommend and why? What information would a company need to have before making this decision? For one of the entry modes you did not select, what would have to change for it to become the recommended choice?
Students should base their recommendations on their perceptions of the risks and difficulties involved in going into this market. Instructors may want to encourage students to think about the competencies the firm would likely not have and would need to acquire (., language skills, knowledge of regulations in the foreign country, etc.).
Form teams of three students each. Assume that your team has been given responsibility for assessing the attractiveness of entering Mexico with your firm’s line of laptop computers. Evaluate the opportunity of entering Mexico in terms of its economic, political-legal, and cultural environment for the laptop computer. Present your findings to the class.
This question may be best assigned as an outside of class exercise so that students can utilize library resources in researching their response. A twist on this assignment is to give different groups different countries to explore and have the presentation to the class positioned as a contest to see which team can convince the firm to go into their market.
Under the Hood/Focus on Technology
Everybody can use a little help now and then. But where can you go if you are a business owner who needs assistance expanding your operations internationally? Recognizing the need for American businesses to become more competitive in global markets, the . Congress passed legislation to create the Centers for International Business Education and Research (CIBERs) in 1988. Currently, thirty universities from across the country are provided funding to develop programs, conduct research, provide language training, and make available other resources that will aid the international capabilities of businesses, teachers, and students. Visit the CIBER website ( and examine the type of information that is available to companies wishing to do business internationally. Then respond to these questions.
What resources are available to businesses and students to help understand international marketing concerns?
“CIBERs organize events and discussions about international business, provide evening and summer courses in modern languages, and offer consulting and market research services to local companies. Available resources include research reports on international topics in economics, finance, operations management, strategy, organizational behavior, and human resources; programs and events to help faculty members and K-12 educators internationalize their teaching activities; business language course offerings and research in teaching languages for business purposes; and examples of programs which integrate foreign language training and international studies into the business school curriculum.”
How might a small business owner interested in expanding the company’s operations to Latin America utilize the CIBER resources?
Information on doing business in the country market research resources, and language resources are available from the CIBER network.
What sorts of resources are available for business school faculty interested in advancing the international component of their curriculum?
“CIBER faculty development programs are designed to bring the realities of the global marketplace into the classroom. Programs are offered to faculty members from colleges and universities, community colleges, and secondary schools throughout the United States to enhance their ability to teach issues and concepts of international business. Through faculty development programs focused on Asia, Europ,e and Latin America, teachers at all levels have the opportunity to observe business abroad and visit government agencies, councils, and embassies of other nations. These programs provide preparation in political, economic, environmental and social issues, enabling teachers to pass on an understanding of international business to their students.”
Focus on Ethics
The global marketplace exposes marketing managers to a variety of customs and traditions as companies expand internationally. At times, business practices that may be disapproved of in one country (., hiring from within one’s family or offering gifts to secure business deals) may be common and accepted ways of doing business in other parts of the world. This can cause some concern among managers, who are unsure how to react to cultural differences. A “cultural relativism” approach would suggest that the customs of the local culture be adopted. At the other extreme, an “ethical imperialism” approach means that an individual’s home country rules are correct and should be applied universally.
Which approach should be taken? Cultural relativism, ethical imperialism, or some middle position? Explain your choice.
Student responses will vary depending upon students’ attitudes. Instructors should point out that there are both positive and negative ramifications of following either of these philosophical approaches.
Are there any guidelines that all companies should follow regardless of where the company operates (., respect human dignity)?
Some basic human rights issues would appear to transcend cultural boundaries and should be universally applied. However, this must be approached with an understanding of what motivates the offending culture from behaving in the non-desired manner (., child labor).
How would you express your discomfort with business practices that are considered unethical in your culture, but are acceptable in the local culture you are operating in?
Depending upon the severity of the practice and the importance of the business to the firm, some individuals may choose to overlook some unethical transactions as being a part of the cost of doing business. Organizations must make decisions as to which practices they will go along with and which they will not. Further, individual employees in a company must make decisions regarding whether they will work for firms allowing practices they deem unacceptable or how they might work to change company policy on the issue.
Great Ideas
Barriers to Effective Learning
Many students today have traveled internationally, perhaps even studied abroad. However, this chapter will introduce concepts that most likely will not have crossed their minds before. Free trade agreements may be known in name, but not in what they actually do. The analytics of deciding whether to go global and if so, which countries to enter, will certainly not have been encountered before. This chapter will serve as an excellent introduction to these notions.
The terms involved in the international trade system (tariff, quota, embargo, etc.) are generally unfamiliar to most students. Go through these carefully and use examples from recent press; the . steel tariffs of 2003 could help illustrate the effect of tariffs, especially since they were removed under pressure from the WTO and several countries.
The economic and political-legal environments will also most likely be a mystery to most students. Some students might have done some mission or humanitarian work in foreign countries with economies and political systems vastly different from our own. If you are lucky enough to have them in your class, have them relate their experiences. Economics majors, or those who enjoyed an economics class, may also be able to relate what they have learned about these issues from a different point of view.
