• Author / Uploaded
• waseem ahmad

Citation preview

Principles of Marketing

Assignment Group Members

Hailey College of Commerce University of the Punjab Lahore Table of Contents Acknowledgment…………………………………………………………………….. Executive Summary………………………………………………………………….. Introduction…………………………………………………………………………..

1

Principles of Marketing

ACKNOWLEDGEMENT

In the name of Allah, the most Gracious and Merciful who gave us the strength and determination to complete this project within due time. 2

Principles of Marketing

We feel great pleasure in expressing our deepest appreciation and heartiest gratitude to Mr. Arshad, the former employee of Polka for his time and corporation through out our project and at the same time our respected Professor Mr. Zia Ur Rehman for his guidance and great help during the course. We would also like to express gratitude towards our families for their never-fading and constant support; and appreciate and acknowledge the patience, understanding and love provided by them. It is of course the reward of their good wishes and kind blessings. The acknowledgement will remain incomplete without special thanks to our friends for their excellent cooperation and nice companionship. With out this bolster it was impossible to ever even conceive a completed project.

EXECUTIVE SUMMARY The main Focus of this report is on the Ice-cream. The current objective of product is to expand its market, to strengthen and position and to capture new markets. We conducted market survey by using different research methodologies The strategy of 3

Principles of Marketing

product is for the obtainment of these objectives is delivery of customer segments of ice-cream market. The main stress of is to change the customer behavior towards the ice-cream which is to make it an impulse item which initially it wasn’t.

Organization Hierarchy

4

Principles of Marketing

5

Principles of Marketing

Company profile: Contact Information

Address: Phone: Fax:

Bund Road, Lahore-Pakistan 111-007-007 111-007-008

Key People

• Chairman: • President, and CEO: • Directors: Industry Information

Sector: Consumer Goods Industry: Ice Cream Top Competitors

• Wall’s •

Yummy

6

Principles of Marketing

We are introducing for the very first time great variety novelty sticks of sugar free ice creams. Introduction of Marketing A market-focused, or customer-focused, organization first determines what its potential customers desire, and then builds the product or service. Marketing theory and practice is justified in the belief that customers use a product or service because they have a need, or because it provides a perceived benefit. Two major factors of marketing are the recruitment of new customers (acquisition) and the retention and expansion of relationships with existing customers (base management). Once a marketer has converted the prospective buyer, base management marketing takes over. The process for base management shifts the marketer to building a relationship, nurturing the links, enhancing the benefits that sold the buyer in the first place, and improving the product/service continuously to protect the business from competitive encroachments.

Definition: “Marketing is a total system of business activities designed to plan, price, promote and distribute want satisfying products to target markets in order to achieve Organizational objectives”. This definition has two significant implications:  Focus: The entire system of business activities should be customer-oriented. Customer’s wants must be recognized and satisfied.  Duration: Marketing should start with an idea about a want satisfying product and should end until the customer‘s want are completely satisfied, which may b sometime after the exchange is made.

Nature and scope of Marketing Marketing can occur anytime a person or organization strives to exchange something of value with another person or organization. Thus, at its core Marketing is a transaction of exchange. In this broad sense, marketing consist of activities designed to generate and facilitate exchanges intended to satisfy human or organizational needs or wants.

7

Principles of Marketing

Evolution of Marketing Marketing as we all know it today began in the 1970s with the birth of the "marketing orientation"  During the first stage of capitalism business had a production orientation. Business was concerned with production, manufacturing, and efficiency issues.  By the mid 1950s a second stage emerged, the sales orientation stage. Business's prime concern was to sell what it produced.  By the early 1970s a third stage, the marketing orientation stage emerged as businesses came to realize that consumer needs and wants drove the whole process. Marketing research became important. Businesses realized it was futile putting a lot of production and sales effort into products that people did not want.  Some commentators claim that we are now on the verge of a fourth stage, one of a personal marketing orientation. They believe that the technology is available today to market to people on an individual basis (see personalized marketing, permission marketing, and mass customization). They feel it is no longer necessary to think in broad aggregated terms like market segments or target markets. Marketing has become an academic discipline in itself, with tertiary degrees in the field now routinely awarded. Masters and Doctrinal degrees can be obtained in numerous subcategories of marketing including: Marketing Research, Consumer Behavior, International Marketing, Industrial Marketing (also called b-to-b marketing), Consumer Marketing (also called b-to-c marketing), Product Management, and e-Marketing.

