Principles of marketing 15th Edition

Principles of Marketing By Philip Kotler & Gary Armstrong Slide prepared by Mahir Mahtab Haque 1

Contents Marketing: Creating and capturing customer value - 3 Company and marketing strategy: partnering to build customer relationships -12 Analyzing the marketing environment -25 Managing marketing information to gain customer insights - 33 Consumer markets and consumer buyer behavior - 49 Business markets and business buyer behavior - 61 Customer-driven marketing strategy: Creating value for target customers - 71 Products, services and brands: Building customer value - 83 New-product development and product life-cycle strategies - 101 Pricing: Understanding and capturing customer value - 108 Pricing strategies: Additional considerations - 117 Marketing channels: Delivering customer value - 126 Retailing and wholesaling - 139 Communicating customer value: Integrated marketing communications strategy - 148 Creating competitive advantage - 164 The Global marketplace - 177 Sustainable marketing: Social responsibility and ethics - 189 2

Marketing: Creating & Capturing Customer Value Chapter 1 3

What is Marketing? Marketing is managing profitable customer relationships . Goals of marketing : Attract new customers by promising them superior value Retain and grow current customers by delivering satisfaction Marketing can be defined as the process by which companies create value for customers and build strong customer relationships in order to capture value from customers in return . 4

Marketing Process (Step 1) Understanding the marketplace and customer needs (5 core customer and marketplace concepts) : Needs, wants and demands : Human needs are states of felt deprivation; wants are the form of human needs as they are shaped by culture and individual personality; demands are wants when they are backed by buying power. Market offerings : A combination of products , services , information , experiences , persons , places , organizations and ideas that fulfills the consumers’ needs and wants. ( Marketing myopia is the mistake of paying more attention to the specific products a company offers than to the benefits and experiences produced by these products.) Customer value and satisfaction : Customers form expectations about the value and satisfaction that various market offerings will deliver and buy accordingly. Hence, marketers must be careful to set the right level of expectations. Exchanges and relationships : Marketing consists of actions taken to create, maintain and grow desirable exchange relationships with target audiences involving market offerings. Companies want to build strong relationships by consistently delivering superior customer value. Markets : This is the set of actual and potential buyers of a product/service. These buyers share a particular need or want that can be satisfied through exchange relationships. 5

Marketing Process (Step 2) Designing a customer-driven marketing strategy : ( Marketing management is the art and science of choosing target markets and building profitable relationships with them.) To design a winning strategy, marketing managers must answer 3 questions: What’s our target market? What’s our value proposition? What philosophy should guide this strategy? Selecting customers to serve : The company must first decide whom it will serve; this is done by dividing the market into segments of customers ( market segmentation ) and then selecting which segments it will go after ( target marketing ). Choosing a value proposition : The company must also decide how it will serve its targeted customers, i.e., how it will differentiate and position itself in the marketplace. (A brand’s value proposition is the set of benefits/values it promises to deliver to consumers to satisfy their needs.) Marketing management orientations : Production concept : Consumers will favor products that are available and highly affordable; therefore, the organization should focus on improving production and distribution efficiency. Product concept : Consumers will favor products that offer the most in quality, performance and innovative features; therefore, the organization should focus on making continuous product improvements. Selling concept : Consumers will not buy the firm’s products unless it undertakes a large-scale selling and promotion effort. Marketing concept : Achieving organizational goals depends on knowing the needs and wants of target markets and delivering the desired satisfactions better than the competition. ( Customer-driven marketing is understanding the customer needs even better than customers and creating products and services that meet both existing needs and latent needs, now and in the future.) Societal marketing concept : Marketing strategy should deliver to customers in a way that maintains/improves both the consumer’s and society’s well-being. It calls for sustainable marketing, socially and environmentally responsible marketing that meets the present needs of consumers and businesses while also preserving or enhancing the ability of future generations to meet their needs. 6

Marketing Process (Step 3) Preparing an integrated marketing plan and program : The marketing program builds customer relationships by transforming the marketing strategy into action. It consists of the firm’s marketing mix ( 4Ps of marketing ), which are a set of marketing tools the firm uses to implement its marketing strategy: Product : a need-satisfying market offering Price : how it will charge for this offering Place : how it will make the offering available to target consumers Promotion : how it will communicate the merits of its offering to target consumers The firm must blend these 4Ps into a comprehensive integrated marketing program that communicates and delivers intended value to chosen customers. 7

Marketing Process (Step 4) Building customer relationships : Customer relationship management (CRM) is the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. Customer-perceived value : This is the customer’s evaluation of the difference between all the benefits and all the costs of a market offering relative to those of competing offers. Customer satisfaction : This depends on the product’s perceived performance relative to the buyer’s expectations. Studies show higher levels of customer satisfaction leads to greater customer loyalty which in turn results in better company performance. Performance < expectations (customer is dissatisfied) Performance = expectations (customer is satisfied) Performance > expectations (customer is delighted) Customer relationships : A company with many low-margin customers may seek to develop basic relationships with them. In markets with few customers and high margins, sellers want to create full partnerships with key customers. Customer marketing tools : Frequency marketing programs that reward customers who buy frequently or in large amounts. Club marketing programs offer members special benefits and create member opportunities. Customer-managed relationships : Marketing relationships in which customers, empowered by today’s new digital technologies, interact with companies and with each other to shape their relationships with brands. Consumer-generated marketing : Brand exchanges created by consumers themselves – both invited and uninvited – by which consumers are playing an increasing role in shaping their own brand experiences and those of other consumers. Partner relationship management : Working closely with partners (suppliers, channel partners, etc.) in other company departments and outside the company to jointly bring greater value to customers. 8

Marketing Process (Step 5) Capturing value from customers in the form of sales, market share and profits : Customer lifetime value (CLV) : The value of the entire stream of purchases a customer makes over a lifetime of patronage. Share of customer : The portion of the customer’s purchasing that a company gets in its product categories. To increase share of customer, firms can offer greater variety to current customers or create programs to cross-sell and up-sell to market more products and services to existing customers. Customer equity : The total combined customer lifetime values of all the company’s customers. The more loyal the firm’s profitable customers, the higher its customer equity. Customer equity may be a greater measure of a firm’s performance than current sales or market share, whereas sales and market share reflect the past, customer equity suggests the future. 9

Customer relationship groups Strangers show low potential profitability and little projected loyalty. There is little fit between company’s offerings and their needs. (Don’t invest anything in them.) Butterflies are potentially profitable but not loyal. There is a good fit between the company’s offerings and their needs. (Enjoy them for the time being by creating satisfying and profitable transactions and capturing as much of their business as possible.) True friends are both profitable and loyal. There is a strong fit between their needs and the company’s offerings. (Make continuous relationship investments to delight, nurture, retain and grow them.) Barnacles are highly loyal but not very profitable. There is a limited fit between their needs and the company’s offerings. (Improve their profitability by selling them more, raising their fees or reducing services to them; otherwise, don’t invest!) 10

Changing marketing landscape Changing economic environment : Great recession caused many consumers to rethink their spending priorities and cut back on their buying. Challenge is to balance the brand’s values proposition with the current times while also enhancing its long-term equity. In uncertain economic times, the goal is to build market share and strengthen customer relationships at the expense of competitors who cut back. Digital age : Advent of the Internet Online marketing (click-and-mortar companies) Growth of not-for-profit-marketing : Organizations include colleges, hospitals, museums, zoos, orchestras, churches and government. They raise funds through power-house marketing (public service announcements, TV, social media, checkout counters of major retailers). Rapid globalization : Companies are not just selling more of their locally produced goods in international markets; they are also sourcing more supplies and components abroad. Rise of global marketing Sustainable marketing : As the worldwide consumerism and environmentalism movements mature, today’s marketers are being called on to develop sustainable marketing practices. Corporate ethics and social responsibility have become hot topics for almost every business, as today’s customers expect companies to deliver value in a socially and environmentally responsible way. 11

Company & Marketing Strategy: Partnering to build customer relationships Chapter 2 12

Strategic Planning Strategic planning : The process of developing and maintaining a strategic fit between the organization’s goals and capabilities and its changing marketing opportunities . Steps in strategic planning : Defining the company mission Setting company objectives and goals Designing the business portfolio Planning marketing and other functional strategies 13

Step 1: Defining a market-oriented mission A mission statement is a statement of the organization’s purpose – what it wants to accomplish in the larger environment. Mission statements: Need to be market-oriented and be defined in terms of satisfying basic customer needs. Should be meaningful and specific yet motivating. Should emphasize company’s strengths and tell forcefully how it intends to win in the marketplace. Should focus on customers and customer experience the company seeks to create. Examples : Facebook: We connect people around the world and help them share important moments in their lives. Home Depot: We empower consumers to achieve the homes of their dreams. NASA: We reach for new heights and reveal the unknown so that what we do and learn will benefit all humankind. Walmart: We deliver low prices every day and give ordinary folks the chance to buy the same things as rich people. “Save Money. Live Better.” 14

Step 2: Setting company objectives and goals Build profitable relationships with customers. Improve profits by increasing sales or reducing costs. Increase sales by improving company’s share of domestic and international markets. Increase market share by broadening product lines, increasing product availability and promotion in existing markets and expand into new markets. Increase promotion through advertising and public relations efforts. 15

Step 3: Designing the business portfolio Business portfolio is the collection of businesses and products that make up the company. The best business portfolio is the one that fits the company’s strengths and weaknesses to opportunities in the environment. Business portfolio planning (2 steps) : Company must first analyze its current business portfolio and determine which businesses should receive more, less or no investment. Next, it must shape the future portfolio by developing strategies for growth and downsizing. 16

Step 3: Designing the business portfolio (cont.) Analyzing the current business portfolio : The first step is to identify its key businesses that make up the company, called strategic business units (SBUs). An SBU can be a company division, a product line within a division, a product/brand. Next, the company assesses the attractiveness of its various SBUs and decides how much support each deserves. A standard portfolio analysis instrument is the BCG Growth-Share Matrix, which evaluates SBUs on 2 important dimensions: market growth rate and relative market share. BCG Growth-Share Matrix (4 types of SBUs): Stars : High growth, high share businesses/products. Often in need of high investments to fund their rapid growth. However, once their growth slows down, they convert to cash cows. Cash Cows : Low growth, high share businesses/products. Do not need much investment to hold their market share. However, the income generated from these SBUs are used to pay off bills and support other SBUs that need investment. Question Marks : High growth, low share businesses/products. They require lot of cash to hold their share in the market. Management often have to devote more time into Question Marks to decide whether they should be removed or converted into Stars. Dogs : Low growth, low share businesses/products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash. Star Cash Cow Question Mark Dog Relative Market Share Market Growth Rate High Low Low High 4 strategies for each SBU : Invest more in the SBU to build its share Invest just enough to hold the SBU’s share at the current level Harvest the SBU (milking short-term cash flow regardless of long-term effect) Divest SBU by selling it/phasing it out and using the resources elsewhere 17

Step 3: Designing the business portfolio (cont.) Developing strategies for growth and downsizing : Beyond evaluating current businesses, designing the business portfolio involves finding businesses and products the company should consider in the future. The company’s objective must be to manage profitable growth. Marketing has the main responsibility for achieving profitable growth for the company. Marketing needs to identify, evaluate and select market opportunities and establish strategies for capturing them. A useful device for identifying growth opportunities is the product/market expansion grid (Ansoff Matrix) . Strategies : Market penetration : Company growth by increasing sales of current products to current market segments without changing the product. Market development : Company growth by identifying and developing new market segments for current company products. Product development : Company growth by offering modified or new products to current market segments. Diversification : Company growth through starting up or acquiring businesses outside the company’s current products and markets. Reasons for downsizing business portfolios : The firm may have grown too fast or entered areas where it lacks experience. Market environment may change, making some products or markets less profitable. Some products or business units simply age and die. 18

Step 4: Planning Marketing: Partnering to Build Customer Relationships Value chain : The series of internal departments that carry out value-creating activities to design, produce, market, deliver and support a firm’s products. The firm’s success depends not only on how well each department performs its work but also on how well the various departments coordinate their activities. More companies today are partnering with other members of the supply chain – suppliers, distributors and customers – to improve the performance of the customer value delivery network . 19

Customer-driven marketing strategy Each company must divide up the total market, choose the best segments and design strategies for profitably serving chosen segments. This process involves market segmentation , market targeting , differentiation and positioning . Market segmentation : The process of dividing a market into distinct groups of buyers who have different needs, characteristics/behaviors and who might require separate products or marketing programs. (A market segment consists of consumers who respond in a similar way to a given set of marketing efforts.) Market targeting : This involves evaluating each market segment’s attractiveness and selecting one or more segments to enter. A company should target segments in which it can profitably generate the greatest customer value and sustain it over time. Market differentiation and positioning : Positioning is arranging for a product to occupy a clear, distinctive and desirable place relative to competing products in the minds of target consumers. In positioning a brand, a company first identifies possible customer value differences that provide competitive advantages on which to build the position. Thus, effective positioning begins with differentiation , i.e., differentiating the company's market offering to create superior customer value. Once the company has chosen a desired position, it must take strong steps to deliver and communicate that position to target consumers. The company’s entire marketing program should support the chosen positioning strategy. 20

Developing an integrated marketing mix Marketing mix : Set of tactical tools – product, price, place and promotion – that the firm blends to produce the response it wants in the target market. Product : A combination of goods/services the company offers to the target market. Price : The amount of money customers must pay to obtain the product. Place : Includes the company activities that make the product available to target consumers. Promotion : Refers to activities that communicate the merits of the product and persuade target customers to buy it. An effective marketing program blends the marketing mix into an integrated marketing program designed to achieve the company's marketing objectives by delivering value to consumers. 21

Managing the marketing effort Marketing analysis : Managing the marketing function begins with a complete analysis of the company’s situation. The marketer should conduct a SWOT analysis by which it evaluates the company’s overall strengths, weaknesses, opportunities and threats. Market planning : This involves choosing marketing strategies that will help the company attain its overall strategic objectives. A detailed marketing plan comprises of the following: Executive summary Current marketing situation Threats and opportunities analysis Objectives and issues Marketing strategy Action programs Budgets Controls 22

Managing the marketing effort (cont.) Marketing implementation : This is the process that turns marketing plans into marketing actions to accomplish strategic marketing objectives. Marketing control : Measuring and evaluating the results of marketing strategies and plans and taking corrective action to ensure that the objectives are achieved. 4 steps in marketing control : Management first sets specific marketing goals. Then measures its performance in the marketplace and evaluates the causes of any differences between expected and actual performance Finally, management takes corrective action to close the gaps between goals and performance. This may require changing the action programs or even changing the goals. 23

Measuring and managing marketing ROI Marketing ROI is the net return from a marketing investment divided by costs of the marketing investment . It measures the profits generated by investment in marketing activities. Marketing ROI can be difficult to measure. A company can assess the marketing ROI in terms of standard marketing performance measures , such as brand awareness, sales or market share. However, beyond standard performance measures, marketers are using customer-centered measures of marketing impact , such as customer acquisition , customer retention , customer lifetime value and customer equity . These measures capture not only current marketing performance but also future performance resulting from stronger customer relationships. 24

Analyzing the marketing environment Chapter 3 25

Marketing environment A company’s marketing environment consists of actors and forces outside marketing that affect marketing management’s ability to build and maintain successful relationships with target customers. The marketing environment consists of: Microenvironment : Consists of actors close to the company that affect its ability to serve its customers – the company, suppliers, marketing intermediaries, customer markets, competitors and publics. Macroenvironment : Consists of the larger societal forces that affect the microenvironment – demographic, economic, natural, technological, political and cultural forces. 26

Microenvironment Company : Marketing management must take into consideration the internal environment – top management, finance, R & D, purchasing, operations and accounting – when designing marketing plans. Suppliers : They provide the resources needed by the company to produce its goods and services; hence, supply-related problems – supply availability and costs – can seriously undermine company sales and damage customer satisfaction. Most marketers today treat their suppliers as partners in creating and delivering customer value. Marketing intermediaries : They help the company promote, sell and distribute its products to final buyers. They include resellers, physical distribution firms, marketing services agencies and financial intermediaries. Marketers must partner effectively with marketing intermediaries to optimize the performance of the entire system. Resellers are distribution channel firms (wholesalers, retailers) that help the company find customers or make sales to them by buying and reselling the merchandise. Physical distribution firms help the company stock and move goods from their points of origin to their destinations. Marketing services agencies are the marketing research firms, advertising agencies, media firms and marketing consulting firms that help the company target and promote its products to the right markets. Financial intermediaries include banks, credit companies, insurance companies, etc. that help finance transactions or insure against the risks associated with the buying and selling of goods. 27

Microenvironment (cont.) Competitors : Each firm should consider its own size and industry position compared to those of its competitors when developing their competitive marketing strategy. Publics : It is any group that has an actual or potential interest in or impact on an organizations’ ability to achieve its objectives. There are 7 types of publics: Financial publics (banks, investment analysts, stockholders) influences the company’s ability to obtain funds. Media publics (newspapers, magazines, TV stations, blogs, etc.) carry news, features and editorial opinion. Government publics (company lawyers) are consulted by marketers regarding issues of product safety, truth in advertising, etc. Citizen-action publics (consumer organizations, environmental groups, minority groups, etc.) usually question the company’s marketing decisions. Local publics (neighborhood residents, community organizations) General public : A company needs to be concerned about the general public’s attitude toward its products and activities. The public’s image of the company affects its buying. Internal publics (workers, managers, volunteers, board of directors) are informed and motivated through company newsletters. Customers : The company might target any or all 5 types of customer markets: Consumer markets (individuals, households) buy goods and services for personal consumption. Business markets buy goods and services for further processing or 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 and services to others who need them. International markets consist of the above buyers in other countries. 28

Macroenvironment Demographic environment : Demography : It is the study of human populations in terms of size, density, location, age, gender, race, occupation, etc. Changing age structure of the population : Baby boomers: People born between 1946 to 1964 following the end of WWII. Generation X: People born between 1965 to 1976 following the baby boom. Millennials/ Generation Y: People born between 1977 to 2000. Changing family : More people are divorcing or separating, choosing not to marry, marrying later or marrying without intending to have children. Marketers must increasingly consider the special needs of nontraditional households because they are now growing more rapidly than traditional households. Each group has distinctive needs and buying habits. In addition, number of working women has also increased greatly. Geographic shifts in population : An increasing number of people are working from home with the help of electronic conveniences such as PCs, smartphones, Internet access, etc. Better educated, more white-collar, more professional population : The rising number of educated professionals will affect not just what people buy but also how they buy. Increasing diversity : Diversity goes beyond ethnic heritage – the LGBT community has increasingly emerged in the public eye along with people with disabilities. Hence, marketers must continue to diversify their marketing programs to take advantage of opportunities in fast-growing segments. 29

Macroenvironment (cont.) Economic environment : It consists of economic factors that affect consumer purchasing power and spending patterns. Changes in consumer spending: Consumers are buying less and looking for greater value in the things that they buy ( value marketing ). Income distribution: Changes in major economic variables such as income, cost of living, interest rates and savings and borrowing patterns have a large impact on the marketplace. Natural environment : This involves the physical environment and the natural resources that are needed as inputs by marketers or that are affected by marketing activities. Environment trends: Growing shortages of raw materials Increased pollution Increased government intervention in natural resource management More and more companies are recognizing the link between a healthy ecology and a healthy economy. They are learning that environmentally responsible actions can also be good business. 30

Macroenvironment (cont.) Technological environment : These are forces that create new technologies creating new product and market opportunities. Many firms are using radio-frequency identification (RFID) technology to track products through various points in the distribution channel. Political and social environment : It consists of laws, government agencies and pressure groups that influence or limit various organizations and individuals in a given society. Governments develop public policy to guide commerce – sets of laws and regulations that limit business for the good of society as a whole. Laws usually cover issues such as competition, fair trade practices, environmental protection, product safety, truth in advertising, consumer privacy, packaging and labeling, pricing, etc. Business legislation has been enacted for the following reasons: Protect companies from each other – from unfair competition. Protect consumers from unfair business practices – making shoddy products, invade privacy, mislead consumers in their advertising, etc. Protect the interests of the society against unrestrained business behavior. Increased emphasis on ethics and socially responsible actions due to the recent boom in Internet marketing – online privacy issues. Cause-related marketing: To exercise social responsibility and build more positive images, many companies are now linking themselves to worthwhile causes. However, it is controversial, in that companies using cause-related marketing might find themselves walking a fine line between increased sales and an improved image and facing charges of exploitation. 31