On deciding whether to go international, many students will believe that it is simply a matter of the company deciding to expand. The concept of being forced to go into other countries because of customers pulling you along, or having to fight a global competitor on your home turf, will surprise some of them. Challenge them to think about how small companies grow, and why they might start selling their goods overseas. Use a local company that sells unique items. How might foreign customers find them? How would they decide that there is a market in another country? You can break the class into teams to work on these types of issues.
Countertrade is almost always an issue with undergraduate students. The various types can be very confusing, and so these concepts and terms need to be described very carefully. The examples in the book are quite useful, and you can generally find additional examples in the business press. Joint venturing is slightly easier to understand, but again, using lots of examples will really help the students appreciate the complexities and how these decisions are made.
Adaptation versus standardization is generally easy to grasp. Any students who have traveled internationally will probably have eaten in American chain restaurants, such as McDonald’s or the Hard Rock Café. Ask them to relate their experiences, both what was the same and what was different. Also use the example of Coca-Cola in the text as an example of a product that is largely standard around the world, but the marketing mix changes to fit the needs of each region and country.
Finally, the complex nature of managing internationally will also be new to students. Discussing the difference between a very small company that is global only because of a website that accepts orders from overseas and a Fortune 500 company that operates in 100 countries, will clearly point out how companies evolve as their globalization progresses.
Student Projects
Pick a company that does global marketing and research its efforts. How are they organized? Do they offer different products or services in other countries than they do in their home country?
Interview a foreign student about the differences that he or she perceives between his or her country and the United States. Ask him or her about international marketing efforts in his or her country. Based on this interview, suggest some marketing opportunities that might be available in that foreign market.
Research the following companies: AstraZeneca (), American Water (), and Nestle (). Where are their corporate headquarters located? Did you know that they were not based in the United States? Would you say they have a standardized or adapted marketing mix?
Do research on the WTO (World Trade Organization). Discuss its history. Examine pro and con arguments for its existence. Take a position on the subject yourself and defend your position.
Classroom Exercise/Homework Assignment
Jaguar is the quintessential English touring sedan. As it turns out, however, it is owned by the quintessentially American auto manufacturer Ford Motor Company. Jaguar remains a separate legal entity, but it still reports to Detroit. Go to and review the various country websites available.
Comment on the marketing mix elements you can see on the different websites.
The students will notice immediately that the product appears to be the same on most country pages. As a matter of fact, the astute will notice that the driver in the S-type sedan on the . page is even on the American side of the car. The . page is somewhat different than the others; rather than showing all models, it focuses on a single new 2004 model that is apparently being showcased in this country. Interestingly, the starting prices for the various models are listed on the ., Japan, and Italy sites, but not the others, suggesting that the consumers in these three countries focus on price in their decision making. Or perhaps it might be a regulation in those countries that prices are easily obtainable. Promotion is also basically the same, although a few photos are different site to site. The vast majority of them, however, are the same, as is the look and feel of each country’s site. It is difficult to comment on the distribution aspects in the different countries, because each country’s website is in the native language of the country.
How easy is it to find out that Jaguar is owned by Ford? Do you think this is on purpose, or just an oversight?
Student responses will vary. The answer is unknowable, but a very good educated guess is that Jaguar and Ford both want to focus on the branding and positioning of the vehicle. Jaguar has been noted as a prestige brand for generations, while Ford has more of a family-type positioning, along with being known for their durable light trucks. Ford’s positioning would not help sell more Jaguars, while maintaining the Jaguar mystique and improving their quality, will.
Classroom Management Strategies
This chapter contains a lot of information that will be brand new to all students. Each section should be reviewed carefully.
The introduction and first section can be covered in 10 minutes. They provide a basis for the remaining content, and the Coca-Cola example in the opening vignette is excellent for setting the stage for the decision to standardize or adapt the marketing mix to each region or country.
The next section, Looking at the Global Marketing Environment, has key information in it that the students must understand. Take 10 minutes with this section, paying particular attention to the international trade system and the economic environment. These two subsections cover very important material and new terminology that the students should understand before moving on.
Deciding whether to go global and into which markets to move together can be covered in 10 minutes. Table 15-1 should figure prominently in this discussion.
How to enter the market is also very important and, again, there are important Key Terms in this section. Spend 10 minutes here and use as many examples as you can for each of the ways to go international.
The global marketing program introduces for the first time the marketing mix element decisions that must be made. This should also be discussed for at least 10 minutes, and again, examples are very important here. If you choose to use the Classroom Exercise in this manual, this is a good place to introduce it to the class. The Speed Bump at the conclusion of this section is also very helpful.
The various ways to organize the company for global marketing can be covered in 5 to 10 minutes. Again, examples of various firms and how they are organized will be very helpful here. If any students have parents who work in global firms they can be called on to discuss how those companies are organized; visit their websites to gain a clearer understanding. The Classroom Exercise might also be utilized here, as it addresses both marketing mix and organizational issues.
Chapter 16
Marketing and Society: Social Responsibility and Marketing Ethics
Previewing the Concepts: Chapter Objectives
Identify the major social criticisms of marketing.
Define consumerism and environmentalism, and explain how they affect marketing strategies.
Describe the principles of socially responsible marketing.