The Marketing Concept Managers who adopt a market orientation recognize that Marketing is vital to the success of their organizations. This realization is reflected in a fundamental approach to doing business that gives the customer the highest priority. Called the marketing concept, it emphasizes customer orientation and coordination of marketing activities to achieve the organization’s performance objectives.

Ethics and Marketing Marketing is the activity of creating a product/service, packaging it, and selling it over and over. One hopes that one is marketing something that is useful to society — that way society improves or

8

Principles of Marketing survives better. Things go better for everyone, and you personally feel better about yourself because you obtain customers and gain friends — and are helping society to grow. If you are marketing something that is not so good for society, things don't get better, society does not survive so well, and things get worse. And things get worse for you, too. One loses customers and gains enemies. There are laws that had to be written and put into effect in society in order to right the wrongs caused by those who produced and sold products/services that did harm. The harm was actually too much! And thus the laws. Ideally, it is best if you ask yourself if the product or service you offer is something that will improve things or improve society. If it does, that will certainly help when you go to sell it to society. If you try to sell a product or service to society that is harmful, or try to sell it by deception or misrepresentation, or if you have to destroy your competition in order to try to dominate by way of the false premise of "survival of the fittest" — or if you hire a company to do the above actions for you — you reap a whirlwind of trouble from society.

Importance of Marketing Domestic marketing: A company marketing only within its national boundaries only has to consider domestic competition. Even if that competition includes companies from foreign markets, it still only has to focus on the competition that exists in its home market. Products and services are developed for customers in the home market without thought of how the product or service could be used in other markets. All marketing decisions are made at headquarters. The biggest obstacle these marketers face is being blindsided by emerging global marketers. Because domestic marketers do not generally focus on the changes in the global marketplace, they may not be aware of a potential competitor who is a market leader on three continents until they simultaneously open 20 stores in the Northeastern U.S. These marketers can be considered ethnocentric as they are most concerned with how they are perceived in their home country.

Export marketing: Generally, companies began exporting, reluctantly, to the occasional foreign customer who sought them out. At the beginning of this stage, filling these orders was considered a burden, not an opportunity. If there was enough interest, some companies became passive or secondary exporters by hiring an export management company to deal with all the customs paperwork and language barriers. Others became direct exporters, creating exporting departments at headquarters. Product development at this stage is still focused on the needs of domestic customers. Thus, these marketers are also considered ethnocentric.

9

Principles of Marketing

International marketing: If the exporting departments are becoming successful but the costs of doing business from headquarters plus time differences, language barriers, and cultural ignorance are hindering the company’s competitiveness in the foreign market, then offices could be built in the foreign countries. Sometimes companies buy firms in the foreign countries to take advantage of relationships, storefronts, factories, and personnel already in place. These offices still report to headquarters in the home market but most of the marketing mix decisions are made in the individual countries since that staff is the most knowledgeable about the target markets. Local product development is based on the needs of local customers. These marketers are considered polycentric because they acknowledge that each market/country has different needs.

Multinational marketing: At the multi-national stage, the company is marketing its products and services in many countries around the world and wants to benefit from economies of scale. Consolidation of research, development, production, and marketing on a regional level is the next step. An example of a region is Western Europe with the US. But, at the multi-national stage, consolidation, and thus product planning, does not take place across regions; an egocentric approach.

Globally: Today, businesses around the world, both large and small, cannot ignore the impact that the global economy is having on their performance. Globalization, the internet, and information transparency have led to an increasingly mobile workforce, ever more fickle customers, and rapidly changing technologies and business models. One result of this seemingly inexorable trend is that companies are less able to predict - let alone control - the short-term shape of their own markets. As a result, more and more organisations are choosing to adopt a marketing-led philosophy to enable them to win market share and capture and retain the hearts and minds of current and prospective customers. Marketing is becoming more important as organisations around the world strive to develop products and services that appeal to their customers and aim to differentiate their offering in the increasingly-crowded global marketplace. These complex issues heighten the need for effective marketing whilst expanding its scope beyond the ‘marketing function’. Put simply, marketing is no longer the sole prerogative of a single ‘function’, even if the leadership on marketing comes from that function, together with the framework within which marketing strategies are conceived, developed, planned, executed, reviewed and improved. It used to be that a company could rise to the top of its industry and deliver superior shareholder returns by doing one thing well. Not anymore. Marketing’s perceived ability to orchestrate collaboration across an organisation (and its role in driving demand in markets that suffer from low rates of consumption) indicates that marketing is becoming increasingly important, even in organisations and sectors where it has, perhaps, traditionally taken a back seat.