Macroenvironment (cont.) Cultural environment : It consist of institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviors. Core beliefs and values are passed on from parents to children and are reinforced by schools, churches, business and government. Secondary beliefs and values are more open to change. Marketers have some chance of changing secondary values but little chance of changing core values. 32

Managing marketing information to gain customer insights Chapter 4 33

Marketing information and customer insights Customer insights : Fresh understanding of customers and the marketplace derived from marketing information that become the basis for creating customer value and relationships. Customer insights groups collect customer and market information from a wide variety of sources, ranging from traditional marketing research to mingling with and observing consumers to monitoring consumer online conversations about the company and its products. Then they use this information to develop important customer insights from which the company can create more value for its customers. Thus, companies must design effective marketing information systems that give managers the right information in the right form at the right time and help them to use this information to create customer value and stronger customer relationships. Marketing information systems (MIS) : People and procedures dedicated to assessing information needs, developing the needed information and helping decision makers to use the information to generate and validate actionable customer and market insights. MIS process: MIS begins and ends with information users – marketing managers, internal and external partners, and others who need marketing information. First, it interacts with these information users to assess information needs . Next, it interacts with the marketing environment to develop needed information through internal company databases, marketing intelligence activities and marketing research. Finally, the MIS helps users to analyze and use the information to develop customer insights, make marketing decisions and manage customer relationships. 34

Step 1: Assessing marketing information needs A good MIS balances the information that users would like to have against what they really need and what is feasible to offer. The MIS must monitor the marketing environment to provide decision makers with information they should have to better understand customers and make key marketing decisions. Finally, costs of obtaining, analyzing, storing and delivering information can quickly mount. Hence, the company must decide whether the value of insights gained from additional information is worth the costs of providing it, and both value and cost are often hard to assess. 35

Step 2: Developing marketing information Marketers can obtain the needed information from internal data , marketing intelligence and marketing research . Internal data : Internal databases are electronic collections of consumer and market information obtained from data sources within the company network. Such as: Marketing department provides information on customer characteristics, sales transactions, website visits, etc. Customer service department keeps records of customer satisfaction or service problems. Accounting department provides detailed records of sales, costs and cashflows. Operations report on production, shipments and inventories. Sales force reports on reseller reactions and competitor activities. Marketing channel partners provide data on point-of-sale transactions. Issues with internal database: It may be incomplete or in the wrong form for making marketing decisions. Data needs to be updated on a regular basis. For maintaining data, highly sophisticated equipment and techniques are required. 36

Step 2: Developing marketing information (cont.) Competitive marketing intelligence : This is the systematic collection and analysis of publicly available information about consumers, competitors and developments in the marketplace. Marketing intelligence techniques range from observing consumers firsthand to quizzing the company’s own employees, benchmarking competitors’ products, researching the Internet, and monitoring Internet buzz. The growing use of marketing intelligence also raises ethical issues. Some intelligence gathering techniques may involve questionable ethics. 37

Step 2: Developing marketing information (cont.) Marketing research : It is the systematic design, collection, analysis and reporting of data relevant to a specific marketing situation facing an organization. It gives marketers insights into customer motivations, purchase behavior and satisfaction. It can help them to assess market potential and market share or measure the effectiveness of pricing, product, distribution and promotional activities. Marketing research process has 4 steps: Defining the problem and research objectives Developing the research plan for collecting information Implementing the research plan – collecting and analyzing the data Interpreting and reporting the findings 38

Defining the problem and research objectives After the problem has been identified carefully, the manager and the researcher must set the research objectives. A marketing research project might have one of three types of objectives: Exploratory research is used to gather preliminary information that will help define the problem and suggest hypotheses. Descriptive research describes things such as the market potential for a product or the demographics and attitudes of consumers who buy the product. Causal research tests hypotheses about cause-and-effect relationships. Managers usually start with exploratory research followed with descriptive or causal research. The statement of the problem and research objectives guides the entire research process. 39

Developing the research plan for collecting information The research plan outlines sources of existing data and spells out the specific research approaches, contact methods, sampling plans and instruments researchers will use to gather new data. The research plan should be presented in a written proposal . A written proposal is especially important when the research project is large and complex or when an outside firm carries it out. The proposal should cover the management problems addressed, the research objectives, the information to be obtained, and how the results will help management’s decision making along with the estimated research costs. To meet the manager’s information needs, the research plan can call for gathering secondary data, primary data or both. Secondary data consist of information that already exists somewhere, having been collected for another purpose. However, secondary data needs to be carefully evaluated to ensure its relevancy, accuracy, recency and impartiality. Common examples: company internal database, buying secondary data from outside suppliers, commercial online database, commercial websites, government agency, business publications, news medium and Internet search engines. Primary data consist of information collected for the specific purpose at hand. Primary data is collected through various research approaches, contact methods, sampling plan and research instruments. 40

Primary data collection Research approaches : Observational research : Gathering primary data by observing relevant people, actions and situations. In addition, marketers not only observe what consumers do but also observe what consumers are saying on blogs, social networks and websites. This research can generate fresh customer and market insights that people are unwilling or unable to provide – it provides a window into the customers’ unconscious actions and unexpressed needs and feelings. However, some observations can be difficult to interpret and long-term behavior is difficult to observe; hence, other data collection methods along with observational research need to be used. A wide range of companies now use ethnographic research – a form of observational research that involves sending trained observers (anthropologists, psychologists, company researchers, managers) to watch and interact with consumers in their natural environments . Many companies now conduct Netnography research – observing consumers in a natural context on the Internet. Observing people as they interact on and move about the Internet can provide useful insights into both online and offline buying motives and behavior. Survey research : Gathers primary data by asking people questions about their knowledge, attitudes, preferences and buying behavior. Although it is a very flexible method, limitations include respondents not answering truthfully, respondents being very unwilling to answer or they have difficulty remembering certain things. Experimental research : Gathers primary data by selecting matched groups of subjects, giving them different treatments, controlling related factors and checking for differences in group responses. It tries to explain cause-and-effect relationships. 41

Primary data collection Contact methods : Mail Telephone Personal interview Online Flexibility Poor Good Excellent Good Quantity of data that can be collected Good Fair Excellent Good Control of interviewer effects Excellent Fair Poor Fair Control of sample Fair Excellent Good Excellent Speed of data collection Poor Excellent Good Excellent Response rate Poor Poor Good Good Cost Good Fair Poor Excellent 42

Primary data collection Sampling plan : Marketing researchers usually draw conclusions about large groups of consumers by studying a small sample of the total consumer population. A sample is a segment of the population selected for marketing research to represent the population as a whole. Designing the sample requires 3 decisions: Who is to be studied?/What sampling unit? How many people should be included? What sample size? How should the people in the sample be chosen? What sampling procedure? Types of probability samples : Simple random sample : Every member of the population has a known and equal chance of selection. Stratified random sample : The population is divided into mutually exclusive groups and random samples are drawn from each group. Cluster (area) sample : The population is divided into mutually exclusive groups and the researcher draws a sample of the groups to interview. Types of non-probability samples : Convenience sample : The researcher selects the easiest population members from which to obtain information. Judgement sample : The researcher uses his/her judgement to select population members who are good prospects for accurate information. Quota sample : The researcher finds and interviews a prescribed number of people in each of several categories. These varied ways of drawing samples have different costs and time limitations as well as different accuracy and statistical properties. Which method is best depends on the needs of the research project. 43

Primary data collection Research instruments : Questionnaires : Open-end questions are especially useful in exploratory research, when the researcher is trying to find out what people think but is not measuring how many people think in a certain way. Closed-end questions provide answers that are easier to interpret and tabulate. Researchers should also use care in the wording and ordering of the questions – questions should be arranged logically. Mechanical instruments : These are used to monitor consumer behavior by: Attaching people meters to TV sets, cable boxes, satellite systems in selected homes to record who watches which programs. Using checkout scanners to record shoppers’ purchases. Measuring subjects’ physical responses to marketing offerings: viewer engagement via physiological measures of skin temperature, heart rate and facial and eye movements. Neuromarketing: Measuring brain activity to learn how consumers feel and respond. Marketing scientists have learned that tracking brain electrical activity and blood flow can provide companies with insights into what turns consumers on and off regarding their brands and marketing. Although this technique can measure consumer involvement and emotional responses, such brain responses can be difficult to interpret. Thus, neuromarketing is usually used in combination with other research approaches to gain a more complete picture of what goes on inside consumers’ heads. 44

Implementing the research plan – collecting and analyzing the data The researcher next puts the marketing research plan into action. This involves collecting, processing and analyzing information. Data collection can be carried out by the company’s marketing research staff/outside firms. Researchers must also process and analyze the collected data to isolate important information and insight. They need to check data for accuracy and completeness and code it for analysis. The researchers then tabulate the results and compute, statistical measures. 45

Interpreting and reporting the findings The market researcher must now interpret the findings, draw conclusions and report them to management. The researcher should present important findings and insights that are useful in the major decisions faced by management. Managers should not also be biased – they should not readily accept research results that show what they expected and reject those that they did not expect or hope for. Findings can be interpreted in different ways and discussions between researchers and managers will help point to the best interpretations. Thus, managers and researchers must work closely together when interpreting research results and both must share responsibility for the research process and resulting decisions. 46

Step 3: Analyzing and using marketing information Customer relationship management : Companies capture information at every possible customer touch point including customer purchases, sales force contacts, service and support calls, online site visits, satisfaction surveys, credit and payment interactions, market research studies. Companies are now turning to customer relationship management (CRM) to manage detailed information about individual customers and carefully manage customer touch points to maximize customer loyalty. CRM consists of sophisticated software and analytical tools that integrate customer information from all sources, analyze it in depth, and apply the results to build stronger customer relationships. CRM analysts develop data warehouses and use sophisticated data mining techniques to unearth the riches hidden in customer data. Distributing and using marketing information : Firms use company intranet and internal CRM systems to facilitate easy access to research and intelligence information, customer contact information, reports, shared work documents, etc. Extranets enable companies to allow key customers and value-network members to access account, product and other data on demand. Suppliers, customers and resellers may access a company’s extranet to update their accounts, arrange purchases and check orders against inventories to improve customer service. 47

Public policy and ethics in marketing research Intrusions on consumer privacy: Companies face the challenge of unearthing valuable but potentially sensitive consumer data while also maintain consumer trust. Simultaneously, consumers wrestle with the trade-offs between personalization and privacy. The best approach is for researchers to ask only for the information they need, use it responsibly to provide customer value and avoid sharing information without the customer’s permission. Misuse of research findings : Research studies can be powerful persuasion tools; companies often use study results as claims in their advertising and promotion. However, many research studies appear to have been designed just to produce the intended effect. Few advertisers openly rig their research designs or blatantly misrepresent the findings. Each company must accept responsibility for policing the conduct and reporting of its own marketing research to protect consumers’ best interests and its own. 48

Consumer markets and consumer buyer behavior Chapter 5 49

Model of consumer behavior Consumer buyer behavior : The buying behavior of final consumers – individuals and households that buy goods and services for personal consumption. All these final consumers combine to make up the consumer market . The environment Marketing stimuli: Product, price, place, promotion Other: Economic, technological, social, cultural Buyer’s black box Buyer’s characteristics Buyer’s decision process Buyer responses Buying attitudes and preferences Purchase behavior: what the buyer buys, when, where and how much Brand and company relationship behavior All these inputs (marketing stimuli) enter the buyer’s black box, where they are turned into a set of buyer responses – the buyer’s brand and company relationship behavior and what he/she buys, when, where and how much. Marketers want to understand how these stimuli are changed into responses inside the consumer’s black box, which has 2 parts: (1) buyer’s characteristics influence how he/she perceives and reacts to the stimuli and (2) buyer’s decision process itself affects his/her behavior. 50

Characteristics affecting consumer behavior: Cultural factors Marketers need to understand the role played by the buyer’s culture , subculture and social class . Culture : This is the most basic cause of a person’s wants and behaviors. Marketers are always trying to spot cultural shifts so as to discover new products that might be wanted. Subculture : Each culture contains smaller subcultures which are groups of people with shared value systems based on common life experiences and situations. Subcultures include nationalities, religions, racial groups and geographic regions. Many subcultures make up important market segments and marketers often design products and marketing programs tailored to their needs. ( Cross-cultural marketing : The practice of including ethnic themes and cross-cultural perspectives within their mainstream marketing.) Social class : These are society’s relatively permanent and ordered divisions whose members share similar values, interests and behaviors. Social class is determined by a combination of factors such as income, occupation, wealth, education, etc. Marketers are interested in social class because people within a given social class tend to exhibit similar buying behavior. Social classes show distinct product and brand preferences in areas such as clothing, home furnishings, travel and leisure activity, financial services and automobiles. 51

Characteristics affecting consumer behavior: Social factors A consumers’ behavior is also influenced by social factors such as the consumer’s small groups, family and social roles and status. Groups and social networks : Many small groups influence a person’s behavior. Groups that have a direct influence and to which a person belongs are called membership groups . 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 the person’s product and brand choices. People are often influenced by reference groups to which they do not belong. Word-of-mouth influence can have a powerful impact on consumer buying behavior. The personal words and recommendations of trusted friends, associates and other consumers tend to be more credible than those coming from commercial sources (ads/salespeople). Marketers of brands subjected to strong group influence must figure out how to reach opinion leaders (influential/leading adopters) – people within a reference group who due to their special skills, knowledge, personality, etc. exert social influence on others. Buzz marketing involves enlisting or even creating opinion leaders to serve as brand ambassadors who spread the good word about a company’s products. Online social networks are online communities where people socialize or exchange information and opinions. Social networking media range from blogs and message boards to social networking sites and virtual worlds. Marketers are working to harness the power of these new social networks and other word-of-Web opportunities to promote their products and build closer customer relationships. However, care must be taken as results are difficult to measure and control since the users control the content. 52

Characteristics affecting consumer behavior: Social factors (cont.) Family : Marketers are interested in the roles and influence of the husband, wife and children on the purchase of different products and services. Roles and status : A person belongs to many groups – family, clubs, organizations, online communities. The person’s position in each group can be defined in terms of both role and status. A role consists of the activities people are expected to perform according to the people around them. Each role carries a status reflecting the general esteem given to it by society. People usually choose products appropriate to their roles and status. 53

Characteristics affecting consumer behavior: Personal factors A buyer’s decisions also are influenced by personal characteristics such as age, life-cycle stage, occupation, economic situation, lifestyle and personality and self-concept. Age and life-cycle stage : Life-stage changes usually result from demographics and life-changing events – marriage, having children, purchasing a home, divorce, children going to college, changes in personal income, moving out of the house, retirement, etc. Marketers often define their target markets in terms of life-cycle stage and develop appropriate products and marketing plans for each stage. Occupation : Marketers try to identify the occupational groups that have an above-average interest in their products and services. A company can even specialize in making products needed by a given occupational group. Economic situation : A person’s economic situation will affect his/her store and product choices. Marketers watch trends in personal income, savings and interest rates. Lifestyle : This is a person’s pattern of living as expressed in his/her psychographics. It involves measuring consumers’ major AIO dimensions – activities (work, hobbies, shopping, sports, social events), interests (food, fashion, family, recreation) and opinions (about themselves, social issues, business products). The lifestyle concept can help marketers understand changing consumer values and how they affect buyer behavior. Marketers look for lifestyle segments with needs that can be served through special products or marketing approaches. Personality and self-concept : Each person’s distinct personality influences his/her buying behavior. Personality is usually described in terms of traits such as self-confidence, dominance, sociability, autonomy, defensiveness, adaptability and aggressiveness. Personality can be useful in analyzing consumer behavior for certain product/brand choices. Self-concept (self-image) states that people’s possessions contribute to and reflect their identities; hence to understand consumer behavior, marketers must first understand the relationship between consumer self-concept and possessions. 54

Characteristics affecting consumer behavior: Psychological factors A person’s buying choices are further influenced by 4 major psychological factors such as motivation, perception, learning and beliefs and attitudes. Motivation : A motive is a need that is sufficiently pressing to direct the person to seek satisfaction of the need. Abraham Maslow created the hierarchy of needs: physiological needs, safety needs, social needs, esteem needs and self-actualization needs. He stated the once each important need is satisfied, the next most important need will come into play. Perception : This is the process by which people select, organize and interpret information to form a meaningful picture of the world. People can form different perceptions of the same stimulus due to 3 perceptual processes: Selective attention: The tendency for people to screen out most of the information to which they are exposed. Selective distortion: The tendency of people to interpret information in a way that will support what they already believe. People tend to forget much of what they learn – they only retain information that supports their attitudes and beliefs. Selective retention: Consumers likely to remember good points made about a brand they favor and forget good points made about competing brands. Learning : Changes in an individual’s behavior arising from experience. Learning occurs through the interplay of drives, stimuli, cues, responses and reinforcement. A drive is a strong internal stimulus that calls for action. A drive becomes a motive when it is directed toward a particular stimulus object. Example: A person’s drive for self-actualization might motivate him/her to look into buying a camera. Cues are minor stimuli that determine when, where and how the person responds. Example: The person might spot several camera brands in a shop window, hear of a special sale price or discuss camera with a friend. These are all cues that might influence a consumer’s response to his/her interest in buying the product. Suppose the consumer buys a Nikon camera. If the experience is rewarding, the consumer will probably use the camera more and more, and his/her response will be reinforced. This increases the probability of him/her buying a Nikon product the next time they go for shopping. Beliefs and attitudes : Marketers are interested in the beliefs that people formulate about specific products and services because these beliefs make up the product and brand images that affect buying behavior. Moreover, people have attitudes regarding religion, politics, clothes, music, food and attitudes are difficult to change. A person’s attitudes fit into a pattern; changing one attitude may require difficult adjustments in many others. Therefore, a company should usually try to fit its products into existing attitudes rather than attempt to change attitudes. 55

Types of buying decision behavior Complex buying behavior : This behavior is undertaken when consumers are highly involved in a purchase and perceive significant differences among brands. Consumers may be highly involved when the product is expensive, risky, purchased infrequently and highly self-expressive. Here, the buyer will pass through a learning process, first developing beliefs about the product, then attitudes and then making a thoughtful purchase choice. Dissonance-reducing buying behavior : This behavior occurs when consumers are highly involved with an expensive, infrequent or risky purchase but see little difference among brands. When perceived brand differences are not significant, buyers may shop around to learn what is available but buy relatively quickly. They may respond primarily to a good price/purchase convenience. After the purchase, consumers might experience postpurchase dissonance/discomfort , when they notice certain disadvantages of their purchased brand or hear favorable things about the brand not purchased. Usually, to counter this dissonance, the marketer’s after-sales communications should provide evidence and support to help consumers feel good about their brand choices. Habitual buying behavior : This behavior occurs under conditions of low-consumer involvement and little significant brand difference. Consumers appear to have low involvement with most low-cost, frequently purchased products. The buying process involves brand beliefs formed by passive learning, followed by purchase behavior which may/may not be followed by evaluation. Marketers use price and sales promotions to promote buying. Alternatively, they can add product features or enhancements to differentiate their brands from the rest of the pack and raise involvement. Variety-seeking buying behavior : This behavior is undertaken in situations characterized by low consumer involvement but significant perceived brand differences. In such cases, consumers often do a lot of brand switching – usually for the sake of variety rather than because of dissatisfaction. Market leading brands will try to encourage habitual buying behavior by dominating shelf space, keeping shelves fully stocked and running frequent reminder advertising. Challenger firms will encourage variety seeking by offering lower prices, special deals, coupons, free samples and advertising that presents reasons for trying something new. 56