Explain the role of ethics in marketing.
Just the Basics
Chapter Overview
There have been many criticisms of marketing as it impacts individual consumers, other businesses, and society as a whole. This chapter discusses them in detail and provides some responses to critics.
Surveys usually show that consumers hold mixed or even slightly unfavorable attitudes toward marketing practices. Consumers, consumer advocates, government agencies, and other critics have accused marketing of harming consumers through high prices, deceptive practices, high-pressure selling, shoddy or unsafe products, planned obsolescence, and poor service to disadvantaged consumers. Companies respond in many ways, noting that the practices that cause so-called high prices—advertising, using intermediaries, decorative packaging, and the like—are necessary and well liked by consumers. Companies also note that those who use deceptive practices and high-pressure selling, or produce shoddy products, will not remain in business long.
Critics also charge that the American marketing system has added to several “evils” in society at large. Advertising has been a special target; it is charged that it urges too much interest in material possessions. However, our wants and values are influenced not only by marketers, but also by family, peer groups, religion, ethnic background, and education. If Americans are materialistic, these values arose out of basic socialization processes that go much deeper than business and mass media could produce alone.
Consumerism is an organized movement of citizens and government agencies to improve the rights and powers of buyers in relation to sellers. Consumers not only have the right but also the responsibility to protect themselves instead of leaving this function to someone else.
Environmentalism is an organized movement of concerned citizens, businesses, and government agencies to protect and improve people’s living environments. Environmentalists are not against marketing and consumption; they simply want people and organizations to operate with more care for the environment. Companies have responded. At the most basic level, a company can practice pollution prevention, which means eliminating or minimizing waste before it is created. At the next level, companies can practice product stewardship, which is minimizing not just pollution from production but all environmental impacts through the full product life cycle. At the third level of environmental sustainability, companies look to the future and plan for new environ-mental technologies. Finally, companies can develop a sustainability vision, which serves as a guide to the future.
The philosophy of enlightened marketing holds that a company’s marketing should support the best long-run performance of the marketing system. It consists of five principles: consumer-oriented marketing, innovating marketing, value marketing, sense-of-mission marketing, and societal marketing.
Companies also need to develop corporate marketing ethics policies, which are broad guidelines that everyone in the organization must follow. These policies should cover distributor relations, advertising standards, customer service, pricing, product development, and general ethical standards. For the sake of all of the company’s stakeholders—customers, suppliers, employees, shareholders, and the public—it is important to make a commitment to a common set of shared standards worldwide. Ethics and social responsibility require a total corporate commitment. They must be a component of the overall corporate culture.
Chapter Outline
Introduction
Nike has been a lightning rod for social responsibility criticisms. Critics have accused Nike of putting profits ahead of the interests of consumers and the broader public, both at home and abroad.
Despite its success at selling shoes, Nike has been accused of everything from running sweatshops, using child labor, and exploiting low-income consumers to degrading the environment.
Nike outsources production to contractors in low-wage countries. It has created a Code of Conduct, which demands socially responsible labor practices by its contractors. Nike has actually been improving the working conditions in low-wage countries.
Nike has also received criticism at home. It has been accused of inappropriately targeting its most expensive shoes to low-income families, making the shoes an expensive status symbol for poor urban kids.
A closer look shows that Nike works hard at being a socially responsible global citizen. Nike and the Nike Foundation contributed more than $29 million in cash and products last year to programs that encourage youth to participate in sports and that address challenges of globalization.
Nike also donates money for education, community development, and small-business loans in the countries in which it operates.
Responsible marketers discover what consumers want and respond with marketing offers that give satisfaction and value to buyers and profit to the producer. The marketing concept is a philosophy of customer satisfaction and mutual gain.
But some companies use questionable marketing practices, and some marketing actions that seem innocent in themselves strongly affect the larger society.
Social Criticisms of Marketing
Social critics claim that certain marketing practices hurt individual consumers, society as a whole, and other business firms.
Use Chapter Objectives 1 here.
Marketing’s Impact on Individual Consumers
Surveys usually show that consumers hold mixed or even slightly unfavorable attitudes toward marketing practices.
Many critics charge that the American marketing system causes prices to be higher than they would be under more “sensible” systems.
A long-standing charge is that greedy intermediaries mark up prices beyond the value of their services. There are too many intermediaries, they are inefficient and poorly run, or they provide unnecessary or duplicate services.
Companies respond that intermediaries do work that would otherwise have to be done by manufacturers or consumers. Markups reflect services that consumers themselves want—more convenience, larger stores and assortments, longer store hours, return privileges, and others.
Modern marketing is also accused of pushing up prices to finance heavy advertising and sales promotion. Much of the packaging and promotion adds only psychological value to the product rather than functional value.
Marketers respond that consumers can usually buy func-tional versions of product at lower prices. However, they are willing to pay more for products that also provide psychological benefits.
Heavy advertising adds to product costs but adds value by informing millions of potential buyers of the availability and merits of a brand.
Let’s Discuss This
If you did not have advertising, where would you gather information about products you wanted to buy?
Critics also charge that some companies mark up goods exces-sively.