Environmental scanning:

10

Principles of Marketing Environmental scanning is a concept from business management by which businesses gather information from the environment, to better achieve a sustainable competitive advantage. To sustain competitive advantage the company must also respond to the information gathered from environmental scanning by altering its strategies and plans when the need arises.

Definition Environmental Scanning refers to the organizational practice of scanning, identifying, analyzing the external environmental (e.g. issues, trends, threats, opportunities) as part of a larger process of strategic decision making. The practice can be compared to horizon scanning, which focuses more explicitly on longer-term, less immediate issues.

Methods: There are three ways of scanning the business environment:  Ad-hoc scanning - Short term, infrequent examinations usually initiated by a crisis  Regular scanning - Studies done on a regular schedule (say, once a year)  Continuous scanning - (also called continuous learning) - continuous structured data collection and processing on a broad range of environmental factors Most commentators feel that in today's turbulent business environment the best scanning method available is continuous scanning. This allows the firm to act quickly, take advantage of opportunities before competitors do, and respond to environmental threats before significant damage is done.

11

Principles of Marketing

Economic conditions

Demographics

Companies

Competition

Marketing Program Social and cultural forces

Technolog y Political and legal forces

Market segmentation Market segmentation is the identification of portions of the market that are different from one another. Segmentation allows the firm to better satisfy the needs of its potential customers. The Need for Market Segmentation The marketing concept calls for understanding customers and satisfying their needs better than the competition. But different customers have different needs, and it rarely is possible to satisfy all customers by treating them alike. Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to all customers. Mass marketing allows economies of scale to be realized through mass 12

Principles of Marketing production, mass distribution, and mass communication. The drawback of mass marketing is that customer needs and preferences differ and the same offering is unlikely to be viewed as optimal by all customers. If firms ignored the differing customer needs, another firm likely would enter the market with a product that serves a specific group, and the incumbent firms would lose those customers. Target marketing on the other hand recognizes the diversity of customers and does not try to please all of them with the same offering. The first step in target marketing is to identify different market segments and their needs. Requirements of Market Segments In addition to having different needs, for segments to be practical they should be evaluated against the following criteria:  Identifiable: the differentiating attributes of the segments must be measurable so that they can be identified. 

Accessible: the segments must be reachable through communication and distribution channels.



Substantial: the segments should be sufficiently large to justify the resources required to target them.

 Unique needs: to justify separate offerings, the segments must respond differently to the different marketing mixes. 

Durable: the segments should be relatively stable to minimize the cost of frequent changes.

A good market segmentation will result in segment members that are internally homogenous and externally heterogeneous; that is, as similar as possible within the segment, and as different as possible between segments. Bases for Segmentation in Consumer Markets Consumer markets can be segmented on the following customer characteristics.    

Geographic Demographic Psychographic Behavioralistic

Geographic Segmentation: The following are some examples of geographic variables often used in segmentation.    

Region: by continent, country, state, or even neighborhood Size of metropolitan area: segmented according to size of population Population density: often classified as urban, suburban, or rural Climate: according to weather patterns common to certain geographic regions

13

Principles of Marketing

Demographic Segmentation: Some demographic segmentation variables include:           

Age Gender Family size Family lifecycle Generation: baby-boomers, Generation X, etc. Income Occupation Education Ethnicity Religion Social class

Many of these variables have standard categories for their values. For example, family lifecycle often is expressed as bachelor, married with no children (DINKS: Double Income, No Kids), full-nest, empty-nest, or solitary survivor. Some of these categories have several stages, for example, full-nest I, II, or III depending on the age of the children.

Psychographic Segmentation: Psychographic segmentation groups customers according to their lifestyle. Activities, interests, and opinions (AIO) surveys are one tool for measuring lifestyle. Some psychographic variables include:     

Activities Interests Opinions Attitudes Values

Behavioralistic Segmentation: Behavioral segmentation is based on actual customer behavior toward products. Some behavioralistic variables include:      

Benefits sought Usage rate Brand loyalty User status: potential, first-time, regular, etc. Readiness to buy Occasions: holidays and events that stimulate purchases

14

Principles of Marketing

Behavioral segmentation has the advantage of using variables that are closely related to the product itself. It is a fairly direct starting point for market segmentation. Bases for Segmentation in Industrial Markets In contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. They evaluate offerings in more detail, and the decision process usually involves more than one person. These characteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments, and institutions. Many of the consumer market segmentation variables can be applied to industrial markets. Industrial markets might be segmented on characteristics such as:   

Location Company type Behavioral characteristics

Location: In industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor for vendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In some industries firms tend to cluster together geographically and therefore may have similar needs within a region.