Buyer decision process Need recognition : The buyer recognizes a problem/need, which can be triggered by internal/external stimuli. The marketer should research consumers to find out what kinds of needs/problems arise, what brought them about and how they led the consumer to this particular product. Information search : Consumers can obtain information from a wide variety of sources; however, the relative influence of these information sources varies within the product and buyer. Traditionally, consumers have received the most information about a product from commercial sources, but the most effective sources tend to be personal. A company must design its marketing mix to make prospects aware of and knowledgeable about its brand – it should carefully identify consumers’ sources of information and the importance of each sources. Personal sources: family, friends, neighbors, acquaintances Commercial sources: advertising, salespeople, dealer websites, packaging, displays Public sources: mass media, consumer rating organizations, online searches, peer reviews Experiential sources: handling, examining, using the product Evaluation of alternatives : This is how consumers process information to choose among alternative brands. The consumers ranks the brands and forms purchase intentions. Hence, marketers should study buyers to find out how they actually evaluate brand alternatives. If marketers know what evaluative processes go on, they can take steps to influence the buyer’s decision. Purchase decision : Generally, the consumers’ purchase decision will be to buy the most preferred brand, but 2 factors can come between the purchase intention and the purchase decision. Attitudes of others Unexpected situational factors Postpurchase behavior : After the purchase, the consumer will either be satisfied/dissatisfied and will engage in postpurchase behavior of interest to the marketer. In most cases, there is cognitive dissonance . Thus, marketers must ensure that their customers are satisfied, as satisfied customers make repeated purchases, talk favorably to others about the product, pay less attention to competing brands and advertising and buy other products from the company. Therefore, a company should measure customer satisfaction regularly to learn how well it is doing and how it can improve. 57

Buyer decision process for new products A new product is a good, service or idea that is perceived by some potential customers as new. Adoption process : Mental process through which an individual passes from first learning about an innovation to final adoption. It is the decision by an individual to become a regular user of the product. Stages in the adoption process: Awareness : Consumer becomes aware of the new product but lacks information about it. Interest : Consumer seeks information about the new product. Evaluation : Consumer considers whether trying the new product makes sense. Trial : Consumer tries the new product on a small scale to improve his/her estimate of its value. Adoption : Consumer decides to make full and regular use of the new product. 58

5 adopter groups Innovators : They are venturesome – they try new ideas at some risk. Early adopters : They are opinion leaders in their communities and adopt new ideas early but carefully. Early mainstream : They adopt new ideas before the average person. Late mainstream : They are skeptical – they adopt an innovation only after a majority of people have tried it. Lagging adopters : Tradition bound – they are suspicious of change and adopt the innovation only when it has become something of a tradition itself. 59

Influence of product characteristics on rate of adoption Relative advantage : The degree to which the innovation appears superior to existing products. Compatibility : The degree to which the innovation fits the values and experiences of potential consumers. Complexity : The degree to which the innovation is difficult to understand or use. Divisibility : The degree to which the innovation may be tried on a limited basis. Communicability : The degree to which the results of using the innovation can be observed or described to others. Ongoing costs Risk and uncertainty Social approval 60

Business markets and business buyer behavior Chapter 6 61

Business buyer behavior This refers to the buying behavior of the organizations that buy the goods and services for use in the production of other products and services that are then sold, rented or supplied to others. It also includes the behavior of retailing and wholesaling, firms that acquire goods to resell or rent them to others at a profit. 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-to-business (B2B) marketers must understand business markets and business buyer behavior in order to build profitable relationships by creating superior customer value with business customers. 62

Features of business markets Market structure and demand : Business marketer normally deals with far fewer but far larger buyers than the consumer marketer. In large business markets, a few buyers often account for most of the purchasing. Business demand is derived demand , i.e., it ultimately derives from the demand for consumer goods. Many business markets have inelastic and more fluctuating demand, i.e., the total demand for many business products is not much affected by changes in price, especially in the short run. Moreover, demand for many business goods and services tends to change more and more quickly than does the demand for consumer goods and services, i.e., a small percentage increase in consumer demand can cause large increases in business demand. Nature of the buying unit : A business purchase usually involves more decision participants and a more professional purchasing effort. Buying committees composed of technical experts and top management are common in the buying of major goods. B2B marketers now face a new breed of higher-level, better trained supply managers. Therefore, companies must have well-trained marketers and salespeople to deal with these well-trained buyers. Types of decisions and the decision process : Business buyers usually face more complex buying decisions – often involving large sums of money, complex technical and economic considerations and interactions among people at many levels of the buyer’s organization. The business buying process also tends to be longer and more formalized. Large business purchases usually call for detailed product specifications, written purchase orders, careful supplier searchers and formal approval. Finally, the buyer and seller are often much more dependent on each other. Supplier development : Systematic development of networks of supplier-partners to ensure an appropriate and dependable supply of products and materials for use in making products or reselling them to others. 63

Model of business buyer behavior The environment: Marketing stimuli: product, price, place, promotion Other stimuli: economic, technological, political, cultural, competitive Buying organization: Buying center Buying decision process Influenced by interpersonal, individual, organizational factors Buyer responses: Product or service choice Supplier choice Order quantities Delivery terms and times Service terms Payment This model raises 4 important questions: What are the major types of buying situations? Who are the participants in the business buying process? What are the major influences on business buyers? What is the business buying process? 64

Types of buying situations Straight rebuy : The buyer routinely reorders something without any modifications. Modified rebuy : The buyer wants to modify product specifications, prices, terms or suppliers. New task : The buyer purchases a product/service for the first time. Systems selling/solutions selling : Buying a packaged solution to a problem from a single seller, thus avoiding all the separate decisions involved in a complex buying situation. 65

Participants in the business buying process Buying center : The decision-making unit of a buying organization. It consists of all the individuals and units that play a role in the business purchase decision-making process. The buying center includes all members of the organization who play any of the five roles in the purchase decision process: Users : Members of the buying organization who will actually use the product/service. Influencers : People in an organization’s buying center who affect the buying decision; they often help define specifications and also provide information for evaluating alternatives. Buyers : People in an organization’s buying center who make an actual purchase. Deciders : People in an organization’s buying center who have formal or informal power to select or approve the final suppliers. Gatekeepers : People in an organization’s buying center who control the flow of information to others. The buying center is not a fixed and formally identified unit within the buying organization. It is a set of buying roles assumed by different people for different purchases. Within the organization, the size and makeup of the buying center will vary for different products and for different buying situations. The buying center concept presents a major marketing challenge. The business marketer must learn who participates in the decision, each participant’s relative influence and what evaluation criteria each decision participant uses. 66

Major influences on business buyers Environmental factors : the economy, supply conditions, technology, politics/regulation, competition, culture and customs Organizational factors : objectives, strategies, structure, systems, procedures Interpersonal factors : influence, expertise, authority, dynamics Individual factors : age/education, job position, motives, personality, preferences, buying style 67

Business buying process Problem recognition : Company recognizes a problem or need that can be met by acquiring a good or a service. Problem recognition can result from internal or externa stimuli. General needs description : A buyer describes the general characteristics and quantity of a needed item. Product specification : Buying organization decides on and specifies the best technical product characteristics for a needed item. Supplier search : Buyer tries to find the best vendors. Proposal solicitation : Buyer invites qualified suppliers to submit proposals. Supplier selection : Buyer reviews proposals and selects a supplier or suppliers. Order-routine specification : Buyer writes the final order with the chosen supplier(s), listing the technical specifications, quantity needed, expected time of delivery, return policies and warranties. Performance review : Buyer assesses the performance of the supplier and decides to continue, modify or drop the arrangement. 68

E-procurement: Buying on the internet E-procurement : Purchasing through electronic connections between buyers and sellers – usually online. It gives buyers access to new suppliers; lowers purchasing costs and hastens order processing and delivery. In turn, business marketers can connect with customers online to share marketing information, sell products and services, provide customer support services and maintain ongoing customer relationships. Companies can do e-procurement in the following ways: Conduct reverse auctions , in which they put their purchasing requests online and invite suppliers to bid for the business Engage in online trading exchanges , through which companies work collectively to facilitate the trading process Setting up own company buying sites Create extranet links with key suppliers Benefits of e-procurement : Cuts transaction costs and results in more efficient purchasing for both buyers and suppliers Reduces the time between order and delivery Eliminates paperwork associated with traditional requisition and ordering procedures and helps an organization keep better track of all purchases Drawbacks of e-procurement : Erode customer-relationships Supplier-supplier enmity Potential security concerns 69

Institutional and Government markets Institutional market consists of schools, hospitals, nursing homes, prisons and other institutions that provide goods and services to people in their care. Many institutional markets are characterized by low budgets and captive patrons. Government market – federal, state and local – purchase or rent goods and services for carrying out the main functions of government. Government buyers purchase products and services for defense, education, public welfare, etc. Government buying practices are highly specialized and specified, with open bidding or negotiated contracts characterizing most of the buying. 70

Customer-driven marketing strategy: Creating value for target customers Chapter 7 71

4 major steps in designing a customer-driven marketing strategy In the first two steps, the company selects the customers that it will serve: Market segmentation : This involves dividing the market into smaller segments of buyers with distinct needs, characteristics or behaviors that might require separate marketing strategies or mixes. The company identifies different ways to segment the market and develops profiles of the resulting market segments. Market targeting ( targeting ): It consists of evaluating each market segment’s attractiveness and selecting one or more market segments to enter. In the final two steps, the company decides on a value proposition – how it will create value for target customers: Differentiation : This involves actually differentiating the firm’s market offering to create superior customer value. Positioning : This consists of arranging for a market offering to occupy a clear, distinctive and desirable place relative to competing products in the minds of target consumers. 72

Market segmentation Buyers in any market differ in their wants, resources, locations, buying attitudes and buying practices. Through segmentation, companies divide large heterogeneous markets into smaller segments that can be reached more efficiently and effectively with products and services that match their unique needs. Marketers rarely limit their segmentation analysis to only one or a few variables. Rather, they use multiple segmentation bases in an effort to identify smaller, better-defined target groups. One of the leading segmentation systems is the Nielsen PRIZM system . Segmenting consumer markets : Geographic segmentation : Dividing the market into different geographical units, such as nations, states, regions, counties, cities or even neighborhoods. A company may decide to operate in one or few geographical areas or operate in all areas but pay attention to geographical differences in needs and wants. Many companies today are localizing their products, ads, promotion and sales efforts to fit the needs of individual regions, cities and neighborhoods. Demographic segmentation : Dividing the market into segments based on variables such as age, life-cycle stage, gender, income, occupation, education, religion, ethnicity and generation. Demographic factors are the most popular bases for segmenting customer groups. Psychographic segmentation : Dividing the market into different segments based on social class, lifestyle or personality characteristics. Behavioral segmentation : Dividing the market into segments based on consumer knowledge, attitudes, uses or responses to a product. 73

Market segmentation (cont.) Segmenting business markets : Business buyers can be segmented geographically, demographically (industry, company, size) or by benefits sought, user status, usage rate and loyalty status. Additional variables include customer operating characteristics, purchasing approaches, situational factors and personal characteristics. Segmenting international markets : Companies can segment international markets using one or a combination of several variables: They can segment by geographic location – grouping countries by regions such as Western Europe, Pacific Rim, Middle East or Africa. Geographic segmentation assumes that nations close to one another will have many common traits and behaviors. World markets can also be segmented based on economic factors . Countries might be grouped by population income levels or by their overall level of economic development. A country’s economic structure shapes its population’s product and service needs and therefore, the marketing opportunities it offers. 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 amount of bureaucracy. Cultural factors can also be used for grouping markets according to common languages, religions, values and attitudes, customs and behavioral patterns. With the use of intermarket segmentation/cross-market segmentation , marketers form segments of consumers who have similar needs and buying behaviors even though they are located in different countries. 74

Market segmentation (cont.) Requirements for effective segmentation : Measurable : The size, purchasing power and profiles of the segments can be measured. Accessible : The market segments can be effectively reached and served. Substantial : The market segments are large or profitable enough to serve. Differentiable : The segments are conceptually distinguishable and respond differently to different marketing mix elements and programs. Actionable : Effective programs can be designed for attracting and serving the segments. 75

Market targeting E valuating market segments : In evaluating different market segments, a firm must look at 3 factors: Segment size and growth : A company wants to select segments that have the right size and growth characteristics. Segment structural attractiveness : Company also needs to examine major structural factors that affect long-run segment attractiveness. Eg: segments with too many strong competitors or low entry barriers; existence of many substitute products which may limit profitability; bargaining power of buyers stronger relative to seller which may limit profitability; powerful suppliers controlling prices/reducing quality or quantity of ordered goods and services. Company objectives and resources : Even if a segment has the right size and growth and is structurally attractive, the company must consider its own objectives and resources. Selecting target market segments : The company must decide which and how many segments it will target. Market targeting can be carried out at several different levels as follows: Undifferentiated marketing : Also known as mass marketing strategy, the firm decides to target the whole market with one offer disregarding market segment differences. Differentiated marketing : Also known as segmented marketing strategy, the firm decides to target several market segments and designs separate offers for each. Concentrated marketing : Also known as niche marketing strategy, the firm goes after a large share of one or a few smaller segments or niches rather than going after a small share of a large market. Micromarketing : This is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. Micromarketing includes local marketing (involves tailoring brands and promotions to the needs and wants of local customers groups such as cities, neighborhoods, even specific stores) and individual marketing/one-to-one marketing/mass customization (tailoring products and marketing programs to the needs and preferences of individual customers). 76

Market targeting Choosing a targeting strategy : Companies need to consider many factors when choosing a market-targeting strategy: Company resources : when resources are limited, go for concentrated marketing. Product variability : undifferentiated marketing works best for uniform products whereas differentiation/concentration marketing works best when products vary in design. Product life-cycle stages : when a firm introduces a new product, it may be practical to launch only one version (undifferentiated/concentrated marketing will be more appropriate in this case) but during maturity stage, a differentiated strategy will be more appropriate. Market variability : if buyers have same tastes, buy the same amounts and react the same way to marketing efforts, then go for undifferentiated marketing. Competitors’ marketing strategies : when the competition uses differentiation/concentration marketing, undifferentiated marketing can be suicidal. On the other hand, when the competition uses undifferentiated marketing, a firm can gain an advantage by using differentiated/concentrated marketing. Socially responsible target marketing : In target marketing, the issue is not really WHO is targeted but rather HOW and for WHAT. Controversies arise when marketers attempt to profit at the expense of targeted segments – 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. 77

Differentiation and Positioning Consumers, in order to simplify their buying process, they organize products, services and companies into categories and position them in their minds. A product ’s position is the complex set of perceptions, impressions and feelings that consumers have for the product compared with competing products. Therefore, marketers must plan positions that will give their products the greatest advantage in selected target markets, and they must design marketing mixes to create these planned positions. Positioning maps : In planning their differentiation and positioning strategies, marketers often prepare these maps which consumer perceptions of their brands versus competing products on some important buying dimensions. 3 steps involved in differentiation and positioning : Identifying a set of differentiating competitive advantages on which to build a position Choosing the right competitive advantages Selecting an overall positioning strategy 78

Identifying a set of differentiating competitive advantages on which to build a position Product differentiation : brands can differentiate on features, performance, style and design. Service differentiation : speedy, convenient and careful delivery; high quality customer care. Channel differentiation : competitive advantage can be gained by designing the channel’s coverage, expertise and performance. People differentiation : hiring and training better people than the competition. Image differentiation : a company or brand image should convey a product’s distinctive benefits and positioning; the chosen symbols or characters or other image elements must be communicated through advertising that conveys the company’s or brand’s personality. 79

Choosing the right competitive advantages How many differences to promote : Some argue that a company should develop a unique selling point (USP) for each brand and stick to it – each brand should pick an attribute and tout itself as the number one brand on that attribute as buyers tend to remember number one more easily. Others think companies should position themselves on more than one differentiator. This may be necessary if two or more firms are claiming to be the best on that same attribute. Which differences to promote : A difference is worth establishing to the extent that it satisfies the following criteria: Important : the difference delivers a highly valued benefit to target buyers Distinctive : competitors cannot offer this difference Superior : the difference is superior to the other ways that customers might obtain the same benefit Communicable : the difference is communicable and visible to buyers Preemptive : competitors cannot easily copy the difference Affordable : buyer can afford to pay for the difference Profitable : the company can introduce the difference profitably 80

Selecting an overall positioning strategy The full positioning of a brand is called the brand’s value proposition – the full mix of benefits on which a brand is differentiated and positioned. Each brand must adopt a positioning strategy designed to serve the needs and wants of its target markets. Possible value propositions : More for more : This positioning involves providing the most upscale product/service and charging a higher price to cover the higher costs. This market offering not only offers high quality, it also gives prestige to the buyer. Eg: Four Seasons hotels, Rolex watches, Mercedes automobiles, etc. More for the same : Companies can attack a competitor’s more-for-more positioning by introducing a brand offering comparable quality at a lower price. Eg: Toyota’s Lexus versus Mercedes and BMW. Same for less : Companies offer many of the same brands as department stores and specialty stores but at deep discounts based on superior purchasing power and lower-cost operations. Eg: Walmart, Best Buy, Amazon.com, etc. Less for much less : This involves meeting consumers’ lower performance or equality requirements at a much lower price. Eg: Holiday Inn, Costco, etc. More for less : The winning value proposition would be to offer more for less, especially in the short run. However, in the long run, it becomes difficult to offer more as it becomes costly, and companies may eventually lose out to more focused competitors. 81

Developing a positioning statement & Communicating and Delivering the Chosen Position Company and brand positioning should be summed up in a positioning statement . Eg: “To busy multitaskers who need help remembering things, Evernote is a digital content management application that makes it easy to capture and remember moments and ideas from your everyday life using your computer, phone, tablet and the web.” Format for positioning statement : To (target segment and need) our (brand) is (concept) that (point of difference). Once the company has fixed its position, it must take strong steps to deliver and communicate the desired position to its target consumers. All the company’s marketing mix efforts must support the positioning strategy. It must also closely monitor and adapt the position over time to match changes in consumer needs and competitors’ strategies. Furthermore, a product’s position should evolve gradually as it adapts to the ever-changing marketing environment. 82

Products, Services and Brands: Building Customer Value Chapter 8 83

Product Product is anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. Products include more than just tangible objects. Broadly defined, products also include services, events, persons, places, organizations, ideas or a combination of these. Services are a form of product that consists of activities, benefits or satisfactions offered for sale that are essentially intangible and do not result in the ownership of anything. Eg: banking, hotel, airline travel, retail, wireless communication, etc. Products are a key element in the overall market offering. Marketing mix planning begins with building an offering that brings value to target customers. This offering becomes the basis on which the company builds profitable customer relationships. A company’s marketing offering often includes both tangible goods and services. At one end, the market offering may consist of a pure tangible good (soap, toothpaste, salt) and at the other end, are pure services for which the market offer consists primarily of a service. Eg: doctor’s exam, financial services, etc. To differentiate their offers, beyond simply making products and delivering services, they are creating and managing customer experiences with their brands or company. Companies that market experiences realize that customers are really buying much more than just products and services. They are buying what those offers will do for them. 84

Levels of product and services Product planners need to think about products and services on 3 levels. Each level adds more customer value. Core customer value : This is the most basic level which addresses the question ‘What is the buyer really buying?’. When designing products, marketers must first define the core, problem-solving benefits or services that consumers seek. Actual product : Product planners need to develop product and service features, a design, a quality level, a brand name and packaging. Augmented product : Product planners must build an augmented product around the core benefit and actual product by offering additional consumer services and benefits. Eg: delivery and credit, product support, aftersales service, warranty, etc. 85