Marketers respond that most businesses try to deal fairly with consumers because they want repeat business.
Marketers also respond that consumers often don’t under-stand the reasons for high markups.
Use Discussing the Issues 1 here.
Marketers are sometimes accused of deceptive practices that lead consumers to believe they will get more value than they actually do. However, marketers argue that most companies avoid deceptive practices because such practices harm their businesses in the long run. Deceptive practices fall into three groups.
Deceptive pricing includes practices such as falsely advertising “factory” or “wholesale” prices or a large reduction from a phony high retail list price.
Deceptive promotion includes practices such as overstating the product’s features or performance, luring the customer to the store for a bargain that is out of stock, or running rigged contests.
Deceptive packaging includes exaggerating package contents through subtle design, not filling the package to the top, using misleading labeling, or describing size in misleading terms.
Salespeople are sometimes accused of high-pressure selling that persuades people to buy goods they had no thought of buying.
Marketers know that buyers often can be talked into buying unwanted or unneeded things.
In most cases, however, marketers have little to gain from high-pressure selling. Such tactics may work in one-time selling situations for short-term gain. However, most selling involves building long-term relationships with valued customers.
Applying the Concept
Have you ever bought a used car? Describe the sales techniques used to get you to buy a car. Did it feel like you were being overly pressured? How did you feel about the transaction?
Another criticism is that products lack the quality they should have. Many products are not made well and services are not performed well. Many products deliver little benefit, or they might even be harmful.
Most manufacturers want to produce quality goods. The way a company deals with product quality and safety problems can damage or help its reputation.
Use Marketing at Work 16-1 here.
Critics have also charged that some producers follow a program of planned obsolescence, causing their products to become obsolete before they actually should need replacement.
Marketers respond that consumers like style changes; they get tired of old goods and want a new look in fashion or a new design in cars.
Companies do not design products to break down early, because they do not want to lose customers to other brands. Instead, they seek improvement to ensure that products will consistently meet or exceed customer expectations.
The American marketing system has been accused of serving dis-advantaged consumers poorly. Critics claim that the urban poor often have to shop in smaller stores that carry inferior goods and charge higher prices.
Better marketing systems must be built to service disadvantaged consumers. Disadvantaged consumers clearly need consumer pro-tection.
The FTC has taken action against merchants who advertise false values, sell old merchandise as new, or charge too much for credit.
Use Speed Bump: Linking the Concepts here.
Marketing’s Impact on Society as a Whole
The American marketing system has been accused of adding to several “evils” in American society at large. Advertising has been a special target.
Critics have charged that the market system urges too much interest in material possessions.
The critics do not view this interest in material things as a natural state of mind but rather as a matter of false wants created by marketing.
On a deeper level, our wants and values are influenced not only by marketers but also by family, peer groups, religion, ethnic back-ground, and education.
Business has been accused of overselling private goods at the expense of public goods.
As an example, an increase in automobile ownership (private good) requires more highways, traffic control, parking spaces, and police services (public goods).
A way must be found to restore a balance between private and public goods.
One option is to make producers bear the full social costs of their operations.
A second option is to make consumers pay the social costs.
Critics charge the marketing system with creating cultural pollution.
Our senses are being constantly assaulted by advertising.
Marketers answer that they hope their ads reach the primary target audience. Also, ads make much of television and radio free to users and keep down the costs of magazines and newspapers. Finally, today’s consumers have alternatives.
Let’s Discuss This
How do you feel about billboards along the highways? Do you feel differently about them along a country road? Can marketers truly target their markets if they advertise on billboards?
Another criticism is that business wields too much political power.
Advertisers are accused of holding too much power over the mass media, limiting their freedom to report independently and objec-tively.
American industries do promote and protect their own interests. They have a right to representation in Congress and the mass media, although their influence can become too great.
Use Application Questions 1 here.
Marketing’s Impact on Other Businesses
Critics also charge that a company’s marketing practices can harm other companies and reduce competition.
Critics claim that firms are harmed and competition is reduced when companies expand by acquiring competitors rather than by developing their own new products.
Critics have also charged that marketing practices bar new com-panies from entering an industry.
Finally, some firms have in fact used unfair competitive marketing practices with the intention of hurting or destroying other firms.
Various laws work to prevent such predatory competition. It is difficult, however, to prove that the intent or action was really predatory.
Citizen and Public Actions to Regulate Marketing
Grassroots movements have arisen from time to time to keep businesses in line.
Use Chapter Objectives 2 here.
Consumerism
American business firms have been the target of organized consumer movements on three occasions.
The first consumer movement took place in the early 1900s. It was fueled by rising prices, Upton Sinclair’s writings on conditions in the meat industry, and scandals in the drug industry.
The second consumer movement, in the mid-1930s, was sparked by an upturn in consumer prices during the Great Depression and another drug scandal.
The third movement began in the 1960s. Consumers had become better educated, products had become more complex and potentially more hazardous, and people were unhappy with American institutions.
Consumerism is an organized movement of citizens and government agencies to improve the rights and powers of buyers in relation to sellers.
Use Key Term Consumerism here.