Company Type: Business customers can be classified according to type as follows:    

Company size Industry Decision making unit Purchase Criteria

Behavioral Characteristics In industrial markets, patterns of purchase behavior can be a basis for segmentation. Such behavioral characteristics may include:   

Usage rate Buying status: potential, first-time, regular, etc. Purchase procedure: sealed bids, negotiations, etc.

Importance of Marketing Research

15

Principles of Marketing Research, as a general concept, is the process of gathering information to learn about something that is not fully known. Nearly everyone engages in some form of research. From the highly trained geologist investigating newly discovered earthquake faults, to the author of best selling spy novels gaining insight into new surveillance techniques, to the model train hobbyist spending hours hunting down the manufacturer of an old electric engine, each is driven by the quest for information. For marketers, research is not only used for the purpose of learning, it is also a critical component needed to make good decisions. Market research does this by giving marketers a picture of what is occurring (or likely to occur) and, when done well, offers alternative choices that can be made. For instance, good research may suggest multiple options for introducing new products or entering new markets. In most cases marketing decisions prove less risky (though they are never risk free) when the marketer can select from more than one option. Using an analogy of a house foundation, marketing research can be viewed as the foundation of marketing. Just as a well-built house requires a strong foundation to remain sturdy, marketing decisions need the support of research in order to be viewed favorably by customers and to stand up to competition and other external pressures. Consequently, all areas of marketing and all marketing decisions should be supported with some level of research. While research is key to marketing decision making, it does not always need to be elaborate to be effective. Sometimes small efforts, such as doing a quick search on the Internet, will provide the needed information. However, for most marketers there are times when more elaborate research work is needed and understanding the right way to conduct research, whether performing the work themselves or hiring someone else to handle it, can increase the effectiveness of these projects.

Examples of Research in Marketing Marketing research is undertaken to support a wide variety of marketing decisions. The table below presents a small sampling of the research undertaken by marketing decision area

Marketing Decision

Types of Research

Target Markets

sales, market size; demand for product, customer characteristics, purchase behavior, customer satisfaction, website traffic

Product

product development; package protection, packaging awareness; brand name selection; brand recognition, brand preference, product positioning

16

Principles of Marketing

Distribution

distributor interest; assessing shipping options; online shopping, retail store site selection

Promotion

advertising recall; advertising copy testing, sales promotion response rates, sales force compensation, traffic studies (outdoor advertising), public relations media placement

Pricing

price elasticity analysis, optimal price setting, discount options

External Factors

competitive analysis, legal environment; social and cultural trends

Other

company image, test marketing

Doing Research Right: Marketing research is a process that investigates both organizations and people. Of course, organizations are made up of people so when it comes down to it, marketing research is a branch of the social sciences. Social science studies people and their relationships and includes such areas as economics, sociology and psychology. To gain understanding into their fields, researchers in the social sciences use scientific methods that have been tested and refined over hundreds of years. Many of these methods require the institution of tight controls on research projects. For instance, many companies survey (i.e., ask questions) a small percentage of their customers (called a sample) to see how satisfied they are with the company’s efforts. For the information obtained from a small group of customers to be useful when evaluating how all customers feel, certain controls must be in place including controls on who should be included in the sample. Thus, doing research right means the necessary controls are in place to insure it is done correctly and increase the chance the results are relevant. Relying on results of research conducted incorrectly to make decisions could prove problematic if not disastrous. Thousands of examples exist of firms using faulty research to make decisions, including many dot-com companies that failed between 1999 and 2002. As one might expect, the trade-off for doing research right is the increase in cost and time needed to conduct the research. So a big decision for marketers, when it comes to doing research, is to determine the balance between the need for obtaining relevant information and the costs involved in carrying out the research.

17

Principles of Marketing

Research Validity and Reliability: As we discussed, not all research requires undertaking an elaborate study. But even marketers conducting small, informal research should know that any type of research performed poorly will not yield relevant results. In fact, all research, no matter how well controlled, carries the potential to be wrong. There are many reasons why research may not yield good results (a full discussion being beyond the scope of this tutorial), however, most errors can be traced to problems with how data is gathered. In particular, many research mistakes occur due to problems associated with research validity and research reliability.