Product and service classifications Products and service fall into 2 broad classes based on types of consumers that use them: Consumer products and Industrial products Consumer products are products and services bought by final consumers for personal consumption. There are 4 types of consumer products: Convenience products are consumer products and services that customer usually buy frequently, immediately and with minimal comparison and buying effort. Eg: laundry detergent, candy, magazines, fast food, etc. Convenience products are usually low priced, and marketers place them in many locations to make them readily available. Shopping products are less frequently purchased consumer products and services that customer compare carefully on suitability, quality, price and style. When buying shopping products and services, consumers spend much time and effort in gathering information and making comparisons. Eg: clothing, furniture, used cards, major appliances, etc. Shopping product marketers usually distribute their products through fewer outlets but provide deeper sales support. Specialty products are consumer products and services with unique characteristics or brand identification for which a significant group of buyers is willing to make a special purchase effort. Eg: specific car brands, designer clothes, gourmet foods, etc. Buyers normally do not compare specialty products; rather they invest only the time needed to reach dealers carrying the wanted products. Unsought products are consumer products that the consumer either does not know about or knows about but does not normally consider buying. Eg: life insurance, blood donations, etc. By their very nature, unsought products require a lot of advertising, personal selling and other marketing efforts. Industrial products are those products purchased for further processing or for use in conducting a business. There are 3 groups of industrial products: Materials and parts include raw materials as well as manufactured materials and parts. These products are sold directly to industrial users. Price and service are the major marketing factors; branding and advertising tend to be less important. Capital items aid the buyer’s production or operations, including installations and accessory equipment. Suppliers and services consist of operating supplies, repair and maintenance items, business advisory services, etc. 86

Organizations, persons, places and ideas Organization marketing consists of activities undertaken to create, maintain or change the attitudes and behavior of target consumers toward an organization. Person marketing consists of activities undertaken to create, maintain or change attitudes or behavior toward particular people. People ranging from presidents, entertainers, sports figures, professionals, etc. Place marketing involves activities undertaken to create, maintain or change attitudes or behavior toward particular places. Cities, states, regions and even entire nations compete to attract tourists, new residents, conventions and company offices and factories. Social marketing (ideas) can be 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. Social advertising campaigns involve issues ranging from healthcare, education, environmental sustainability to human rights and personal safety. 87

Product and service decisions Marketers make product and service decisions at 3 levels: Individual product decisions Product line decisions Product mix decisions 88

Individual product and service decisions Product and service attributes : Product quality has 2 dimensions: performance quality (the product’s ability to perform its functions) and conformance quality (freedom from defects and consistency in delivering a targeted level of performance). Product features: How can a company identify new features and decide which ones to add to its product? It should periodically survey buyers who have used the product and ask questions like ‘Which specific features of the product do you like the most?’, ‘Which features could we add to improve the product?’. The answers to these questions provide the company with a list of feature ideas. The company can then assess each feature’s value to customers versus its cost to the company. Features that customers value highly in relations to costs should be added. Product style and design: Style simply describes the appearance of a product. Design contributes to a product’s usefulness as well as its looks. Design begins with observing customers, deeply understanding their needs and shaping their product use experience. Branding : 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 brand as an important part of a product and branding can add value to a consumer’s purchase. Customers attach meanings to brand and develop brand relationships. As a result, brand have meaning well beyond a product’s physical attributes. Packaging : This involves designing and producing the container or wrapper for a product. Packaging has become an important marketing tool – increased competition and clutter on retail store shelves means that packages must now perform many sales tasks, i.e., from attracting buyers to communicating brand positioning to closing the sale. Labeling : Labels range from simple tags attached to products to complex graphics that are part of the packaging. They perform several functions from identifying the product or brand to describing several things about the product – who made it, where it was made, when it was made, its contents, how it is to be used to helping promote the brand, supporting its positioning and connecting with customers. Product support services : These are an important part of the customer’s overall brand experience. The first step in designing support services is to survey customers periodically to assess the value of current services and obtain ideas for new ones. Once the company has assessed the quality of various support services, it can take steps to fix problems and add new services that will both delight customers and yield profits to the company. 89

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. Eg : Nike produces several lines of athletic shoes and apparel. The major product line decision involves product line length – 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 Managers need to analyze their product lines periodically to assess each item’s sales and profits and understand how each item contributes to the line’s overall performance A company can expand its product line in 2 ways: Product line filling involves adding more items within present range of the line. Reasons for product line filling includes reaching for extra profits, satisfying dealers, using excess capacity, being the leading full-line company and plugging holes to keep out the competition. However, if line filling is overdone, it results in cannibalization and customer confusion. Product line stretching occurs when a company lengthens its product line beyond its current range. The company can stretch its line downward, upward or both ways. A company may stretch downward to plug a market hole that otherwise would attract new competition or respond to a competitor’s attack, or it may add low-end products because it finds faster growth taking place in low-end segments. Companies can also stretch their product lines upward to add prestige to their current products or they may be attracted by a faster growth rate or higher margins at the higher end. 90

Product mix decisions An organization with several product lines has a product mix. A product mix or product portfolio consists of all the product lines and items that a particular seller offers for sale. Eg: Campbell Soup Company’s product mix consists of three major product lines: healthy beverages, baked snacks and simple meals. A company’s product mix has 4 important dimensions : Product mix width refers to the number of different product lines the company carries. Product mix length refers to the total number of items a company carries within its product lines. Product mix depth refers to the number of versions offered for 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, etc. These product mix dimensions provide the handles for defining the company’s product strategy. The company can increase its business in 4 ways: It can add new product lines, widening its product mix It lengthen its existing product lines to become a more full-line company It can add more versions of each product and thus deepen its product mix 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 91

Services marketing 4 characteristics of service : Intangibility : services cannot be seen, tasted, felt, heard or smelled before purchase Variability : quality of services depends on who provides them and when, where and how Inseparability : services cannot be separated from their providers Perishability : services cannot be stored for later sale or use Service profit chain : In a service business, the customer and front-line service employees interact to co-create the service. Effective interaction depends on the skills of the front-line service employees and on the support-processes backing these employees. Successful companies understand the service profit chain, which links service firm profits with employee and customer satisfaction. The chain consists of five links: Internal service quality : superior employee selection and training, a quality work environment and strong support for those dealing with customers which results in… Satisfied and productive service employees : more satisfied, loyal and hardworking employees which results in… Greater service value : more effective and efficient customer value creation and service delivery which results in… Satisfied and loyal customers : satisfied customers who remain loyal, make repeat purchases and refer other customers which results in… Healthy service profits and growth : superior service firm performance. 3 types of service marketing : Traditional external marketing using the 4Ps Internal marketing : orienting and motivating customer contact employees and supporting service employees to work as a team to provide customer satisfaction Interactive marketing : training service employees in the fine art of interacting with customers to satisfy their needs 92

Tasks of service marketing Managing service differentiation : The solution to price competition is to develop a differentiated offer, delivery and image. Offer : innovative features that set one company’s offer apart from competitor’s offers. Delivery : having more able and reliable customer-contact people, developing a superior physical environment in which the service product is delivered or designing a superior delivery process. Images : symbols and branding Managing service quality : Service providers need to identify what target customers expect in regard to service quality, as service quality is harder to define and judge unlike product quality. Customer retention is a good measure of quality; a service firm’s ability to hang onto its customers depends on how consistently it delivers value to them. Top service firms set high-quality standards; they watch service performance closely, both their own and that of the competition. Sometimes even the best companies may have variations in their service quality which may upset their customers, thus they should always opt for a quick service recovery. Managing service productivity : With costs rising rapidly, service firms are under great pressure to increase service productivity. They increase productivity through training/hiring skilled employees, increasing the quantity of their service by giving up some quality or harness the power of technology. Still companies must avoid pushing productivity so hard that doing so reduces quality – attempts to streamline a service or cut costs can make a service company more efficient in the short run but that can also reduce its longer-run ability to innovate, maintain service quality or respond to consumer needs and desires. In attempting to improve service productivity, companies must be mindful of how they create and deliver customer value. 93

Brand equity A powerful brand has high brand equity. Brand equity is the differential effect that knowing the brand name has on customer response to the product and its marketing. It is a measure of the brands ability to capture consumer preference and loyalty. A brand has a positive brand equity when consumers react more favorably to it than a generic/unbranded version of the same product It has negative brand equity if consumers react less favorably than to an unbranded version Ad agency Young & Rubicam’s BrandAsset Valuator measures brand strength along 4 consumer perception dimensions: Differentiation : what makes the brand stand out Relevance : how consumers feel it meets their needs Knowledge : how consumers know about the brand Esteem : how highly consumers regard and respect the brand A brand with high brand equity is a very valuable asset. Brand valuation is the process of estimating the total financial value of a brand. High brand equity provides a company with many competitive advantages: High level of consumer brand awareness and loyalty Since consumers expect stores to carry that particular brand, the company has more leverage in bargaining with resellers And because brand name carries high credibility, the company can more easily launch line and brand extensions Lastly, a powerful brand offers the company some defense against fierce price competition The fundamental asset underlying brand equity is customer equity – the value of customer relationships that the brand creates. The proper focus of marketing is building customer equity with brand management serving as a major marketing tool. 94

Major brand strategy decisions Brand positioning Brand name selection Brand sponsorship Brand development 95

Brand positioning Marketers position brands in the minds of their target customers in any of the following 3 levels: Product attributes : Generally, attributes are the least desirable level for brand positioning as competitors can easily copy attributes and more importantly, customers are not interested in attributes as such, rather they are interested in what the attributes will do for them. Benefit : Desirable benefits such as guaranteed on-time delivery, performance, quality, low prices, etc. Beliefs and values : Engaging customers on a deep, emotional level. When positioning a brand, the marketer should establish a mission for the brand and a vision of what the 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 buyers. 96

Brand name selection Desirable qualities for a brand name include: It should suggest something about the product’s benefits and qualities It should be easy to pronounce, recognize and remember The brand name should be distinctive It should be extendable The name should translate easily into foreign languages It should be capable of registration and legal protection Once brand name is chosen, it should be protected. In order to protect the brand, marketers present them carefully using the word brand and the registered trademark symbol. 97

Brand sponsorship A manufacturer has 4 sponsorship options: Launch product as a national/manufacturer’s brand Sell to resellers who then give the product a private brand/store brand/distributor brand Market licensed brands Join forces with another company to co-brand a product 98

Brand development A company has 4 choices when it comes to developing brands: Line extensions : These occur when a company extends existing brand names to new forms, colors, sizes, ingredients or flavors of an existing product category. A company might introduce line extensions as a low-cost, low-risk way to introduce new products or it might want to meet consumer desires for variety, use excess capacity or simply command more shelf space from resellers. However, line extensions involve some risks such as overextended brand name might cause consumer confusion or lose some if its specific meaning. Eg: Cheerios line of cereals includes Honey Nut, Frosted, Yogurt Burst, MultiGrain , etc. Brand extensions : This extends a current brand name to new or modified products in a new category. A brand extension give a new product instant recognition and faster acceptance. It also saves the high advertising costs usually required to build a new brand name. However, brand extensions also poses some risks, i.e., it may confuse the image of the main brand or if a brand extension fails, it may harm consumer attitudes toward other products carrying the same brand name. Eg: Kellogg’s has extended its Special K cereal brand into a full line of cereals plus lines of crackers, snack and nutrition bars, breakfast shakes, etc. Multibrands : This offers a way to establish different features that appeal to different customer segments, lock up more reseller shelf space and capture a larger market share. A drawback of multibrands is that each brand might obtain only a small market share, and none may be very profitable. Eg: PepsiCo’s many brands of beverages competing with one another on supermarket shelves – the combined brands reap much greater overall market share than any single brand ever could. New brands : A company might believe that the power of its existing brand name is waning, so a new brand name is needed, or it may create a new brand name when it enters a new product category for which none of its current brand names are appropriate. Eg: Toyota created the Lexus brand aimed at luxury car consumers and Scion brand for millennial consumers. 99

Managing brands Companies must manage their brands carefully. First, the brand’s positioning must be continuously communicated to consumers . Brand marketers often spend huge amounts on advertising to create brand awareness and build preference and loyalty. Such ad campaigns can help create name recognition, brand knowledge, brand preference. However, brands are not maintained by advertising but by the customers’ brand experiences . Today, customers come to know a brand through a wide range of contacts and touchpoints. The company must put as much care into managing these touchpoints as it does into producing its ads. The brand’s positioning will not take hold fully unless everyone in the company lives the brand. Thus, the company needs to be customer-centric . Many companies go even further to train and encourage their distributors and dealers to serve their customers well. Finally, companies need to periodically audit their brand’s strengths and weaknesses . The brand audit may turn up brands that need more support, brands that need to be dropped or brands that must be rebranded or repositioned because of changing customer preferences or new competitors. They should ask the following questions: Does our brand excel at delivering benefits that consumers truly value Is the brand properly positioned Do all our consumer touchpoints support the brand’s positioning Do brand managers understand the meaning of the brand to the customers Does the brand receive proper, sustained support 100

New product development and product life-cycle strategies Chapter 9 101

New-product development strategy A firm can obtain new products in 2 ways: Acquisition – by buying a whole company, a patent or a license to produce someone else’s product Firm’s own new product development efforts New products mean original products, product improvements, product modifications and new brands that the firm develops through its own R&D efforts. Why do so many new products fail: Regardless of being a good idea, company may overestimate the market size Actual product may be poorly designed or incorrectly positioned , launched at the wrong time , priced too high or poorly advertised High-level executive might push a favorite idea despite poor marketing research findings Costs of product development higher than expected Competitors fight back harder than expected To create successful new products, a company must understand its consumers, markets and competitors and develop products that deliver superior value to customers. 102

New -product development process Idea generation : This is the systematic search for new product ideas. Major sources of ideas include: Internal idea sources : formal R&D as well as gathering ideas from the company’s own people – from executives to salespeople to scientists, engineers and manufacturing staff External idea sources : Distributors and suppliers, competitors, customers, government agencies, advertising agencies, marketing research firms, etc. Crowdsourcing involves inviting broad communities of people – customers, employees, independent scientists and researchers and even the public at large – into the new-product innovation process. Idea screening : Screening new-product ideas to spot good ideas and drop poor ones as soon as possible. Best approach is the RWW screening framework which asks the following questions. The company should be able to answer yes to all the 3 questions before developing the new-product idea further. Is it REAL ? : Is there a real need and desire for the product and will customers buy it? Is there a clear product concept and will such a product satisfy the market? Can we WIN? : Does the product offer a sustainable competitive advantage? Does the company have the resources to make such a product a success? Is it WORTH DOING? : Does the product fit the company’s overall growth strategy? Does it offer sufficient profit potential? Concept development and testing : An attractive idea must then be developed into a product concept. Note : It is important to distinguish between a product idea (an idea for a possible product that the company can see itself offering to the market), product concept (a detailed version of the new-product idea stated in meaning consumer terms) and a product image (the way consumers perceive an actual/potential product). The marketer’s task is to develop the new-product into alternative product concepts, find out how attractive each concept is to the customers and choose the best one. Concept testing : This calls for testing new-product concepts with groups of target consumers to find out if the concepts have stronger consumer appeal. 103

New -product development process (cont.) Marketing strategy development involves designing an initial marketing strategy for a new product based on the product concept. The marketing strategy statement consists of 3 parts: The first part describes the target market, the planned value proposition and the sales, market share and profit goals for the first few years The second part of the marketing strategy statement outlines the product’s planned price, distribution and marketing budget for the first year The third part of the marketing strategy statement describes the planned long-run sales, profit goals and marketing mix strategy 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. If they do, the product can move to the product development stage. To estimate sales, the company might look at sales history of similar products and conduct market surveys – it can then estimate the minimum and maximum sales to assess the range of risk After preparing the sales forecast, management can estimate the expected costs and profits for the product including marketing, R&D, operations, accounting and finance costs. The company then uses the sales and costs figures to analyze the new product’s financial attractiveness Product development : This involves developing the product concept into a physical product to ensure that the product idea can be turned into a workable market offering. Test marketing : This is the stage of new-product development in which the product and its proposed marketing program are tested in realistic market settings. It lets the company test the product and its entire marketing program – targeting and positioning strategy, advertising, distribution, pricing, branding and packaging and budget levels. As an alternative to costly test markets, companies can use controlled test markets (new products and tactics are tested among controlled panels of shoppers and stores) or simulated test markets (researchers measure consumer responses to new products and marketing tactics in library stores or simulated online shopping environment). Both these test markets reduce the costs of test marketing and speed up the process. Commercialization : Introducing anew product into the market. A company launching a new product must first decide on introduction timing Next, the company must decide where to launch the new product – in a single location, a region, national market or international market 104

Managing new-product development Customer-centered new-product development : This focuses on finding new ways to solve customer problems and create more customer-satisfying experiences. Team-based new-product development : In this approach, company departments work closely together in cross-functional teams, overlapping the steps in the product development process to save time and increase effectiveness, in order to get their new products to market more quickly. Systematic new-product development : New-product development process should be holistic and systematic rather than compartmentalized and haphazard. To prevent ideas from being generated, a company can install an innovation management system to collect, review, evaluate and manage new-product ideas. This system approach yields 2 favorable outcomes: It helps create an innovation-oriented company culture, i.e., it shows that top management supports, encourages and rewards innovation It will yield a larger number of new product ideas – which will be more systematically developed, producing more new-product successes Note : Tough times call for greater new-product development, as the company struggles to better align its market offerings with changing consumer needs and tastes. In difficult times, innovation more often helps in making the company more competitive and positioning it better for the future. 105

Product life-cycle (PLC) PLC is the course that a product’s sales and profits take over its lifetime. The PLC has 5 distinct stages: Product development : This begins when the company finds and develops a new-product idea. During product development, sales are zero and the company’s investment costs mount. Introduction : This is a period of slow sales growth as the product is introduced in the market. Profits are nonexistent in this stage because of the heavy expenses of product introduction. Growth : It is a period of rapid market acceptance and increasing profits. Maturity : It is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off/decline because of the increased marketing outlays to defend the product against competition. Decline : It is the period when sales fall off and profits drop. Note: Not all products follow these 5 stages of the PLC. Some products are introduced and die quickly; others stay in the maturity stage for a long time. Some enter the decline stage and are then cycled back to the growth stage through strong promotion/repositioning PLC concept can describe: A product class (gasoline powered automobiles): Product classes have the longest life cycles; sales of many product classes stay in the maturity stage for a long time A product form (SUVs): They tend to have the standard PLC shape starting from introduction to decline A brand (Ford Escape): A specific brand’s life cycle can change quickly because of changing competitive attacks and responses. PLC concept can also be applied to: Style : It is a basic and distinctive mode of expression. Styles can appear in homes, clothing and art. Once style is invented, it may last for generations. A style has a cycle showing serval periods of renewed interest. Fashion : It is a currently accepted or popular style in a given field. Fashions tend to grow slowly, remain popular for a while and then decline slowly. Fad : These are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity. 106

Summary of PLC Characteristics, Objectives & Strategies Introduction Growth Maturity Decline Characteristics Sales Low sales Rapidly rising sales Peak sales Declining sales Costs High cost/customer Average cost/customer Low cost/customer Low cost/customer Profits Negative Rising profits High profits Declining profits Customers Innovators Early adopters Middle majority Laggards Competitors Few Growing number Stable number, beginning to decline Declining number Marketing objectives Create product awareness and trial Maximize market share Maximize profit while defending market share Reduce expenditure and milk the brand Strategies Product Offer a basic product Offer product extensions, service and warranty Diversify brand and models Phase out weak items Price Use cost-plus Price to penetrate market Price to match or beat competitors Cut price Distribution Build selective distribution Build intensive distribution Build more intensive distribution Go selective: phase out unprofitable outlets Advertising Build product awareness among early adopters and dealers Build awareness and interest in the mass market Stress brand differences and benefits Reduce to level needed to retain hard-core loyals Sales promotion Use heavy sales promotion to entice trial Reduce to take advantage of heavy consumer demand Increase to encourage brand switching Reduce to minimal level 107

Pricing: Understanding and capturing customer value Chapter 10 108

What is Price In the narrowest sense, price is the amount of money charged for a product/service . In the broadest sense, it is the sum of all the values that customers give up to gain the benefits of having or using a product/service. Price remains one of the most important elements that determines a firm’s market share and profitability. Price is the only element in the marketing mix that produces revenue ; all other elements represent costs. Price is also one of the most flexible marketing mix elements as prices can be changed quickly. The price the company charges will fall somewhere between one that is too low to produce a profit and one that is too high to produce any demand : Customer perceptions of the product’s value set the ceiling for prices – if customers perceive that the product’s price is greather than its value, they will not buy the product Likewise, product costs set the floor for prices – if the company prices the product below its costs, the company’s profits will suffer In setting its price between these 2 extremes, the company must also consider several external and internal factors like the competitors’ strategies and prices , the overall marketing strategy and mix as well as the nature of the market and demand . 109