Traditional sellers’ rights include:
The right to introduce any product in any size and style, provided it is not hazardous to personal health or safety; or, if it is, to include proper warnings and controls.
The right to charge any price for the product, provided no discrimination exists among similar kinds of buyers.
The right to spend any amount to promote the product, provided it is not defined as unfair competition.
The right to use any product message, provided it is not misleading or dishonest in content or execution.
The right to use any buying incentive schemes, provided they are not unfair or misleading.
Traditional buyers’ rights include:
The right not to buy a product that is offered for sale.
The right to expect the product to be safe.
The right to expect the product to perform as claimed.
Consumer advocates call for the following additional consumer rights:
The right to be well informed about important aspects of the product.
The right to be protected against questionable products and marketing practices.
The right to influence products and marketing practices in ways that will improve the “quality of life.”
Consumers have not only the right but also the responsibility to protect themselves instead of leaving this function to someone else.
Environmentalism
Environmentalism is an organized movement of concerned citizens, businesses, and government agencies to protect and improve people’s living environments.
Use Key Term Environmentalism here.
Environmentalists are not against marketing and consumption; they simply want people and organizations to operate with more care for the environ-ment.
The first wave of modern environmentalism in the United States was driven by environmental groups and concerned consumers in the 1960s and 1970s.
They were concerned about the damage to the ecosystem caused by strip-mining, forest depletion, acid rain, loss of the atmos-phere’s ozone layer, toxic wastes, and litter.
The second environmentalism wave was driven by government, which passed laws and regulations during the 1970s and 1980s governing industrial practices that have an impact on the environment.
Those two movements are now merging into a third and strong wave in which companies are accepting responsibility for doing no harm to the environment.
More and more companies are adopting policies of environmental sustainability—developing strategies that both sustain the environ-ment and produce profits for the company.
Use Key Term Environmental Sustainability here.
Use Marketing at Work 16-2 here.
Use Discussing the Issues 2 here.
Use Application Questions 2 here.
Figure 16-1 shows a grid that companies can use to gauge their progress toward environmental sustainability.
Use Figure 16-1 here.
Use Application Questions 3 here.
At the most basic level, a company can practice pollution pre-vention.
At the next level, companies can practice product stewardship—minimizing not just pollution from production but all environ-mental impacts through the full product life cycle.
Many companies are adopting design for environment (DFE) practices, which involve thinking ahead in the design stage to create products that are easier to recover, reuse, or recycle.
At the third level of environmental sustainability, companies look to the future and plan for new environmental technologies.
Many organizations that have made good headway in pollution prevention and product stewardship are still limited by existing technologies.
Use Under the Hood/Focus on Technology here.
Finally, companies can develop a sustainability vision, which serves as a guide to the future. It shows how the company’s products and services, processes, and policies must evolve and what new technologies must be developed to get there.
Environmentalism creates some special challenges for global marketers.
As international trade barriers come down and global markets expand, environmental issues are having an ever-greater impact on international trade.
Environmental policies still vary widely from country to country, and uniform worldwide standards are not expected for many years.
Let’s Discuss This
What might be holding back worldwide environmental standards? Do you think they will ever be developed?
Public Actions to Regulate Marketing
Figure 16-2 illustrates the major legal issues facing marketing manage-ment.
Use Figure 16-2 here.
Business Actions Toward Socially Responsible Marketing
Most companies have grown to accept the new consumer rights, at least in principle. They might oppose certain pieces of legislation as inappropriate ways to solve specific consumer problems, but they recognize the con-sumer’s right to information and protection.
Use Chapter Objectives 3 here.
Enlightened Marketing
The philosophy of enlightened marketing holds that a company’s marketing should support the best long-run performance of the marketing system. It consists of five principles.
Consumer-oriented marketing means that the company should view and organize its marketing activities from the consumer’s point of view. It should work hard to sense, serve, and satisfy the needs of a defined group of customers.
The principle of innovative marketing requires that the company continuously seeks real product and marketing improvements. The company that overlooks new and better ways to do things will eventually lose customers to another company that has found a better way.
According to the principle of value marketing, the company should put most of its resources into value-building marketing invest-ments.
Sense-of-mission marketing means that the company should define its mission in broad social terms rather than narrow product terms. When a company defines a social mission, employees feel better about their work and have a clearer sense of direction.
Following the principle of societal marketing, an enlightened company makes marketing decisions by considering consumers’ wants and interests, the company’s requirements, and society’s long-run interests.
Figure 16-3 shows how products can be classified according to their degree of immediate consumer satisfaction and long-run con-sumer benefit.
Deficient products, such as bad-tasting and ineffective medicine, have neither immediate appeal nor long-run benefits.
Pleasing products give high immediate satisfaction but may hurt consumers in the long run.
Salutary products have low appeal but may benefit consumers in the long run.
Desirable products give both high immediate satisfaction and high long-run benefits.
Companies should try to turn all of their products into desirable products.
Use Key Terms Enlightened Marketing, Consumer-Oriented Marketing, Innovative Marketing, Value Marketing, Sense-of-Mission Marketing, Societal Marketing, Deficient Products, Pleasing Products, Salutary Products, and Desirable Products here.