Research Validity: This problem with data gathering represents several concepts that to the nonresearcher may be quite complex. But basically validity boils down to whether the research is really measuring what it claims to be measuring. For instance, if a marketer is purchasing a research report from a company claiming to measure how people prefer the marketer’s products over competitors’ products, the marketer should understand how the data was gathered to help determine if the research really captures the information the way the research company says it does. While research validity is measured in several ways, those evaluating research results should keep asking this simple question: Is the research measuring what it is supposed to measure? If the marketer has doubts about the answer to this question then it is possible the results should also be questioned.

Research Reliability: This problem relates to whether research results can be applied to a wider group than those who took part in a study. In other words, would similar results be obtained if another group containing different respondents or a different set of data points were used? For example, if 40 salespeople out of 2,000-person corporate sales force participate in a research study focusing on company policy, is the information obtained from these 40 people sufficient to conclude how the entire sales forces feels about company policies? What if the same study was done again with 40 different salespeople, would the responses be similar? Reliability is chiefly concerned with making sure the method of data gathering leads to consistent results. For some types of research this can be measured by having different researchers follow the same methods to see if results can be duplicated. If results are similar then it is likely the method of data gathering is reliable. Assuring research can be replicated and can produce similar results is an important element of the scientific research method.

Risk in Marketing Research 18

Principles of Marketing Doing research right shows that good marketing research, especially when it involves formal research projects, requires strict controls in order to produce relevant information. Being relevant means the probability is high that the research results reflect what is happening now or might happen in the future. But following the right procedures to produce a relevant study does not insure the results of research will be 100% correct as there is always the potential that results are wrong. Because of the risks associated with research, marketers are cautioned not to use the results of marketing research as the only input in making marketing decisions. Rather, smart marketing decisions require considering many factors, including management’s own judgment of what is best. But being cautious with how research is used should not diminish the need to conduct research. While making decisions without research input may work sometimes, long-term success is not likely to happen without regular efforts to collect information. Additionally, risk in research extends to research produced by others, the research process often includes using information initially gathered by other sources, such as market research firms. However, in many instances the methods for collecting this information is not be fully disclosed, thus questions exist regarding research validity and reliability. Marketers using research collected by third-party sources should do so with a reasonable level of skepticism. In fact, it is wise for marketers to always make an effort to locate multiple information sources that address the same issue (e.g., two or more sales forecasts reports). A good rule-of-thumb for all marketers is never to rely on one source for making definitive statements about a market.

Trends in Marketing Research In recent years the evolution of marketing research has been dramatic with marketers getting access to a wide variety of tools and techniques to improve their hunt for information. Below we discuss a few important trends shaping the marketing research field:

Gaining an Information Advantage: In its role as the foundation of marketing, marketing research is arguably marketing’s most important task. Today marketers not only view research as a key ingredient in making marketing decisions they also consider information to be a critical factor in gaining advantage over competitors. Because organizations recognize the power information has in helping create and maintain products that offer value, there is an insatiable appetite to gain even more insight into customers and markets. Marketers in nearly all industries are expected to direct more resources to gathering and analyzing information especially in highly competitive markets. Many of the trends discussed below are directly related to marketers’ quest to acquire large amounts of customer, competitive and market information.

What is a Customer? Definition: 19

Principles of Marketing “A customer is a person or organization that a marketer believes will benefit from the goods and services offered by the marketer’s organization”. As this definition suggests, a customer is not necessarily someone who is currently purchasing from the marketer. In fact, customers may fall into one of three customer groups: •