Major pricing strategies Customer value-based pricing Cost-based pricing Competition-based pricing 110

Customer value-based pricing Customer value-based pricing uses buyers’ perceptions of value as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set the price, rather the price is considered along with all other marketing mix variables before the marketing program is set. Process of customer value-based pricing : Company first assesses customer needs and value perceptions Then it sets its target price based on customer perceptions of value The targeted value and price drive decisions about what costs be incurred and the resulting product design As a result, pricing starts with analyzing consumer needs and value perceptions and the price is set to match the perceived value 2 types of customer value-based pricing : Good-value pricing : This involves offering 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. In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for less. An important type of good-value pricing is everyday low pricing (EDLP) which involves charging a constant, everyday low price with few or no temporary price discounts like Costco and Walmart. In contrast, high-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items like Macy’s and Kohl’s. Value-added pricing : This involves attaching value-added features and services to differentiate their offers and thus support their higher prices. 111

Cost-based pricing Cost-based pricing involves setting prices based on the costs of producing, distributing and selling the product plus a fair rate of return for its effort and risk. Types of costs : Fixed costs /overhead costs do not vary with production or sales level. Eg: rent, heat, interest, executive salaries, etc. Variable costs vary directly with the level of production. Total costs is the summation of both fixed and variable costs for any given level of production. Management wants to charge a price that will at least cover the total production costs at a given level of production. Experience/learning curve : It is a drop in the average per unit production cost that comes with accumulated production experience. Risks involved in experience-curve pricing : Aggressive pricing may give the product a cheap image The strategy also assumes that the competition is weak and not willing to fight it out by meeting the company’s price cuts As the company is building volume under one technology, a competitor may find a lower-cost technology that lets it start at prices lower than those of the market leader, which still operates on the old experience curve 112

Cost-based pricing (cont.) Cost-plus pricing/markup pricing : This involves adding a standard markup to the cost of the product. Lawyers, accountants, other professionals typically price by adding a standard markup to their costs. Example : Variable cost (VC): $10 Fixed cost (FC): $300000 Expected unit sales: 50000 Unit cost = VC + FC/unit sales = 10 + 300000/50000 = $16 Now, manufacturer wants to earn 20% markup on sales So, markup price = unit cost/ (1- desired return on sales) = 16/(1-0.2) = $20 Does using standard markups to set prices make sense : Generally, no. Any pricing method that ignores demand and competitor’s 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 demand – by tying the price to cost, sellers simplify pricing Prices tend to be similar when all firms in the industry apply this pricing strategy – so price competition is minimized The notion that it is a fair to both the buyers and sellers Break-even analysis and target profit pricing : This involves setting the price to break-even on the costs of making and marketing a product or setting the price to make a target return. Break-even volume formula : fixed cost/ (price – variable cost) When setting prices, price elasticity and competitor’s prices must be taken into account. 113

Competition-based pricing Competition-based pricing : This involves setting prices based on the competitors’ strategies, costs, prices and market offerings. Consumers will base their judgements of a product’s value on the prices that competitors charge for similar products. How does the company's market offering compare with competitors' offerings in terms of customer value : If consumers perceive that the company’s product/service provides greater value, the company can charge a higher price but if consumer perception is less in relation to competing products, the company must either charge a lower price or change customer perception to justify a higher price. How strong are current competitors and what their pricing strategies : If the company faces a host of smaller competitors charging high prices relative to the value they deliver, it might charge lower prices to drive weak competition away from the market. On the other hand, if the market is dominated by larger, lower-priced competitors, the company may decide to target unserved market niches with value-added products at higher prices. 114

Other internal and external considerations affecting price decisions Overall marketing strategy, objectives and mix : Pricing may play an important role in helping to accomplish company objectives at many levels: a firm can set prices to attract new customers/profitably retain existing ones or it can set prices low to prevent competition from entering the market/set prices at competitors’ levels to stabilize the market; it can price to keep the loyalty and support of resellers or avoid government intervention; prices may be reduced temporarily to create excitement for a brand or one product may be priced to help the sales of other products in the company’s line. Price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and effective integrated marketing mix program. Decisions made for other marketing mix variables may affect pricing decisions. Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Target costing is pricing that starts with an ideal selling price based on customer-value considerations, then targets costs that will ensure that the price is met. Organizational considerations : Companies handle pricing in a variety of ways: Small companies price their products through top management; large companies price their products through divisional or product managers; in industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges. In industries in which pricing is a key factor (airlines, aerospace, oil companies, etc ), companies often have pricing departments to set the best prices or help others set them – these departments report to the marketing department/top management. 115

Other internal and external considerations affecting price decisions Market demand : Pricing in different types of markets: Pure competition: Market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. In this market, marketing research, product development, pricing, advertising and sales promotion play little or no role. Therefore, sellers in this markets do not spend much time on marketing strategy. Monopolistic competition: In this market, there are many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because the sellers can differentiate their offers to buyers. The sellers try to develop differentiated offers for different customer segments and in addition to price, freely use branding, advertising and personal selling to set their offers apart. Oligopolistic competition: In this market there are only a few large sellers. Each seller is alert and responsive to competitors’ pricing strategies and marketing moves. Pure monopoly: Here the market is dominated by only one seller. the seller may be a government monopoly or a private regulated monopoly or a private unregulated monopoly. Price elasticity of demand: A measure of the sensitivity of demand to changes in price. Less elastic the demand, the more it pays for the seller to raise the price and vice versa. Determinants of PED: buyers are less price sensitive when product is unique, availability of substitutes are low and total expenditure for a product is low relative to their income or when cost is shared by another party. Economy : Economic factors such as a boom/recession, inflation and interest rates affect pricing decisions as they affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product. Other external factors : Resellers, government and social concerns, etc. 116

Pricing strategies: Additional considerations Chapter 11 117

New-product pricing strategies Market-skimming pricing/price skimming : Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales. This strategy only works when: Product quality and image support its higher price, and there are enough buyers who want the product at that high price Costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more Competitors cannot enter the market easily and undercut the high price Market-penetration pricing : Setting a low price for a new product in order to attract a large number of buyers and a large market share. This strategy only works when: Market is highly price sensitive, so that a low price produces more market growth Production and distribution costs must decrease as sales volume increases Low prices help keep the competition out from the market and the penetration price maintains its low-price position 118

Product mix pricing strategies Product line pricing : Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features and competitors’ prices. Optional-product pricing : The pricing of optional/accessory products along with a main product. Captive-product pricing : Setting a price for products that must be used along with a main product, such as blades for a razor and games for a video-game console. By-product pricing : Setting a price for by-product in order to make the main product’s price more competitive. Product bundle pricing : Combining several products and offering the bundle at a reduced price. 119

Price adjustment strategies Discount and allowance pricing : Cash discount : a price reduction to buyers who pay their bills promptly Quantity discount : a price reduction to buyers who buy large volumes Functional discount/trade discount : sellers offer this discount to trade-channel members who perform certain functions like selling, storing and record keeping Seasonal discount : a price reduction to buyers who buy merchandise or services out of season Trade-in allowances : price reductions given for turning in an old item when buying a new one Promotional allowances : payments/price reductions that reward dealers for participating in advertising and sales support programs Segmented pricing : This involves selling a product/service at two or more prices, even though the difference in prices is not based on costs. For this to be an effective strategy, the following conditions need to met: market must be segmentable and segments must show different degrees of demand; costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference; segmented prices should reflect real differences in customers’ perceived value. Customer-segment pricing : different customers pay different prices for the same product/service like in museums (child/senior citizens) or movie theaters. Product-form pricing : different versions of the product are priced differently but not according to differences in their costs such as economy/business class in air travel. Location-based pricing : a company charges different prices for different locations even though the cost of offering each location is the same such as theater seats varying in seat prices due to audience location preference. Time-based pricing : a firm varies its price by the season, month, day and even the hour such as resorts giving weekend and seasonal discounts. 120

Price adjustment strategies (cont.) Psychological pricing : Sellers consider the psychology of prices, not simply the economics; the price is used to say something about the product. When consumers can judge the quality of a product by examining it or by calling on past experiences with it, they use price less to judge quality. But when they cannot judge quality because they lack the information/skill, price becomes an important quality signal. Reference prices : prices that buyer 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. Sellers can influence or use these consumers’ reference prices when setting price. Promotional pricing : This involves temporarily pricing products below the list price and sometimes even below cost to create buying excitement and urgency. Discounts Special-event pricing Limited-time offers Cash rebates Low-interest financing, longer warranties, free maintenance Geographical pricing : This involves setting prices for customers located in different parts of the country or world. FOB origin pricing : a pricing strategy in which goods are placed free on board a carrier; the customer pays the freight from the factory to the destination Uniform-delivered pricing : a pricing strategy in which the company charges the same price plus the freight to all customers, regardless of their location. Zone pricing : a pricing strategy in which the company sets up two or more zones. All customers within a zone pay the same total price; the more distant the zone, the higher the price. Basing-point pricing : a pricing strategy in which the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer. Freight-absorption pricing : a pricing strategy in which the seller absorbs all or part of the freight charges in order to get the desired business. 121

Price adjustment strategies (cont.) Dynamic and internet pricing : Dynamic pricing : This involves adjusting prices continually to meet the characteristics and needs of individual customers and situations. This is very prevalent online This strategy offers many advantages: marketers mine their databases to gauge a specific shopper’s desires, measure his/her means, instantaneously tailor offers to fit that shopper’s behavior and price products accordingly In extreme cases, some companies customize their offers and prices based on specific characteristics and behaviors of individual customers, mined from online browsing and purchasing histories As for the Internet, consumers can get instant product and price comparisons from thousands of vendors at price comparison sites. Many retailers are finding that ready online access to comparison prices is giving consumers too much of an edge. Store retailers are now devising strategies to combat the consumer practice of showrooming ( consumers armed with smartphones come to stores to see an item, compare prices online while in the store and then buy the item online at a lower price). To counter showrooming, store retailers must either match online prices or work with manufacturers to develop exclusive or store-branded merchandise on which price comparisons cannot be made. International pricing : In some cases, companies set a uniform worldwide price but, in most cases, companies adjust their prices to reflect local market conditions and cost considerations The price a company should charge in a specific country depends on factors like economic conditions, competitive situations, laws and regulations and the nature of the wholesaling and retailing system. Consumer perceptions and preferences also may vary from country to country calling for different prices. Care needs to be taken to prevent price escalation , which results from the high costs of selling in another country – the additional costs of operations, product modifications, shipping and insurance, import tariffs and taxes, exchange rate fluctuations and physical distribution. 122

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 the competition. Initiating price changes: Initiating price cuts to boost sales and market share when there’s excess capacity, falling demand in the face of strong price competition or a weakened economy or to dominate market through lower costs. Initiating price increases due to inflation, over-demand Buyer reactions to price changes: a price change, especially a drop in price, can adversely affect how consumers view the brand. Competitor reactions to price changes: competitors most likely to react when number of firms involved is small, when product is uniform and when buyers are well informed about products and prices. 123

Price changes (cont.) Has competitor cut price? Will lower price negatively affect our market share and profits? Can/should effective action be taken? Hold current price; continue to monitor competitor’s price Launch low-price fighter brand Raise perceived value Improved quality and increase price Reduce price YES YES NO NO NO YES Responding to price changes 124

Public policy and pricing Most important pieces of legislation affecting pricing are the Sherman Act, the Clayton Act and the Robinson-Patman Act, initially adopted to curb the formation of monopolies and regulate business practices that might unfairly restrain trade. Pricing withing channel levels : Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected. Price-fixing is illegal. 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. The biggest problem, however, is determining just what constitutes predatory pricing behavior. Selling below cost to unload excess inventory is not considered predatory but selling below cost to drive out competitors is. Thus, a given action may or may not be predatory depending on intent, and intent can be very difficult to determine or prove. Pricing across channel levels : 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. However, price discrimination is allowed if the seller can prove that its costs are different when selling to different retailers. The seller can also discriminate in its pricing if the seller manufactures different qualities of the same product for different retailers. The seller needs to prove that these differences are proportional. Laws also prohibit retail/resale price maintenance – a manufacturer cannot require dealers to charge a specified retail price for its product. Although the seller can propose a manufacturer’s suggested retail price to dealers, it cannot refuse to sell to a dealer that takes independent pricing action, nor can it punish the 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 and then announce sale prices close to its previous everyday prices. 125

Marketing channels: Delivering customer value Chapter 12 126

Supply chain and value delivery network Producing a product/service and making it available to buyers requires building relationships not only with customers but also with key suppliers and resellers in the company’s supply chain. This supply chain consists of upstream and downstream partners. Upstream from the company is the set of firms that supply raw materials, components, parts, information, finances and expertise needed to create a product/service. Downstream marketing channel partners are the wholesalers and retailers 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. 127

Nature and importance of marketing channels Most companies use intermediaries to bring their products to market. They try to forge a marketing/distribution channel – a set of interdependent organizations that help make 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: Pricing decisions depend on whether the company works with national discount chains, uses high quality specialty stores or sells directly to consumers online Firm’s sales force and communication decisions depend on how much persuasion, training, motivation and support its channel partners need Whether the firm develops or acquires certain new products may depend on how well those products fit the capabilities of its channel members Distribution channel decisions often involve long-term commitments to other firms In making products and services available to consumers, channel members add value by bridging the major time, place and possession gaps that separate goods and services from those who use them. Members of the marketing channel perform many key functions as follows: Information : gathering and distributing information about consumers, producers and other actors and forces in the marketing environment needed for planning and aiding exchange Promotion : developing and spreading persuasive communications about an offer Contact : finding and communicating with prospective buyers Matching : shaping offers to meet the buyer’s needs, including activities such as manufacturing, grading, assembling and packaging Negotiation : reaching an agreement on price and other terms so that ownership or possession can be transferred 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 Companies can design their distribution channels to make products and services available to customers in different ways. 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. The number of intermediary levels indicates the length of a channel Direct marketing channel has no intermediary levels, i.e., the company sells directly to consumers Indirect marketing channels contain one or more intermediaries From the producer’s perspective, a greater number of levels means less control and greater channel complexity. All the institutions in the channel are connected by several types of flows: physical flow of products, flow of ownership, payment flow, information flow and promotion flow. These flows can make even channels with only one or a few levels very complex. 128

Channel and organization behavior Channel behavior : Ideally, because the success of individual channel members depends on the overall channel’s success, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their activities and cooperate to attain overall channel goals. However, individual channel members rarely take such a broad view – often acting alone in their own short-run best interests. They often disagree on who should do what and for what rewards. Such disagreements over goals, roles and rewards generate channel conflict . Horizontal conflict occurs among firms at the same level of the channel Vertical conflict occurs between different levels of the same channel For the channel as a whole to perform well, each channel member’s role must be specified and the channel conflict must be managed. The channel will perform better if it includes a firm, agency or mechanism that provides leadership and has the power to assign roles and manage conflict. Historically, conventional distribution channels have lacked such leadership and power, often resulting in damaging conflict and poor performance. Conventional distribution channel consists of one or more independent producers, wholesalers and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole. No channel member has much control over the other members and no formal means exists for assigning roles and resolving channel conflict. 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 the producer, the wholesaler or the retailer. 129

Channel and organization behavior (cont.) Vertical marketing systems: Corporate VMS: This combines successive stages of production and distribution under single ownership – channel leadership is established through common ownership. Contractual VMS: Here the independent firms at different levels of production and distribution join together through contracts. The franchise organization is the most common type of contractual relationship. In this system, a channel member called a franchisor links several stages in the production-distribution process. There are 3 types of franchises. Manufacturer-sponsored retailer franchise system: Ford and its network of independent franchised dealers Manufacturer-sponsored wholesaler franchise system: Coca-Cola licenses bottlers (wholesalers) in various world markets who buy Coca-Cola syrup concentrate and then bottle and sell the finished product to retailers locally. Service-firm-sponsored retailer franchise system: Burger King and its nearly 12300 franchisee-operated restaurants around the world - Administered VMS: In this case, there is coordination among successive stages of production and distribution through the size and power of one of the parties. 130

Channel and organization behavior (cont.) Horizontal marketing systems: This is a channel arrangement 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. Multichannel distribution systems: A distribution system in which a single firm sets up two or more marketing channels to reach one or more customer segments. The producer can sell directly to its target consumers using catalogs, telemarketing and Internet It can also reach its consumer segment through retailers It can sell directly to business segments through distributors and dealers It can also cater to business segments through its own sales force Note: Multichannel distribution systems offer many advantages to companies facing large and complex markets. With each new channel, the company expands its sales and market coverage and gains opportunities to tailor its products and services to the specific needs of diverse customer segments. But such multichannel systems are harder to control and they generate conflict as more channels compete for customers and sales. Changing channel organization : - Changes in technology and the explosive growth of direct and online marketing are having a profound impact on the nature and design of marketing channels. One major trend is toward disintermediation – the cutting out of marketing channel intermediaries by product/service producers or the displacement of traditional resellers by radical new types of intermediaries. 131

Channel design decisions A new firm with limited capital usually starts by selling in a limited market area. In such a case, deciding on the best channels might not be a problem, rather on how to convince one or a few good intermediaries to handle the line. If successful, the new firm can branch out to new markets through existing intermediaries. In smaller markets, the firm might sell directly to retailers; in larger markets, it might sell through distributors. In one part of the country, it might grant exclusive franchisees; in another, it might sell through all available outlets. Then it might add an internet store that sells directly to hard-to-reach customers. In this way, channel systems often evolve to meet market opportunities and conditions. Marketing channel design calls for: Analyzing consumer needs Setting channel objectives Identifying major channel alternatives Evaluating those alternatives 132

Marketing channel design Analyzing consumer needs : Do consumers want to buy from nearby locations or are they willing to travel to more distant and centralized locations? Would customers rather buy in person, by phone or online? Do they value breadth of assortment or do they prefer specialization? Do consumers want many add on services such as delivery, installation, repairs or will they obtain these services elsewhere? 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. Usually, a company can identify several segments wanting different levels of service. The company should decide which segments to serve and the best channels to use in each case. In each segment, the company wants to minimize the total channel cost of meeting customer service requirements. The company’s channel objectives are also influenced by the nature of the company, its products, its marketing intermediaries, its competitors and the environment. Finally, environmental factors such as economic conditions and legal constraints many affect channel objectives and design. Identifying major alternatives : When the company has defined its channel objectives, it should next identify its major channel alternatives in terms of: Types of intermediaries : Through the use of retailers, resellers and a company’s own channel can reach more and different kinds of buyers. However, it becomes difficult to manage and control causing competition between them. Number of marketing intermediaries : Companies must also determine the number of channel members to use at each level. 3 strategies are available: Intensive distribution : Stocking the products in as many outlets as possible Exclusive distribution : Giving a limited number of dealers the exclusive right to distribute the company’s products in their territories. Selective distribution : The use of more than one but fewer than all of the intermediaries who are willing to carry the company’s products. Responsibilities of channel members : The producer and the intermediaries need to agree on the terms and responsibilities of each channel member. They should agree on price policies, conditions for sale, territory rights and specific services to be performed by each party. Evaluating the major alternatives : Each alternative should be evaluated against the following: Economic criteria : A company compares the likely sales, costs and profitability of different channel alternatives. Control criteria : Using intermediaries means giving them some control over the marketing of the product and some intermediaries take control more than others. Adaptability criteria : Channels often involve long-term commitments, yet the company wants to keep the channel flexible so that it can adapt to environmental changes. 133