Use Figure 16-3 here.
Use Marketing at Work 16-3 here.
Use Speed Bump: Linking the Concepts here.
Use Discussing the Issues 3 here.
Use Focus on Ethics here.
Marketing Ethics
Companies need to develop corporate marketing ethics policies—broad guidelines that everyone in the organization must follow.
These policies should cover distributor relations, advertising stan-dards, customer service, pricing, product development, and general ethical standards.
Table 16-1 lists some difficult ethical situations marketers could face dur-ing their careers.
Use Table 16-1 here.
Use Chapter Objectives 4 here.
Use Discussing the Issues 4 here.
But what principles should guide companies and marketing managers on issues of ethics and social responsibility?
One philosophy is that such issues are decided by the free market and legal system. Under this principle, companies and their managers are not responsible for making moral judgments. Companies can in good conscience do whatever the system allows.
A second philosophy puts responsibility not on the system but in the hands of individual companies and managers. This more enlightened philosophy suggests that a company should have a “social conscience.”
Under the societal marketing concept, each manager must look beyond what’s legal and allowed and develop standards on personal integrity, corporate conscience, and long-run consumer welfare.
As with environmentalism, the issue of ethics provides a special challenge for international marketers.
Business standards and practices vary a great deal from one country to the next.
For the sake of all the company’s stakeholders—customers, suppliers, employees, shareholders, and the public—it is important to make a commitment to a common set of shared standards worldwide.
Many industrial and professional associations have suggested codes of ethics, and many companies are now adopting their own codes.
Table 16-2 shows the code of ethics for the American Marketing Association.
Use Table 16-2 here.
Use Discussing the Issues 5 here.
Ethics and social responsibility require a total corporate commitment. They must be a component of the overall corporate culture.
Travel Log
Discussing the Issues
Discuss the claim that the high cost of distribution, high cost of advertising and promotion, and excessive markups lead to higher than necessary costs for American consumers. Do you agree or disagree with this position?
Student responses will vary. The text provides both sides to the argument and a debate could be set up in class to further explore this issue.
What is the difference between consumerism and environmentalism? How are they alike and different? Give an example of a cause that would be championed by each movement.
Consumerism is an organized movement of citizens and government agencies to improve the rights and power of buyers in relation to sellers. Whereas consumerists consider whether the marketing system is efficiently serving consumer wants, environmentalists are concerned with marketing’s effects on the environment and with the costs of serving consumer needs and wants. Environmentalism is an organized movement of concerned citizens, businesses, and government agencies to protect and improve people’s living environments. Product safety issues would be of concern to the consumerism movement, while water pollution would be of concern to the environmentalism movement.
Distinguish among the five principles of enlightened marketing: consumer-oriented marketing, innovative marketing, value marketing, sense-of-mission marketing, and societal marketing.
Consumer-oriented marketing means that the company should view and organize its marketing activities from the consumer’s point of view.
The principle of innovative marketing requires that the company continuously seek real product and marketing improvements.
For the principle of value marketing, the company should put most of its resources into value building marketing investments (., actual improvements in the product’s quality, features, or convenience).
Sense-of-mission marketing means that the company should define its mission in broad social terms rather than narrow product terms.
Following the principle of societal marketing, an enlightened company makes marketing decisions by considering consumers’ wants and interests, the company’s requirements, and society’s long run interests.
Write a corporate marketing ethics policy for a company selling mortgage services online. How would such a policy influence ethical decision making among employees in this company?
Student response to this question will vary. Such an ethical policy provides a baseline for employees in terms of appropriate behavior and does not leave them on their own to decide what is right or wrong (this may be especially important in “gray” areas).
Search through news reports to find a story about a company that is acting in a socially responsible manner. Would this information influence your buying deci-sion if you were in the market to buy the type of product this firm sells? What impact do you think the socially responsible action reported in the news story has on the employees of the organization?
Student response to this question will vary by student attitude toward corporate social behavior as well as the specific examples they find. Instructors may want to have students share the examples they have found and have groups discuss those that would impact their behavior and those that would not.
Application Questions
Get into small groups and consider the four issues regarding marketing’s impact on society as a whole (materialism, few social goods, cultural pollution, and too much political power). Divide the group in half with each half of the group supporting a different side of these issues. Debate each issue and after each debate take a poll of where your group stands on the issue.
Group discussion may be difficult if students are too “pro-business.” Students may need to be encouraged to take more extreme positions than they actually hold in order for the debate to be an interesting learning experience.
One concern of environmentalists over the years has been the excessive packag-ing material some companies use to enclose and promote their product. At issue is that a larger package requires more resources for production (., trees) and disposal (., landfills). Visit a grocery store and identify a product whose packaging could be described as excessive. How does the packaging of this product compare to the packaging of rival products? What packaging modifi-cations do you think an environmentalist would recommend?
Students might be invited to bring in the examples they find for further discussion with the entire class. Instructors may want to examine past issues of Consumer Reports magazine, which often publicizes “excess packaging abuses” that their readership finds and sends in for publication.
Study Figure 16-1. Select two companies, one you feel is environmentally considerate and one you feel is lacking in this area. Describe how you would rate each company in the areas of pollution prevention, product stewardship, new environmental technology, and sustainability vision. Do your initial attitudes regarding the environmental consciousness of each company still hold?
Some students will find that the companies they have selected are only strong in one or two of the four areas. This assignment would be appropriate to assign outside of class to allow time for students to conduct additional research on their chosen firm.
Under the Hood/Focus on Technology
A forest full of trees has been spared thanks to a new paperless wine list being used at Aureole restaurants in Las Vegas and New York. The wine selection boasts an awe-inspiring 4,000 different wine labels that would be impractical to print onto paper in the form of a manageable wine list. Instead of a paper wine list, customers are presented with a lightweight, wireless, computer tablet. Pages are turned and selections are made by the customer using either a stylus or the customer’s finger. Aside from the positive environmental impact, there are other marketing applications to the electronic wine list. For example, the tablet can be used to display brief wine reviews and narratives about the winery, customers are allowed to bookmark favorite wine selections, and it has the ability to let customers request that wine selection information and special offers be emailed to them at home.
Consider other opportunities that electronic tablets have for replacing material that is traditionally printed on paper (., textbooks, novels, etc.).
Instructors may want to have students discuss the pros and cons of going to a “paperless” system for other material traditionally printed on paper.
What sort of resistance do you think consumers may have to accessing printed material in an electronic format? How could such resistance be overcome?
Convenience issues are one concern. Is the electronic format as portable and durable as a paper format? Cost may also be a factor depending upon the application. Some costs will be higher (due to the additional hardware required), while some applications may reduce users’ costs.
What do you see as the environmental benefits to such a system?
Clearly the reduction of paper consumption has benefits for the environment. However, the new hardware (., electronic notebook tablets) may also have production and disposal issues relative to the environment.
Focus on Ethics
The text presents Figure 16-3 as a way to classify products in terms of their level of long-run benefit to consumers and the level of immediate satisfaction they provide. The goal of a societally oriented marketer is to design products that are both beneficial and pleasing—the “desirable products” cell in Figure 16-3.
Select products that are representative of each of the four cells in this classifi-cation scheme.
Student response to this question will vary based on the nature of the products selected.
For those products that fall into the deficient, salutary, and pleasing categories, consider what modifications could be made, if any, to move them to the desirable product classification.
Student responses will vary. Instructors may want students to consider what the “cost” would be to move the products to the desirable product cell. Costs might be in terms of lost convenience or higher prices. Students should then be asked if they feel consumers would be willing to pay that “cost.”
Why do you think some companies continue to sell products that would be classi-fied as deficient under this classification? What should society do, if anything, about such products?
Lack of competitive alternatives may be one factor that lets products in the deficient cell operate. Presumably, better alternatives would be able to displace deficient cell products and force them to adapt or withdraw from the marketplace in the long run.
Great Ideas
Barriers to Effective Learning
Unless a student has been involved in an activist or protest group, all the concepts in this chapter will be new. On the other hand, some students cast an uncritical eye on the opinions of activist groups and think that not a single company can be trusted to “do the right thing.” The task in this chapter is to present both sides, both good and bad, so that students can see that although problems do exist, there are solutions, and that industry does tend to work toward reining in those who would create problems for consumers, society as a whole, or other businesses.
The complaint of prices being higher than they would be without marketing is a good way to get students thinking about how the costs do add up at every stage of the process. It is important for them to understand where the complaint originates, and going through each of the areas—distribution and intermediaries, advertising and promotion, and the markups that come from every level—will drive home why items that might cost only pennies to manufacture will cost dollars by the time they hit the retail shelves. This will also help students understand why effective budgeting is necessary and why it is important to clearly understand your target market so that you can reach them efficiently.
Unless the university is in an urban environment, most students will be surprised that many large retailers stay away from disadvantaged neighborhoods, and that banks and insurance companies might discriminate against customers living in these areas. Even at urban universities this could be cause for surprise, because most urban schools are not located in the truly disadvantaged areas. A discussion on the pros and cons of, say, a Wal-Mart or a major grocery retailer locating in an inner-city neighborhood can aid in the comprehension of the risks and rewards for the company, as well as for the consumers.
The United States is certainly a materialistic society, but is that because of marketing? This is an unanswerable question, but it makes for a lively debate in class. You can either have two students volunteer to represent each side of the question, or break the class up into teams to debate among themselves.
Another lively debate is that of public versus private goods. Should society bear the cost of health care for those who smoke, eat too much, or drink to excess? And are these problems caused by marketing, or is marketing reacting to what people are asking for? Again, there is really no “right” answer, only beliefs. But attempting to answer these questions is a good way to get students to exercise their critical thinking skills.
Consumerism and environmentalism are two important concepts for the students to be aware of. It is unlikely that either of these movements will go away any time soon, and because the Internet has made so much information available to so many, these issues will likely only become more in the forefront of consumers’ minds. Product recalls have become commonplace, but it is worthwhile discussing in class any recalls the students have been affected by. Comparing the number of recalls today to the number in the 1960s and 1970s will also help. As for environmentalism, one thing that is useful is to ask how many students have traveled to cities in other countries where the pollution controls are not as stringent as in the United States. Also, discuss how your own university recycles, particularly if computers are given to the students every two years, as many business schools are now doing. What happens to those that are turned in by students? Go further with this topic, however, and discuss companies such as IKEA (see Classroom Exercise) that work hard toward achieving environmentally sustainable practices.