Channel management decisions Marketing channel management calls for selecting, managing and motivating individual channel members and evaluating their performance over time. Selecting channel members : 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, location, growth and profit record, cooperativeness and reputation. Managing and motivating channel members : Most companies see their intermediaries as first-line customers and partners. They practice strong partner relationship management (PRM) to forge long-term partnerships with channel members. This creates a value delivery system that meets the needs of both the company and the marketing partners. Many companies are now installing integrated high-tech PRM systems to coordinate their whole-channel marketing efforts. Companies can now use PRM and SCM software to help recruit, train, organize, manage, motivate and evaluate relationships with channel partners. Evaluating channel members : The company must regularly check channel member performance against standards such as sales quotas, average inventory levels, customer delivery time, treatment of damaged goods 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. 134

Public policy and distribution decisions Many producers and wholesalers like to develop exclusive channels for their products. When the seller allows only certain outlets to carry its products, this strategy is called exclusive distribution . When the seller requires that these dealers not handle the competition's products, it is called exclusive dealing . Both parties can benefit from exclusive arrangements, i.e., the seller obtains more loyal and dependable outlets, and the dealers obtain a steady source of supply and stronger seller support. But exclusive arrangements also exclude other producers from selling to these dealers. This situation brings exclusive dealing contracts under the scope of the Clayton Act of 1914. They are legal as long as they do not substantially lessen the competition or tend to create a monopoly and as long as both parties enter into the agreement voluntarily. Exclusive dealing often includes exclusive territorial arrangements . The producer may agree not to sell to other dealers in a given area or the buyer may agree to sell only in its own territory. The first practice is normal under franchise systems as a way to increase dealer enthusiasm and commitment. It is also perfectly legal, i.e., a seller has no legal obligation to sell through more outlets than it wishes. The second practice, whereby the producer tries to keep a dealer from selling outside its territory has become a major legal issue. Producers of a strong brand sometimes sell it to dealers only if the dealers will take some or all of the rest of its line – this is called full-line forcing . Such tying agreements are not necessarily illegal, but they do violate the Clayton Act if they tend to lessen the competition substantially. The practice may prevent consumers from freely choosing among competing suppliers of these other brands. Finally, producers are free to select their dealers but their right to terminate dealers is somewhat restricted. Generally, the sellers can drop dealers ‘for cause’, however they cannot drop dealers if, for instance, the dealers refused to cooperate in a doubtful legal arrangement such as exclusive dealing or tying agreements. 135

Marketing logistics and supply chain management Nature and importance of marketing logistics : Marketing logistics/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. In short, it involves getting the right product to the right customer in the right place at the right time. However, today’s customer-centered logistics starts with the marketplace and works backward to the factory or even to sources of supply. Marketing logistics involves not only outbound logistics (moving products from the factory to resellers and ultimately to customers) but also inbound logistics (moving products and materials from suppliers to the factory) and reverse logistics (reusing, recycling, refurbishing or disposing of broken, unwanted or excess products returned by consumers or resellers). That is, 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. The logistics manager’s task is to coordinate the activities of suppliers, purchasing agents, marketers, channel members and customers. These activities include forecasting, information systems, purchasing, production planning, order processing, inventory, warehousing and transportation planning. Companies today are placing greater emphasis on logistics for several reasons: Companies can gain a powerful competitive advantage by using improved logistics to give customers better service or lower prices Improved logistics can yield tremendous cost savings to both a company and its customers The explosion in product variety has created a need for improved logistics management Improvements in IT have also created opportunities for major gains in distribution efficiency. Today’s companies are using sophisticated supply chain management software, Internet-based logistics systems, point-of-sale scanners, RFID tags, satellite tracking and electronic transfer of order and payment data. Logistics also affects the environment and a firm’s environmental sustainability efforts. Transportation, warehousing, packaging and other logistics functions are typically the biggest supply chain contributors to the company’s environmental footprint. At the same time, they also provide one of the most fertile areas for cost savings. 136

Marketing logistics and supply chain management (cont.) Goals of the logistics system : To provide a targeted level of customer service at the least cost Maximize profits, not sales Major logistics functions : Warehousing : A company must decide on how many and what types of warehouses it needs and where they will be located. The company might use either storage warehouses or distribution centers. Storage warehouses store goods for moderate to long periods. On the other hand, distribution centers are large, highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently and deliver goods to customers as quickly as possible. Inventory management : In managing inventory, firms must balance the costs of carrying larger inventories against resulting sales and profits. Many companies have greatly reduced their inventories and related costs through just-in-time (JIT) logistics systems. With JIT, producers and retailers carry only small inventories of parts or merchandise, often enough for only a few days of operations. New stock arrives exactly when needed, rather than being stored in inventory until being used. JIT systems require accurate forecasting along with fast, frequent and flexible delivery so that new supplies will be available when needed. However, JIT systems result in substantial savings in inventory-carrying and handling costs. Companies also use RFID to know at any time exactly where a product is located physically within the supply chain. Transportation : The choice of transportation carriers affects the pricing of products, delivery performance and the conditions of goods when they arrive - all of which will affect customer satisfaction. In shipping goods to its warehouses, dealers and customers, the company can choose among 5 main alternatives: truck, rail, pipeline, air and internet. Shippers can also use intermodal transportation – combining two or more modes of transportation. Logistics information management : Information is mostly shared through electronic data interchange (EDI) – this is the digital exchange of data between organizations, which primarily is transmitted via the internet. On the other hand, are vendor-managed inventory (VMI) systems/continuous inventory replenishment systems , where customer share real-time data on sales and current inventory levels with the supplier. The supplier then takes the full responsibility for managing inventories and deliveries. 137

Marketing logistics and supply chain management (cont.) Integrated logistics management : This logistics concept emphasizes teamwork – both inside the company and among all the marketing channel organizations to maximize the performance of the entire distribution system. Cross-function teamwork inside the company : As distribution activities involve strong trade-offs, decisions by different functions of the company must be coordinated to achieve better overall logistics performance. Some companies have created permanent logistics committees composed of managers responsible for different physical distribution activities. Companies can also create supply chain manager positions that link the logistics activities of functional areas. Finally, companies can employ sophisticated, system-wide SCM software. Building logistics partnerships : One company’s distribution system is another company’s supply system. The success of each channel member depends on the performance of the entire supply chain. Smart companies coordinate their logistics strategies and forge strong partnerships with suppliers and customers to improve customer service and reduced channel costs. Many companies have created cross-functional, cross-company teams. Other companies partner through shared projects. Third-party logistics (3PL) providers : These are independent logistics providers that perform any or all of the functions required to get a client’s product to market. These logistics providers help their clients tighten up sluggish, overstuffed supply chains; slash inventories and get products to customers more quickly and reliably. Eg: FedEX , UPS, DHL, etc. 138

Retailing and wholesaling Chapter 13 139

Retailing Retailing includes all the activities involved in selling products or services directly to final consumers for their personal, nonbusiness use. Many institutions – manufacturers, wholesalers, retailers – do retailing. But most retailing is done by the retailers – businesses whose sales come primarily from retailing such as Costco, Home Depot, Best Buy, etc. Retailing plays an important role in connecting brands to consumers in the ‘ last mile ’ – the final stop in the consumer’s path to purchase. Shopper marketing concept : Using in-store promotions and advertising to extend brand equity to the ‘last mile’ and encourage favorable point-of-purchase decisions. Shopper marketing involves focusing the entire marketing process – from product and brand development to logistics, promotion and merchandising – toward turning shoppers into buyers at the point of sale. The dramatic growth of digital shopping or combined digital and in-store shopping has added a new dimension to shopper marketing. The ‘last mile’ or ‘first moment of truth’ no longer takes place only in stores. Most consumers now make at least some of their purchases online, without even setting foot into a retail store. Alternatively, they may research a purchase on the internet before or even during a store visit. 140

Types of retailers Type Description Examples Specialty store A store that carries a narrow product line with a deep assortment such as apparel stores, sporting-goods stores, furniture stores, florists and bookstores. Radio Shack, Williams-Sonoma Department store A store that carries several product lines – typically clothing, home furnishings and household goods – with each line operated as a separate department managed by specialist buyers or merchandisers. Macy’s, Sears, Neiman Marcus Supermarket A relatively large, low-cost, low-margin, high-volume, self-service operation designed to serve the consumer’s total needs for grocery and household products. Kroger, Safeway, Giant Convenience store A relatively small store located near residential areas, open long hours seven days a week and carrying a limited line of high-turnover convenience products at slightly higher prices. 7-eleven, Stop-N-Go Discount store A store that carries standard merchandise sold at lower prices with lower margins and higher volumes. Walmart, Target, Kohl’s Off-price retailer A store that sells merchandise bought at less-than-regular wholesale prices and sold at less than retail. These include factory outlets owned and operated by manufacturers; independent off-price retailers owned and run by entrepreneurs or by divisions of larger retail corporations; and warehouse/wholesale clubs selling a limited selection of goods at deep discounts to consumers who pay membership fees. Mikasa (factory outlet); TJ Maxx (independent off-price retailer); Costco (warehouse clubs) Superstore A very large store that meets consumers’ total needs for routinely purchased food and nonfood items. This includes supercenters, combined supermarket and discount stores, and category killers, which carry a deep assortment in a particular category. Walmart Supercenter, SuperTarget (discount stores); Best Buy, PetSmart, Staples, Barnes & Noble (category killers) 141

Major types of retail organizations Type Description Examples Corporate chain Two or more outlets that are commonly owned and controlled. Corporate chains appear in all types of retailing, but they are strongest in department stores, discount stores, food stores, drugstores and restaurants. Sears (department stores), Target (discount stores), Kroger (grocery stores), CVS (drugstores) Voluntary chain Wholesaler-sponsored group of independent retailers engaged in group buying and merchandising. Independent Grocers Alliance (IGA), Do-It Best (hardware), Western Auto, True Value Retailer cooperative Group of independent retailers who jointly establish a central buying organization and conduct joint promotion efforts. Associated Grocers (groceries), Ace Hardware (hardware) Franchise organization Contractual association between a franchisor (a manufacturer, wholesaler, or service organization) and franchisees (independent businesspeople who buy the right to own and operate one or more units in the franchise system). McDonald’s, Subway, Pizza Hut, Jiffy Lube, 7-eleven 142

Retailer marketing decisions Segmentation, targeting, differentiation and positioning decisions : Retailers must first segment and define their target markets and then decide how they will differentiate and position themselves in these markets. Should the store focus on upscale, midscale or downscale shoppers? Do target shoppers want variety, depth of assortment, convenience or low prices? Product assortment and services decision : Retailers must decide on 3 major product variables: Product assortment : The retailer’s product assortment should differentiate it while matching target shoppers’ expectations. One strategy is to offer merchandise that no other competitor carries (store brands/national brands) on which it holds exclusive rights. Alternatively, a retailer can differentiate itself by offering a highly targeted product assortment. Services mix : The services mix can also help set one retailer apart from another by inviting customers to ask questions or consult service representatives in person or via phone, etc. Store atmosphere : Retailers can create a unique store experience, one that suits the target market and moves customers to buy. Experiential retailing confirms that retail stores are much more than simply assortment of goods. They are environments to be experienced by the people who shop in them. Price decision : A retailer’s price policy must fit its target market and positioning, product and service assortment, the competition and economic factors. Most retailers seek either high markups on lower volume (most specialty stores) or low markups on higher volume (mass merchandisers and discount stores). Retailers must also decide on the extent to which they will use sales and other promotions. Some retailers use no price promotions at all, competing instead on product and service quality rather than on price. Other retailers practice either everyday low pricing (EDLP) or high-low pricing. Promotion decision : Retailers use any or all of the 5 promotion tools to reach consumers: Advertising Personal selling Sales promotion Public relations Direct marketing Place decision : It’s very important that retailers select locations that are accessible to the target market in areas that are consistent with the retailer’s positioning. Small retailers may have to settle for whatever locations they can find/afford. Large retailers, however, usually employ specialists who use advanced methods to select store locations. 143

Retailing trends and developments Tighter consumer spending : Beyond cost-cutting and price promotions, many retailers also added new value pitches to their positioning. In addition, when reacting to economic difficulties, retailers must be careful that their short run actions do not damage their long run images and positions. Instead of relying on cost cutting and price reductions, retailers should focus on building greater customer value within their long-term store positioning strategies. New retail forms, shortening retail life cycles and retail convergence : New retail forms continue to emerge to meet new situations and consumer needs, but the life cycle of new retail forms is getting shorter. Many retailing innovations are partially explained by the wheel-of-retailing (a concept that suggests new types of retailers usually begin as low-margin, low-price, low-status operations but later evolve into higher-price, higher-service operations, eventually becoming like the conventional retailers they replaced). Moreover, today’s retail forms appear to be converging – increasingly, different types of retailers now sell the same products at the same prices to the same consumers. Such convergence means greater competition for retailers and greater difficulty in differentiating the product assortments of different types of retailers. Rise of megaretailers : Megaretailers with their size and buying power, can offer better merchandise selections, good service and strong price savings to consumers. As a result, they grow even larger by squeezing out their smaller, weaker competitors. The megaretailers have shifted the balance of power between retailers and producers. A small handful of retailers now control access to enormous number of consumers, giving them the upper hand in their dealings with manufacturers. Growth of direct and online retailing : Increasingly, customers are merging store, online and mobile outlets into a single shopping process. The internet and digital devices have spawned a whole new breed of shoppers and way of shopping. Growing importance of retail technology : Progressive retailers are using advanced IT and software systems to produce better forecasts, control inventory costs, interact electronically with suppliers, send information between stores and even sell to customers within stores. They have adopted sophisticated systems for checkout scanning, RFID inventory tracking, merchandise handling, information sharing and customer interactions. Retailers are increasingly attempting to meet new consumer expectations by bring online-style technologies into their stores. Many retailers now routinely use technologies ranging from touch-screen kiosks, mobile hand-held shopping assistants and customer loyalty apps to interactive dressing-room mirrors and virtual sales associates. Green retailing : Today’s retailers are increasingly adopting environmentally sustainable practices. They are greening up their stores and operations, promoting more environmentally responsible products, launching programs to help customers be more responsible and working with channel partners to reduce their environmental impact. Global expansions of major retailers : Retailers with unique formats and strong brand positions are increasingly moving into other countries. Many are expanding internationally to escape saturated home markets. International retailing presents challenges as well as opportunities. Retailers can face dramatically different retail environments when crossing countries, continents and cultures. Simply adapting the operations that work well in the home country is usually not enough to create success abroad. Instead, when going global, retailers must understand and meet the needs of local markets. 144

Wholesaling Wholesaling includes all activities involved in selling goods and services to those buying them for resale or business use. Firms engaged primarily in wholesaling activities are called wholesalers . Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers and other wholesalers. Functions of wholesalers : 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 much work. Bulk breaking : Wholesalers save their customers money by buying in carload lots and breaking bulk. 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 to buyers than are 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. 145

Types of wholesalers Merchant wholesalers : These are the largest single group of wholesalers. There are 2 main types: Full-service wholesalers provide a full set of services Limited-service wholesalers offer fewer services to their suppliers and customers; different types of limited-service wholesalers perform varied specialized functions in the distribution channel Brokers and agents : They do not take title to goods, and they perform only a few functions A broker brings buyers and sellers together and assists in negotiation Agents represent buyers/sellers on a more permanent basis Manufacturers’ sales branches and offices : Wholesaling is done by the sellers or buyers themselves rather than through independent wholesalers. 146

Wholesaler marketing decisions Segmentation, targeting, differentiation and positioning decisions : Wholesalers must segment and define their target markets and differentiate and position themselves effectively. They can choose a target group by size of customer, type of customer, the need for service, etc. Within the target group, they can identify the more profitable customers, design stronger offers and build better relationships with them. Marketing mix decisions : Wholesalers must decide on product and service assortments, prices, promotion and place. Today, progressive wholesalers have reacted to rising costs by investing in automated warehouses and IT systems. Orders are fed from the retailer’s information system directly into the wholesaler’s, and the items are picked up by mechanical devices and automatically taken to a shipping platform where they are assembled. Most large wholesaler use technology to carry out accounting, billing, inventory control and forecasting. 147

Communicating Customer Value: Integrated Marketing Communications Strategy Chapter 14 148

Promotion mix A company’s total promotion mix/marketing communications mix consists of the specific blend of advertising, public relations, personal selling, sales promotion and direct marketing tools that the company uses to persuasively communicate customer value and build customer relationships. The 5 major promotion tools are as follows: Advertising : Any paid form of nonpersonal presentation and promotion of ideas, goods or services by an identified sponsor. Advertising includes broadcast, print, internet, mobile, outdoor, etc. Sales promotion : Short-term incentives to encourage the purchase or sale of a product/service. Sales promotion includes discounts, coupons, displays and demos. Personal selling : Personal presentation by the firm’s sales force for the purpose of making sales and building customer relationships. Personal selling includes sales presentations, trade shows and incentive programs. 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. Public relations includes press releases, sponsorships, events and web pages. Direct marketing : Direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships. Direct marketing includes catalogs, direct-response TV, kiosks, internet, mobile marketing, etc. 149

New marketing communications trend Consumers are changing – consumers are better informed and more communications empowered. Rather than relying on marketer-supplied information, they can use the internet and other technologies to find information. They can connect more easily with other consumers to exchange brand-related information or even create their own marketing messages. Marketing strategies are changing – as mass markets have fragmented; marketers are shifting away from mass marketing. More and more, they are developing focused marketing programs designed to build closer relationships with customers in more narrowly defined micro markets. Sweeping advances in communications technology – the digital age has spawned a host of new information and communication tools from smartphones, iPads, satellite/cable TV, internet, etc. Note: Despite the shift toward new digital media, traditional mass media (TV, magazines, newspapers, etc ) still capture a lion’s share of the promotion budgets of most major marketing firms. 150

Integrated marketing communications (IMC) This concept states that a company carefully integrates its many communications channels to deliver a clear, consistent and compelling message about the organization and its brands. IMC calls for recognizing all touchpoints where the customer may encounter the company and its brands. Each contact with brand will deliver a message. The company's goal should be to deliver a consistent and positive message at each contact. IMC ties together all of the company’s messages and images. Its TV and print ads have the same message, look and feel as its email and personal selling communications. To help implement IMC, some companies appoint a marketing communications director who has overall responsibility for the company’s communications efforts. This helps to produce better communications consistency and greater sales impact. IMC involves identifying the target audience and shaping a well-coordinated promotional program to obtain the desired audience response. The communications process should start with an audit of all the potential touchpoints that target customers may have with the company and its brands. Eg: someone purchasing a new phone plan may talk with others, see TV ads, visit various websites, etc. The marketer needs to assess what influence each communication experience will have at different stages of the buying process. This understanding helps marketers allocate their communication dollars more efficiently and effectively. 151

IMC process Sender: The party sending the message to another party (suppose it’s McDonald’s) Encoding: The process of putting thought into symbolic form (McDonald’s ad agency assembling words, sounds and illustrations into a TV ad that will convey the intended message) Message: The set of symbols that the sender transmits (actual ad) Media (along with the message): The communications channels through which the message moves from the sender to the receiver (TV ads) Decoding: The process by which the receiver assigns meaning to the symbols encoded by the sender (a consumer sees the ad and interprets the meaning behind the ad) Receiver: The party receiving the message sent by another party (customer who watches the ad) Response: The reactions of the receiver after being exposed to the message (consumer making a decision to eat at McDonald’s) Feedback: The part of the receiver’s response communicated back to the sender (consumer either praising/criticizing the ad) Noise: Unplanned static/distortion during the communication process which results in the receiver getting a different message than the one sent by the sender (consumer distracted while watching the ad) 152

Steps in developing effective marketing communication Identifying the target audience Determining the communication objectives Designing a message Choosing media Selecting the message source Collecting feedback 153

Identifying the target audience The audience may be current users or potential buyers, those who make the buying decision or those who influence it. The target audience will heavily affect the communicator ’s decisions on what will be said, how it will be said, when it will be said and who will say it. 154

Determining the communication objectives Based on the position of the target audience on the buyer-readiness stage, the marketing communicator needs to tailor its communication objectives accordingly. Buyer-readiness stages : These are the stages consumers normally pass through on their way to a purchase, including awareness, knowledge, liking, preference, conviction and finally, the actual purchase. 155