The concepts of enlightened marketing should not be difficult to understand, however, you should go through them carefully. Consumer-oriented marketing should certainly not be new, but the term will be. Sense-of-mission marketing might be a new notion, but describing companies such as Ben & Jerry’s, Newman’s Own, and even the old “Bell System,” which had a mission of “universal service” that truly motivated its thousands of employees, should help the students see how having a broad social mission would make employees feel better about their work.
Use Table 16-1 to guide the discussion of marketing ethics. This section would also be best handled as a debate or discussion, rather than as a lecture. Forcing students to make choices in delicate situations is the best way to illustrate how decisions are made on a daily basis. Also, a discussion of how ethics failed in corporations such as Enron and Tyco will also be of use.
Student Projects
Research articles on ADP, a division of Tyco, and their former billing practices. Did the managers involved make ethical decisions? Did the corporate culture encourage the kinds of decisions they made, or were they made in spite of the culture?
Find five examples of products or a marketer’s practices that you believe are environmentally sensitive. How can you tell that this is a policy that is being stressed?
Bring an example of a firm that you do not think is being socially responsible to class. How did you determine this? What were the firm’s negative actions? What could they do to remove the negative perceptual image?
Describe an ethical situation that you have faced since you have been an adult. This situation could be personal, school-related, or job-related. Be honest in describing how you resolved this situation. What did you learn? Would you do anything differently if you were to face the situation again?
Research the business news and find a situation where a company acquired a competitor. Did the acquisition harm consumers in any way?
Classroom Exercise/Homework Assignment
IKEA operates 154 stores in 22 countries. It offers furnishings for the home that as many people as possible can afford. They claim their business is run in partnership with their customers—their part is to find the suppliers and raw materials that will produce fashionable yet durable furniture. And then customers do their part by picking it up and assembling it themselves. But IKEA goes well beyond offering nice furnishings at low prices. They firmly believe in social and environmental responsibility—they believe that this will translate into not only greater profits, but a better world. Visit the company’s website at and click the “about” link to find information about their corporate responsibility.
What is “the IKEA Way,” and how does it translate into good corporate citizenship?
The IKEA Way is a document that codifies its purchasing standards. It covers such issues as social and working conditions, child labor, the environmen,t and forestry. The code sets only minimum standards; suppliers are supposed to go well beyond the code in ensuring safety and respect for their employees, and in the use of environmentally safe processes. IKEA also works with nongovern-mental organizations, such as UNICEF, to aid in environmental and child labor issues.
IKEA says it “takes all aspects of a product’s life into consideration. Through choice of raw material through production and distribution to end of use” (see the section “IKEA and the Environment”). Using Figure 16-1, determine IKEA’s progress toward environmental sustainability.
IKEA is at least at product stewardship. They are attempting to not only minimize pollution from production, but are working toward design for environment (DFE).
How has this social responsibility affected IKEA’s financials?
IKEA’s revenues have grown steadily since its inception. Worldwide, 286 million people visited their 154 stores in their last fiscal year. It is difficult to tell if this is because of their social responsibility, but customers are certainly responding to their marketing efforts.
Classroom Management Strategies
Although there are several Key Terms in this section that should be defined for the students, this is that rare chapter that could be more easily learned in a discussion format than a lecture. Drawing out student opinions on the topics in this chapter will make the material come alive.
You can spend a full 30 minutes on the first section. Discussing actual situations that could cause critics to make these charges would be helpful. For instance, as mentioned in the text, many people rail against the high prices that pharma-ceutical companies charge, when each pill typically costs only a few cents to manufacture. Discussing all the “backroom” work that goes into developing new drugs, as well as the costs of their push-and-pull marketing strategies, brings the full picture into focus. If Christmas is near, a good discussion can also ensue about the onslaught of advertising, both on television and in newspapers. Debate whether this is the cause of materialism, or a reaction to it. An interesting debate can also be held regarding cigarettes and alcohol—is it ethical to market these products when we know they can be harmful? Have students take sides to fully discuss the pros and cons.
The section on citizen and public actions should take 15 minutes. A brief history of both consumerism and environmentalism is generally helpful. If you have an activist university, and Earth Day is near, perhaps you could organize a group to participate through increasing your own recycling and studying the history of the environmental movement in the United States. Also, research the companies in Marketing at Work 16-2 as well as IKEA (found in the Classroom Exercise) to see what actions they are currently taking to improve the environment.
Finally, take 15 minutes to discuss business actions, enlightened marketing, and marketing ethics. Use Marketing at Work 16-3 to discuss what happens when a company focuses too much on being socially responsible and how it could hurt the bottom line. Then stress the positive results from companies such as Honest Tea and WorldWise, also discussed. Have the students search for other companies that practice enlightened marketing.