Designing a message Ideally, the message should get attention, hold interest, arouse desire and obtain action (a framework known as the AIDA model). The marketing communicator must decide what to say (message content) and how to say it (message structure and format). Message content : The marketer has to figure out an appeal/theme that will produce the desired response. There are 3 types of appeals: Rational appeals relate to the audience’s self-interest; they show that the product will produce the desired benefits. Emotional appeals attempt to stir up negative/positive emotions that can motivate purchase. Communicators may use emotional appeals ranging from love, joy and humor to fear and guilt. Advocates of emotional messages claim that they attract more attention and create more belief in the sponsor and the brand. The idea is that consumers often feel before they think, and persuasion is emotional in nature. Good storytelling in a commercial often strikes an emotional chord. Moral appeals are directed to an audience’s sense of what is right and proper. They are often used to urge people to support social causes. Message structure : Marketers must also decide how to handle 3 message structures: The first is whether to draw a conclusion or leave it to the audience – research suggests that in many cases, rather than drawing a conclusion, the advertiser is better off asking questions and letting buyers come to their own conclusions. The second is whether to present the strongest argument first or last – presenting them first gets strong attention but may lead to an anticlimactic ending. The third is whether to present one-sided argument (mentioning only the product’s strengths) or a two-sided argument (touting the product’s strengths while also admitting its shortcomings) . Message format : The marketing communicator also needs a strong format for the message. In a print ad, the communicator has to decide on the headline, copy, illustration and colors. To attract attention, advertisers use novelty and contrast; eye-catching pictures and headlines; distinctive formats; message size and position; and color, shape and movement. If the message is to be communicated by TV or video, the communicator must incorporate motion, pace and sound. If the message is carried out on the product/its package, the communicator must watch texture, scent, color, size and shape. One study suggests that color increases the brand recognition up by 80%. 156

Choosing media There are 2 broad types of communication channels: Personal communication channels : Here, two or more people communicate directly. They might communicate face to face, on the phone, through email, etc. Personal communication channels are effective because they allow for personal addressing and feedback. Personal influence carries great weight, especially for products that are expensive, risky or highly visible. ( Buzz marketing involves cultivating opinion leaders and getting them to spread information about a product/service to others in their communities.) Nonpersonal communication channels : These are media that carry messages without personal contact/feedback. They include major media, atmospheres and events. Major media include print media (newspapers, magazines), broadcast media (TV, radio), display media (billboards, posters) and online media (company website). Atmosphere are designed environments that create or reinforce the buyer’s leanings toward buying a product. Events are staged occurrences that communicate messages to target audiences. Nonpersonal communication affects buyers directly. In addition, using mass media often affects buyers indirectly by causing more personal communication through the help of opinion leaders. 157

Selecting the message source In either personal/nonpersonal communication, the message’s impact also depends on how the target audience views the communicator. Messages delivered by highly credible sources are more persuasive. Marketers also hire celebrity endorsers (popular athletes, actors, musicians, cartoon characters) to deliver their messages. However, companies must be careful when selecting celebrities to represent their brands. Picking the wrong spokesperson can result in embarrassment and a tarnished image. 158

Collecting feedback After the message has been sent, the communicator must research its effect on the target audience. This involves asking target audience members whether they remember the message, how many times they saw it, what points they recall, how they felt about the message and their past and present attitudes toward the product and company. The communicator would also like to measure behavior resulting from the message – how many people bought the product, talked o others about it or visited the store. Feedback on marketing communications may suggest changes in promotion program or in the product offer itself. 159

Setting the total promotion budget 4 common methods used to set total budget for advertising: Affordable method : Setting the promotion budget at the level management thinks the company can afford. Percentage-of-sales method : Setting the promotion budget at a certain percentage of current/forecasted sales or as a percentage of the unit sales price. Competitive-parity method : Setting the promotion budget to match competitors’ outlays. Objective-and-task method : Developing the promotion budget by 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. 160

Nature of each promotional tool Advertising : It can reach masses of geographically dispersed buyers at a low cost per exposure and it enables the seller to repeat a message many times. Due to advertising’s public nature, consumers tend to view advertised products as more legitimate. Advertising is also very expressive; it allows the company to dramatize its products through the artful use of viuals , print, sound and color. On the one hand, advertising can be used to build up a long-term image for a product. On the other hand, advertising can trigger quick sales. Advertising also has some shortcomings, i.e., it is impersonal and lacks the direct persuasiveness of the company salespeople. Advertising can carry on only a one-way communication with an audience and the audience does not feel that it has to pay attention/respond. Advertising can also be very costly at times. Personal selling : It is the most effective tool at certain stages of the buying process, particularly in building 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. Finally, with personal selling, the buyer usually feels a greater need to listen and respond. However, the drawback is that the salesforce requires a longer-term commitment than does advertising. Personal selling is also the company’s most expensive promotion tool. Sales promotion : It includes a wide assortment of tools – coupons, contests, discounts, premiums, etc. They attract consumer attention, offer strong incentives to purchase and can be used to dramatize product offers and boost sagging sales. Sales promotions invite and reward quick response. Sales promotion effects, however, are short lived and often are not as effective as advertising/personal selling in building long-run brand preference and customer relationships. Public relations : PR is very believable – news stories, features, sponsorships, events seem more real and believable to readers than ads do. PR can also reach many prospects who avoid salespeople and ads. PR can dramatize a company or product. Marketers tend to underuse PR – a well planned PR campaign used with other promotion mix elements can be very effective and economical. Direct marketing : Direct mail and catalogs, online marketing, mobile marketing, etc. – all share 4 distinctive characteristics. Direct marketing is less public (message is normally directed to a specific person). Direct marketing is immediate and customized (messages can be prepared very quickly and can be tailored to appeal to specific consumers). Finally, direct marketing is interactive (it allows a dialogue between the marketing team and the consumer, and messages can be altered depending on the consumer’s response). Thus, direct marketing is well suited to highly targeted marketing efforts and building one-to-one customer relationships. 161

Promotion mix strategies Marketers can choose from 2 basic promotion mix strategies: Push strategy : This involves pushing the product through marketing channels to final consumers. The producer directs its marketing activities (primarily personal selling and trade promotion) toward channel members to induce them to carry the product and promote it to final consumers. Pull strategy : It involves the producer directing its marketing activities (primarily advertising and consumer promotion) toward final consumers to induce them to buy the product. Most companies use some combination of both the push and pull strategy. Companies consider many factors when designing their promotion mix strategies, including the type of product and market. B2C companies usually pull more, putting more of their funds to advertising, followed by sales promotion, personal selling and then PR. B2B companies tend to push more, putting more of their funds into personal selling, followed by sales promotion, advertising and PR. 162

Socially responsible marketing communication Advertising and sales promotion : By law, companies must avoid false or deceptive advertising. Advertisers must not make false claims. Sellers must avoid bait-and-switch advertising , that attracts buyers under false pretenses. A company's trade promotion activities also are closely regulated – for instance, under the Robinson-Patman Act, sellers cannot favor certain customers through their use of trade promotions. They must make promotional allowances and services available to all resellers on proportionately equal terms. Beyond simply avoiding legal pitfalls, such as deceptive or bait-and-switch advertising, companies can use advertising and other forms of promotion to encourage and promote socially responsible programs and actions. Personal selling : A company's salespeople must follow the rules of ‘fair competition’. To avoid bait-and-switch practices, salespeople statements must match advertising claims. In selling to businesses, salespeople may not offer bribes to purchasing agents or others who can influence sale. They must not obtain or use technical or trade secrets of competitors through bribery or industrial espionage. Finally, salespeople must not disparage competitors or competing products by suggesting things that are not true. 163

Creating competitive advantage Chapter 15 164

Steps in competitor analysis Identifying the company’s competitors Assessing competitors’ objectives, strategies, strengths and weaknesses, and reaction patterns Selecting which competitors to attack or avoid 165

Identifying competitors At the narrowest level, a company can define its competitors as other companies offering similar products and services to the same customers at similar prices. The company might define its competitors as all firms with the same product/class of products. Companies must avoid ‘ competitor myopia ’ – a company is more likely to be buried by its latent competitors than its current ones. Companies can identify their competitors from an industry point of view . A company must understand the competitive patterns in its industry if it hopes to be an effective player in that industry. Companies can also identify competitors from a market point of view . Here they define competitors as companies that are trying to satisfy the same customer need or build relationships with the same customer group. 166

Assessing competitors Determining competitors’ objectives : The company wants to know the relative importance that a competitor places on current profitability, market share growth, cash flow, technological leadership, service leadership and other goals. Knowing a competitors’ mix of objectives reveals whether the competitor is satisfied with its current situation and how it might react to different competitive actions. A company must also monitor its competitors’ objectives for various segments. If the company finds that a competitor has discovered a new segment, this might be an opportunity. If it finds that competitors plan new moves into segments now served by the company, it will be forewarned and forearmed. Identifying competitors’ strategies : The more that one firm’s strategy resembles another firm’s strategy, the more the two firms compete. A strategic group is a group of firms in an industry following the same or a similar strategy in a given target market. Insights emerging from strategic groups: If a company enters a strategic group, the members of that group become its key competitors. Although competition is intense within a strategic group, there is also rivalry among groups. First, some strategic groups may appeal to overlapping customer segments; second, customers may not see much difference in the offers of different groups – they may see little difference in quality; finally, members of one strategic group might expand into new strategy segments. The company needs to look at all the dimensions that identify strategic groups within the industry. It must understand how each competitor delivers value to its customers. It needs to know each competitor’s product quality, features and mix; customer services; pricing policy; distribution coverage; sales force strategy; and advertising, sales promotion, and online and social media programs. And it must study the details of each competitor’s R&D, manufacturing, purchasing, financial and other strategies. Assessing competitors’ strengths and weaknesses : Companies normally learn about their competitors’ strengths and weaknesses through secondary data, personal experience and word of mouth. They can also conduct primary marketing research with customers, suppliers and dealers. They can check competitors’ online and social networking sites. They can benchmark themselves against other firms, comparing the company’s products and processes to those of competitors or leading firms in other industries to identify best practices and find ways to improve quality and performance. Estimating competitors’ reactions : A competitor’s objectives, strategies, and strengths and weaknesses go a long way toward explaining its likely actions. They also suggest its likely reactions to company moves, such as price cuts, promotion increases or new product introductions. In addition, each competitor has a certain philosophy of doing business, a certain internal culture and guiding beliefs. Marketing managers need a deep understanding of a competitor’s mentality if they want to anticipate how that competitor will act or react. 167

Selecting competitors to attack and avoid Strong or weak competitors : Most companies prefer to compete against weak competitors as it requires fewer resources and less time, but there’s usually little to gain. A useful tool for assessing competitor strengths and weaknesses is customer value analysis . The aim of customer value analysis is to determine the benefits that target customers value and how customers rate the relative value of various competitors’ offers. In conducting a customer value analysis, the company first identifies the major attributes that customers value and the importance customers place on these attributes. Next, it assesses its performance against competitors on those valued attributes. The key to gaining competitive advantage is to examine how a company’s offer compares to that of its major competitors in each customer segment. The company wants to find the place in the market where it meets customers’ needs in a way rivals can’t. Close or distant competitors : Most companies will compete with close competitors – those that resemble them most – rather than distant competitors. At the same time, the company may want to avoid trying to destroy a close competitor. Good or bad competitors : The existence of competitors results in several strategic benefits. Competitors may share the costs of market and product development and help legitimize new technologies. They may serve less-attractive segments or lead to more product differentiation. Finally, competitors may help increase total demand. However, a company may not view all its competitors as beneficial. An industry often contains good competitors and bad competitors. Good competitors play by the rules of the industry. Bad competitors, in contrast, break the rules. They try to buy share rather than earn it, take large risks and play by their own rules. Uncontested market spaces : Rather than competing head-to-head with established competitors, many companies seek out unoccupied positions in uncontested market spaces. They try to create products and services for which there are no direct competitors. Called a ‘blue-ocean strategy’ – the goal is to make competition irrelevant. 168

Designing a competitive intelligence system Gathering competitive intelligence can cost much money and time, so the company must design a cost-effective competitive intelligence system. The competitive intelligence system first identifies the vital types of competitive information needed and the best sources of this information. Then, the system continuously collects information from the field (sales force, channels, suppliers, market research firms, internet sites, online monitoring and trade associations) and publish data (government publications, speeches and online databases). Next the system takes the information for validity and reliability, interprets it, and organizes it in an appropriate way. Finally, it sends relevant information to decision makers and responds to inquiries from managers about competitors. With this system, company managers receive timely intelligence about competitors in the form of reports, phone calls, emails, alerts, bulletins and newsletters. Managers can also connect with the system when they need to interpret a competitor’s certain move, know a competitor’s weaknesses and strengths, or assess how a competitor will respond to a planned company move. 169

Basic competitive strategies Overall cost leadership : Here the company works hard to achieve the lowest production and distribution costs. Low costs let it price lower than its competitors and win a large market share. Eg: Walmart Differentiation : Here the company concentrates on creating a highly differentiated product line and marketing program so that it comes across as the class leader in the industry. Most customers would prefer to own this brand if its price is not too high. Eg: Nike Focus : Here the company focuses its effort on serving a few market segments well rather than going after the whole market. Eg: Ritz-Carlton focuses on the top 5% of corporate and leisure travelers. Middle-of-the-roaders : These firms try to be good on all strategic counts but end up not very good at anything. Note: More customer-centered classification of competitive marketing strategies. They suggest that companies gain leadership positions by delivering superior value to their customers. Companies can pursue any of the 3 strategies: Operational excellence : The company provides superior value by leading its industry in price and convenience. It works to reduce costs and create a lean and efficient value delivery system. It serves customers who want reliable, good quality products/services but want them cheaply and easily. Eg: Walmart, Costco, SouthWest Airlines, etc. Customer intimacy : The company provides superior value by precisely segmenting its markets and tailoring its products/services to exactly match the needs of targeted customers. It specializes in satisfying unique customer needs through a close relationship with and intimate knowledge of the customer. It empowers its people to respond quickly to customer needs. Customer-intimate companies serve customers who are willing to pay a premium to get precisely what they want. They will do almost anything to build long-term customer loyalty and to capture customer lifetime value. Eg: Ritz-Carlton Product leadership : The company provides superior value by offering a continuous stream of leading-edge products/services. It aims to make its own and competing products obsolete. Product leaders are open to new ideas, relentlessly pursue new solutions and work to get new products to market quickly. They serve customers who want state-of-the-art products and services, regardless of the costs in terms of price or inconvenience. Eg: Apple 170

Competitive positions in the target market Market leader : The firm in an industry with the largest market share (40%). Market challenger : A runner-up firm that is fighting hard to increase its market share in an industry (30%). Market follower : A runner-up firm that wants to hold its share in an industry without rocking the boat (20%). Market nicher : A firm that serves small segments that the other firms in an industry overlook or ignore (10%). 171

Market leader strategies Expanding total demand : Market leaders can expand the market by developing new users, new uses and more usage of its products. New users/untapped market segments are usually found online, through launching of mobile apps and through targeting emerging markets as China. Marketers can expand markets by discovering and promoting new uses for the product. Finally, market leaders can encourage more usage by convincing people to use the product more often or use more per occasion. Protecting market share : It must prevent or fix weaknesses that provide opportunities for competitors. It must always fulfill its value promise and work tirelessly to keep strong relationships with valued customers. Its prices must remain consistent with the value that customers see in the brand. Continuous innovation – the market leader should always strive to lead the industry in new products, customer services, distribution effectiveness, promotion and cost cutting. It keeps increasing its competitive effectiveness and value to customers. Expanding market share : Small market share increases mean very large sales increases – studies reveal, on average, profitability rises with increasing market share. It appears that profitability increases as a business gains share relative to competitors in its served market. However, gaining increased market share doesn’t automatically mean profitability will improve – much depends on their strategy for gaining increased share. Higher shares tend to produce higher profits only when unit costs fall with increased market share or when the company offers a superior-quality product and charges a premium price that more than covers the cost of offering higher quality. 172

Market challenger strategies These runner-up firms can adopt one of two competitive strategies: They can challenge the market leader and other competitors in an aggressive bid for more market share or they can play along with competitors and not rock the boat. A market challenger must first define which competitors to challenge and its strategy objectives. The challenger can attack the market leader, a high-risk but potentially high-gain strategy. Its goal might be to take over market leadership. Or the challenger’s objective may simply be to wrest more market share. Market challengers often have what some strategists call the ‘ second-mover advantage ’ – the challenger observes what has made the market leader successful and improves on it. In fact, challengers often become market leaders by imitating and improving on the ideas of pioneering processors. Alternatively, the challenger can avoid the leader and instead challenge firms its own size or smaller local and regional firms. The smaller firms may be under-financed and not serving their customers well. If the challenger goes after a small local company, its objective may be to put that company out of business. The market challenger can attack the chosen competitor in 2 ways: It may launch a full-frontal attack , matching the competitor’s product, advertising, price and distribution efforts. It attacks the competitor’s strengths rather than its weaknesses. The outcome depends on who has the greater strength and endurance. Eg: PepsiCo challenges Coca-Cola in this way. Note: If the market challenger has fewer resources than the competitor, this approach will be futile. Thus, many new market entrants avoid such attacks knowing that market leaders can head them off with ad blitzes, price wars and other retaliations. The challenger can make an indirect attack on the competitor’s weaknesses or on gaps in the competitor’s market coverage. Eg: Red Bull tackled market leaders indirectly by selling a high-priced niche product in nontraditional distribution points. 173

Market follower strategies A follower can gain many advantages. The market leader often bears the huge expenses of developing new products and markets, expanding distribution and educating the market. By contrast, as with challengers, the market follower can learn from the market leader’s experience. It can copy or improve on the leader’s products and programs usually with much less investment. Although the follower will probably not overtake the leader, it often can be as profitable. Following is not the same as being passive or a carbon copy of the market leader. A follower must know how to hold current customers and win a fair share of new ones. It must find the right balance between following closely enough to win customers from the market leader and following at enough of a distance to avoid retaliation. Each follower tries to bring distinctive advantages to its target market such as location, services, financing. The follower is often a major target of attack by challengers; therefore, the market follower must keep its manufacturing costs and prices low, or its product quality and services high. It must also enter new markets as they open. 174

Market nicher strategies Nichers know their customer groups so well that it meets their needs better than other firms. Niche firms can build skills and customer goodwill to defend itself against major competitors. The key idea in niching is specialization . A market nicher can specialize along the following lines: Specializing in serving one type of end user , as when a law firm specializes in the criminal/business law markets. Nicher can specialize in serving a given customer-size group – many nichers specialize in serving small and midsize customers who are neglected by the majors. Some nichers focus on one or a few specific customers , selling their entire output to a single company such as Walmart. Other nichers specialize by geographic market , selling only in a certain locality, region or area of the world. Quality-price nichers operate at the low or high end of the market. Eg: HP specializes in the high-quality, high-price end of the hand-calculator market. Service nichers offer services not available from other firms . Sometimes, the market niche may dry up or it grow to the point that it attracts larger competitors. Hence, companies may opt for multiple niching . By developing two or more niches, a company increases its chances for survival. 175

Balancing customer and competitor orientations Product orientation Customer orientation Competitor orientation Market orientation Customer-centered Competitor-centered No Yes No Yes 176

The Global Market Chapter 16 177

Global marketing Global firm : 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. Since the global company sees the world as one market, it minimizes the importance of national boundaries and develops global brands. The global company raises capital, obtains materials and components, and manufacturers and markets its goods wherever it can do the best job. The rapid move toward globalizations means that all companies will have to answer some basic questions: What market position should we try to establish in our country, in our economic region and globally? Who will our global competitors be and what are their strategies and resources? Where should we produce or source our products? What strategic alliances should we form with other firms around the world? Major international marketing decisions : Looking at the global marketing environment Deciding whether to go global Deciding which markets to enter Deciding how to enter the market Deciding on the global marketing program Deciding in the global marketing organization 178

Looking at the global marketing environment Before deciding whether to operate internationally, a company must understand the international marketing environment. International trade system : Start by understanding the international trade system. When selling to another country, a firm may face restrictions on trade between nations. Governments may charge tariffs – taxes on certain imported products designed to raise revenue or protect domestic firms. Tariffs are often used to force favorable trade behaviors from other nations. Countries may sets quotas – limits on the amount of foreign imports that they will accept in certain product categories. The purpose of a quota is to conserve on foreign exchange and protect local industry and employment. Firms may also encounter exchange controls – these limit the amount of foreign exchange and the exchange rate against other currencies. A company may also face nontariff trade barriers , such as biases against its bids, restrictive product standards or excessive host-country regulations or enforcement. World Trade Organization (WTO) : General Agreement on Tariffs and Trade (GATT) was designed to promote world trade by reducing tariffs and other international trade barriers. It established the World Trade Organization (WTO) in 1995, which replaced GATT and now oversees the original GATT provisions. WTO imposes international trade sanctions and mediates global trade disputes. Regional free trade zones : Certain countries have formed free trade zones/economic communities – these are groups of nations organized to work toward common goals in the regulation of international trade. One such community is the European Union (EU) , which was formed in 1957, to create a single European market by reducing barriers to the free flow of products, services, finances and labor among member countries and developing policies on trade with nonmember nations. In 1994, the North American Free Trade Agreement (NAFTA) established a free trade zone among the US, Mexico and Canada. NAFTA has eliminated trade barriers and investment restrictions among the three countries. 179

Looking at the global marketing environment (cont.) Each nation has unique features that must be understood. A nation’s readiness for different products and services and its attractiveness as a market to foreign firms depend on its economic, political-legal and cultural environments. Economic environment : The international marketer must study each country’s economy. 2 economic factors reflect the country’s attractiveness as a market: its industrial structure and its income distribution. The country’s industrial structure shapes its product and service needs, income levels and employment levels. The 4 types of industrial structures are as follows: Subsistence economies : In a subsistence economy, the vast majority of people engage in simple agriculture. They consume most of their output and barter the rest for simple goods and services. These economies offer few market opportunities. Many African countries fall into this category. Raw material exporting economies : These economies are rich in one or more natural resources but poor in other ways. Much of their revenue comes from exporting these resources. Chile exports tin and copper, whereas the Democratic Republic of Congo exports copper, cobalt and coffee. These countries are good markets for large equipment, tools and supplies and trucks. Emerging economies (industrializing economies) : In an emerging economy, fast growth in manufacturing results in rapid overall economic growth. Examples include the BRIC countries – Brazil, Russia, India and China . As manufacturing increases, the country needs more imports of raw materials, steel and heavy machinery and fewer imports of finished textiles, paper products and automobiles. Industrialization typically creates a new rich class and a growing middle class, both demanding new types of imported goods. Industrial economies : Industrial economies are major exporters of manufactured goods and services, and investment funds. They trade goods among themselves and also export them to other types of economies for raw materials and semifinished goods. The varied manufacturing activities of these industrial nations and their large middle class make them rich markets for all sorts of goods. Eg: USA, Japan and Norway. The second economic factor is the country’s income distribution : Industrialized nations may have low-, medium-, and high-income households Countries with subsistence economies consist mostly of households with very low family incomes Poor emerging economies may be attractive markets for all kinds of goods Political-legal environment : In considering to do business in a given country, a company should consider factors such as the country’s attitudes toward international buying, government bureaucracy, political stability and monetary regulations. Cultural environment : When designing global marketing strategies, companies must understand how culture affects consumer reactions in each of its world markets. Sellers must understand the ways that consumers in different countries think about and use certain products before planning a marketing program Business norms and behaviors also vary from country to country 180

Deciding whether to go global Operating domestically is easier and safe. Managers don’t need to learn another country’s language and laws. They don’t have to deal with unstable currencies, face political and legal uncertainties or redesign their products to suit different customer expectations. However, companies that operate in global industries, where their strategic positions in specific markets are affected strongly by their overall global positions, must compete on a regional or worldwide basis to succeed. Ant of several factors might draw a company into international arena. For instance, global competitors might attack the company’s home 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. The company’s customers might be expanding abroad and require international servicing – international markets provide better opportunities for growth. Before going abroad, the company must weigh several risks and answer many questions about its ability to operate globally: Can the company learn to understand the preferences and buyer behavior of consumers in other countries? Can it offer competitively attractive products? Will it be able to adapt to other countries’ business culture and deal effectively with foreign nationals? Do the company’s managers have the necessary international experience? Has management considered the impact of regulations and the political environments of other countries? 181

Deciding which markets to enter Before going abroad, the company should try to define its international marketing objectives and policies. It should decide what volume of sales it wants. The company also needs to choose in how many countries it wants to market. Companies must be careful not to spread themselves too thin or expand beyond their capabilities by operating in too many countries too soon. Next, the company needs to decide on the types of countries to enter. A country’s attractiveness depends on the product, geographical factors, income and population, climate change and other considerations. After listing possible international markets, the company must carefully evaluate each one. It must consider many factors. 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 the following indicators below: Demographic characteristics : education, population size and growth, population age composition Sociocultural factors : consumer lifestyles, beliefs and values; business norms and approaches; cultural and social norms; languages Geographic characteristics : climate, country size, population density (urban/rural), transportation structure and market accessibility Political and legal factors : national priorities, political stability, government attitudes toward global trade, government bureaucracy, monetary and trade regulations Economic factors : GDP size and growth; income distribution; industrial infrastructure; natural resources; financial and human resources Based on these, the marketer must decide which markets offer the greatest long-run ROI. 182

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: Exporting Joint venturing Direct investment 183

Exporting Exporting : Entering foreign markets by selling goods produced in the company’s home country, often with little modification. 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 marketing organization or network. It also involves less risk. International marketing intermediaries bring know-how and services to the relationship, so the seller normally makes fewer mistakes. Sellers eventually move into direct exporting , whereby they handle their own exports. The investment and risk are somewhat greater in this strategy, but so is the potential return. 184

Joint venturing Joint venturing : Entering foreign markets by joining with foreign companies to produce or market a product/service. There are 4 types of joint ventures: Licensing : Entering foreign markets through developing an agreement with a licensee in the foreign market. For a fee or royalty payments, the licensee buys the right to use the company’s manufacturing process, trademark, patent, trade secret or other item of value. The company this gains entry into a foreign market at little risk; at the same time, the licensee gains production expertise or a well-known product or name without having to start from scratch. Eg: Coca-Cola markets internationally by licensing bottlers around the world and supplying them with the syrup needed to produce the product. Contract manufacturing : A joint venture in which a company contracts with manufacturers in a foreign market to produce its product or provide its services. Management contracting : A joint venture in which the domestic firm supplies the management know-how to a foreign company that supplies the capital; the domestic firm exports management services rather than products. Eg: Hilton uses this arrangement in managing hotels around the world, i.e., the hotel chain operates Double Tree by Hilton hotels in a wide range of country. The properties are locally owned, but Hilton manages the hotels with its world-renowned hospitality expertise. Joint ownership : A cooperative venture in which a company creates a local business with foreign investors in a foreign market, who share ownership and control. A company may buy an interest in a local firm, or the tow parties may form a new business venture. Firms 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 or companies may form joint ownership ventures to merge their complementary strengths in developing a global marketing opportunity. 185

Direct investment Direct investment : Entering a foreign market by developing foreign-based assembly or manufacturing facilities. If a company has gained experience in exporting and if the foreign market is large enough, foreign production 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 also improve its image in the host country because it creates jobs. Generally, a firm develops a deeper relationship with the government, customers, local suppliers and distributors allowing it to adapt its products to the local market better. Finally, the firm keeps full control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives. The main drawbacks of direct investment is that the firm faces many risks such as restricted or devalued currencies, falling markets or government changes. 186

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 strategies and programs to local conditions. Standardized global marketing : An international marketing strategy that basically uses the same marketing strategy and mix in all of the company’s international markets. Adapted global marketing : An international marketing approach that adjusts the marketing strategy and mix elements to each international target market, which creates more costs but hopefully produces a larger market share and return. Marketing mix decisions : Product : Straight product extension : Marketing a product in a foreign market without making any changes to the product. Product adaptation : Adapting a product to meet local conditions or wants in foreign markets. Product invention : Creating new products/services for foreign markets. Promotion : Companies can either adopt the same communication strategy they use in the home market or change it for each local market. Communication adaptation : A global communication strategy of fully adapting advertising messages to local markets. Price : It could set a uniform price globally It could charge what consumers in each country would bear Company could use a standard markup of its costs everywhere Regardless of how companies go about pricing their products, foreign prices will probably be higher than domestic prices for comparable prices. Price escalation issues may arise due to cost of transportation, tariffs, importer margin, wholesaler margin and retailer margin to its factory price. Distribution channels : An international company must take a whole-channel view of the problem of distribution products to final consumers – designing international channels that take into account the entire global supply chain and marketing channel, forging an effective global value delivery network. The global value delivery network comprises of : international seller  channels between nations  channels within nations  final user/buyer 187

Deciding on the global marketing organization Companies manage their international marketing activities in at least 3 different ways. Most companies first organize an export department , then create an international division and finally become a global organization . A firm normally gets into international marketing by simply shipping out its goods. If its international sales expand, the company will establish 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. If the firm moves into joint ventures or direct investment, the export department will no longer be adequate. A company may export to one country, license to another, have a joint ownership venture in a third, and own a subsidiary in a fourth. Sooner or later it will create international divisions or subsidiaries to handle all its international activity. International divisions are organized in a variety of ways. An international division’s corporate staff consists of marketing, manufacturing, research, finance, planning and personnel specialists. It plans for and provides services to various operating units, which can soon be organized in 3 ways: Geographical organizations with country managers who are responsible for salespeople, sales branches, distributors and licensees in their respective countries World product groups which are responsible for worldwide sales of different product groups International subsidiaries which are responsible for their own sales and profits Many firms have passed beyond international division stage and are truly global organizations. Global organizations don’t think of themselves as national marketers who sell abroad but as global marketers. 188

Sustainable marketing: Social responsibility and ethics Chapter 17 189

Sustainable marketing Sustainable marketing calls for socially and environmentally responsible actions that meet the present needs of consumers and businesses, while also preserving or enhancing the ability of future generations to meet their needs. Note: Marketing concept recognizes that organizations thrive from day to day by determining the current needs and wants of target customers and fulfilling those needs and wants more effectively and efficiently than the competition. It focuses on meeting the company’s short-term sales, growth and profit needs by giving customers what they want now. However, satisfying consumers’ immediate needs and desires doesn’t always serve the future best interests of either customers or the business. Societal marketing concept considers the future welfare of consumers. Strategic planning concept considers the future company needs. Sustainable marketing concept considers both. 190

Social criticisms of marketing Marketing’s impact on individual consumers Marketing’s impact on society as a whole Marketing’s impact on other businesses 191

Marketing’s impact on individual consumers Consumer advocates, government agencies and other critics have accused marketing of harming consumers through: High prices : Critics point to 3 factors: High costs of distribution : Critics charge that there are too many intermediaries, that intermediaries are inefficient or that they provide unnecessary or duplicate services. As a result, distribution costs too much, and consumers pay for these excessive costs in the form of higher prices. High advertising and promotion costs : Critics charge that much of packaging and promotion adds only psychological, not functional, value to the product. Excessive markups Deceptive practices : Deceptive practices fall into 3 groups: Deceptive pricing – this includes practices such as falsely advertising factory or wholesale prices or a large price reduction from a phony high retail list price. Deceptive promotion – this includes practices such as misrepresenting the product’s features or performance or luring customers to the store for a bargain that is out of stock. Deceptive packaging – this includes exaggerating package contents through subtle design, using misleading labeling or describing size in misleading terms. High-pressure selling : Salespeople are sometimes accused of high-pressure selling that persuades people to buy goods they had no intention of buying. It is often said that insurance, real estate and used cares are sold, not bought. Salespeople are trained to deliver smooth, canned talks to entice purchases. They sell hard because sales contests promise big prizes to those who sell the most. Shoddy, harmful or unsafe products : Criticisms concerning poor product quality or function. One complaint is that too often products and services are not made well or do not perform well . A second complaint concerns product safety – company indifference, increased product complexity, poor quality control. A third complaint is that many products deliver little benefit or may even be harmful . Planned obsolescence : Critics have also charged that some companies practice planned obsolescence causing their products to become obsolete before they actually should need replacement. They accuse some producers of using materials and components that will break, wear, rust or rot sooner than they should. And if the products themselves don’t wear out fast enough, other companies are charged with perceived obsolescence – continually changing consumer concepts of acceptable styles to encourage more and earlier buying. Poor service to disadvantaged consumers : In the US, critics claim that the urban poor often have to shop in smaller stores that carry inferior goods and charge higher prices. The presence of large national chain stores in low-income neighborhoods would help to keep prices down. However, the critics accuse major chain retailers of redlining – drawing a red line around disadvantaged neighborhoods and avoiding placing stores there. 192

Marketing’s impact on society as a whole False wants and too much materialism : Critics have charged that the marketing system urges too much interest in material possessions. The critics do not view this interest in material thins as a natural state of mind but rather as a matter of false wants created by marketing. They claim that marketers stimulate people’s desires for goods and create materialistic models of the good life. Thus, marketers have created an endless loop of mass consumption based on a distorted interpretation of the ‘American Dream.’ Too few social goods : Businesses have been accused of overselling private goods at the expense of public goods. As private goods increase, they require more public services that are usually not forthcoming. For example: An increase in automobile ownership (private good) requires more highways, traffic control, parking spaces and police services (public goods). The overselling of private goods results in social costs. For cars, some of the social costs include traffic congestion, gasoline shortages and air pollution. Therefore, 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. For instance, government is requiring automobile manufacturers to build cars with more efficient engines and better pollution-control systems. Automakers will then raise their prices to cover the extra costs. If buyers find the price of some car models too high, however, these models will disappear. Demand will then move to those producers that can support the sum of the private and social costs. A second option is to make consumers pay the social costs. For instance, many cities around the world are now charging congestion tolls in an effort to reduce traffic congestion. Cultural pollution : Critics charge the marketing system with creating cultural pollution. Commercials interrupt serious programs; pages of ads obscure magazines; billboards mar beautiful scenery; spam fills our email. Critics claim that these interruptions continually pollute people’s minds with messages of materialism, sex, power or status. 193

Marketing’s impact on other businesses Critics also charge that a company’s marketing practices can harm other companies and reduce competition. They identify 3 problems: Acquisitions of competitors : Critics claim that firms are harmed and competition is reduced when companies expand by acquiring competitors, rather than by developing their own new products. Marketing practices that create barriers to entry : Critics have also charged that marketing practices bar new companies from entering an industry. Large marketing companies can use patents and heavy promotion spending or tie up suppliers or dealers to keep out or drive out competitors. Unfair competitive marketing practices : Some firms have used unfair competitive marketing practices with the intention of hurting/destroying other firms. They may set their prices below costs, threaten to cut off business with suppliers or discourage the buying of a competitor’s products. Although various laws work to prevent such predatory competition, it is often difficult to prove that the intent/action was really predatory. 194

Consumer actions to promote sustainable marketing Consumerism Environmentalism 195

Consumerism Consumerism is an organized movement of citizens and government agencies to improve the rights and power of buyers in relation to sellers. Traditional sellers’ rights : 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 inculde 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 buying incentive programs, provided they are not unfair or misleading Traditional buyers’ rights include the following : 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 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 quality of life The right to consume now in a way that will preserve the world for future generations of consumers Note: Each proposed right has led to more specific proposals by consumerists and consumer protection actions by the government: Proposals related to consumer protection include strengthening consumer rights in cases of business fraud and financial protection, requiring greater product safety, ensuring information privacy and giving more power to government agencies. Proposals relating to quality of life include controlling the ingredients that go into certain products and packaging and reducing the level of advertising noise. Proposals for preserving the world for future consumption include promoting the use of sustainable ingredients, recycling and reducing solid wastes, and managing energy consumption. 196

Environmentalism Environmentalism is an organized movement of concerned citizens, businesses and government agencies designed to protect and improve people’s current and future living environment. Environmentalism is concerned with damage to the ecosystem caused by global warming, resource depletion, toxic and solid wastes, litter, the availability of fresh water, etc. Other issues include the loss of recreational areas and the increase in health problems caused by bad air, polluted water and chemically treated food. More companies are now adopting policies of environmental sustainability – a management approach that involves developing strategies that both sustain the environment and produce profits for the company. Environmental sustainability portfolio : At the most basic level, a company can practice pollution prevention . Pollution prevention means eliminating/minimizing waste before it is created. Companies emphasizing prevention have responded with internal green marketing programs – designing and developing ecologically safer products, recyclable and biodegradable packaging, better pollution controls and more energy-efficient operations. At the next level, companies can practice product stewardship – minimizing not only pollution from production and product design but also all environmental impacts throughout the full product life cycle, while at the same time reducing costs. Many companies are adopting design for environment (DFE) and cradle-to-cradle practices . This involves thinking ahead to design products that are easier to recover, reuse, recycle or safely return to nature after usage, thus becoming part of the ecological cycle. DEF and cradle-to-cradle not only help to sustain the environment, but they can also be highly profitable for the company. Companies can plan for new clean technology . Many organizations that have good sustainability headway are still limited by existing technologies. To create fully sustainable strategies, they will need to develop innovative new technologies. 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. This vision of sustainability provides a framework for pollution control, product stewardship and new environmental technology for the company and others to follow. 197

Business actions toward sustainable marketing Under the sustainable marketing concept, a company’s marketing should support the best long-run performance of the marketing system. It should be guided by 5 sustainable marketing principles: Consumer-oriented marketing : A principle of sustainable marketing that holds a company should view and organize its marketing activities from the consumer’s point of view. Customer-value marketing : A principle of sustainable marketing holding that a company should put most of its resources into customer-value-building marketing investments. Innovative marketing : A principle of sustainable marketing that requires a company to seek real product and marketing improvements. Sense-of-mission marketing : A principle of sustainable marketing holding that a company should define its mission in broad social terms rather than narrow product terms. Societal marketing : A principle of sustainable marketing holding a company should make marketing decisions by considering consumers’ wants, the company’s requirements, consumers’ long-run interests and society’s long-run interests. 198

Societal classification of products Sustainable marketing calls for products that are not only pleasing but also beneficial. Products can be classified according to their degree of immediate consumer satisfaction and long-run consumer benefit. Deficient products : Products that have neither immediate appeal nor long-run benefits. Eg: bad-tasting and ineffective medicine Pleasing products : Products that give high immediate satisfaction but may hurt consumers in the long run. Eg: cigarettes, junk food Salutary products : Products that have low immediate appeal but may benefit consumers in the long run. Eg: bicycle helmets, insurance products Desirable products : Products that give both high immediate satisfaction and high long-run benefits. Eg: tasty and nutritious breakfast food 199

Marketing ethics Good ethics are a cornerstone of sustainable marketing. Companies need to develop corporate marketing ethics policies – 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. What principle should guide companies and marketing managers on issues of ethics and social responsibility? One philosophy is that the free market and the legal system should decide such issues . Under this principle, companies and their managers are not responsible fore making moral judgements. Companies can in good conscience do whatever the market and legal systems allow. A second philosophy puts responsibility not on the system but in the hands of individual companies and managers . This philosophy suggest that a company should have a social conscience. Companies and managers should apply high standards of ethics and morality when making corporate decisions, regardless of what the system allows. The American Marketing Association, an international association of marketing mangers and scholars, developed a code of ethics that calls on marketers to adopt the following ethical norms: Do no harm – this means consciously avoiding harmful actions/omissions by embodying high ethical standards and adhering to all applicable laws and regulations in the choices we make. Foster trust in the marketing system – this means striving for good faith and fair dealing so as to contribute toward the efficacy of the exchange process as well as avoiding deception in product design, pricing, communication and delivery of distribution. Embrace ethical values – this means building relationships and enhancing consumer confidence in the integrity of marketing by affirming these core values (honesty, responsibility, fairness, respect, transparency, citizenship). 200

Principles of marketing 15th Edition

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Principles of marketing 15th Edition

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