•

•

Existing Customers – Consists of customers who have purchased or otherwise used an organization’s goods or services, typically within a designated period of time. For some organizations the timeframe may be short, for instance, a coffee shop may only consider someone to be an Existing Customer if they have purchased within the last three months. Other organizations may view someone as an Existing Customer even though they have not purchased in the last few years (e.g., television manufacturer). Existing Customers are by far the most important of the three customer groups since they have a current relationship with a company and, consequently, they give a company a reason to remain in contact with them. Additionally, Existing Customers also represent the best market for future sales, especially if they are satisfied with the relationship they presently have with the marketer. Getting these Existing Customers to purchase more is significantly less expensive and time consuming than finding new customers mainly because they know and hopefully trust the marketer and, if managed correctly, are easy to reach with promotional appeals (i.e., emailing a special discount for new product). Former Customers – This group consists of those who have formerly had relations with the marketing organization typically through a previous purchase. However, the marketer no longer feels the customer is an Existing Customer either because they have not purchased from the marketer within a certain timeframe or through other indications (e.g., a Former Customer just purchased a similar product from the marketer’s competitor). The value of this group to a marketer will depend on whether the customer’s previous relationship was considered satisfactory to the customer or the marketer. For instance, a Former Customer who felt they were not treated well by the marketer will be more difficult to persuade to buy again compared to a Former Customer who liked the marketer but decided to buy from someone else who had a similar product that was priced lower. Potential Customers – The third category of customers includes those who have yet to purchase but possess what the marketer believes are the requirements to eventually become Existing Customers. The requirements to become a customer include such issues as having a need for a product, possessing the financial means to buy, and having the authority to make a buying decision. Locating Potential Customers is an ongoing process for two reasons. First, Existing Customers may become Former Customers (e.g., decide to buy from a competitor) and, thus, must be replaced by new customers. Second, while we noted above that Existing Customers are the best source for future sales, it is new customers that are needed in order for a business to significantly expand. For example, a company that sells only in its own country may see less room for sales growth if a high percentage of people in the country are already Existing Customers. In order to realize stronger growth the company may seek to sell their products in other countries where Potential Customers may be quite high.

Customers and the Organization 20

Principles of Marketing

For most organizations understanding customers is the key to success while not understanding them is a recipe for failure. It is so important that the constant drive to satisfy customers is not only a concern for those responsible for carrying out marketing tasks; satisfying customers is a concern of everyone in the entire organization. Whether someone’s job involves direct contact with customers (e.g., salespeople, delivery drivers, telephone customer service representatives) or indirect contact (e.g., production, accounting), all members of an organization must appreciate the role customers play in helping the organization meets its goals. To ensure everyone understands the customer’s role, many organizations continually preach a “customer is most important” message in department meetings, organizational communication (e.g., internal emails, website postings), and corporate training programs. To drive home the importance of customers, the message often contains examples of how customers impact the company. These examples include:  Source of Information and Ideas - Satisfying the needs of customers requires organizations maintain close contact with them. Marketers can get close to customers by conducting marketing research (e.g., surveys) and other feedback methods (e.g., website comments forms) that encourage customers to share their thoughts and feelings. With this information marketers are able to learn what people think of their present marketing efforts and receive suggestions for making improvements. For instance, research and feedback methods can offer marketers insight into new products and services sought by their customers.  Affects Activities Throughout Organization - For most organizations customers not only affect decisions made by the marketing team but they are the key driver for decisions made throughout the organization. For example, customer’s reaction to the design of a product may affect the type of raw materials used in the product manufacturing process. With customers impacting such a significant portion of a company, creating an environment geared to locating, understanding and satisfying customers is imperative.  Needed to Sustain the Organization - Finally, customers are the reason an organization is in business. Without customers or the potential to attract customers, a company is not viable. Consequently, customers are not only key to revenue and profits they are also key to creating and maintaining jobs within the organization.

The Importance of Good Customers For marketers simply finding customers who are willing to purchase their goods or services is not enough to build a successful marketing strategy. Marketers should look to manage customers in a way that will “identify, create and maintain satisfying relationships with customers.” By using marketing efforts that are designed to “maintain satisfying relationships” rather than simply pursuing a quick sale, the likelihood increases that customers will be more trusting of the marketer and exhibit a higher level of satisfaction with the organization. In turn satisfied customers are more likely to become “good” customers.

21

Principles of Marketing For our purposes we define a “good” customer as one who holds the potential to undertake activities that offer long-term value to an organization. The activities performed by customers not only include purchasing products, these also include such things as:  offering feedback on company performance  making prompt payment  offering suggestions for new products  voluntarily promoting the company’s products to others These activities along with many others (including profit from product sales) represent the value (i.e., benefits for costs spent) an organization receives from its customers. In the case of “good” customers their potential for providing value should be a signal for marketers to direct additional marketing efforts in building, strengthening and sustaining a relationship with these customers. The fact that we place the descriptive term “good” in front of customers should not be taken lightly. Not all customers who currently have relationships with an organization (i.e., Existing Customers) should be treated on an equal level. Some consistently spend large sums to purchase products from an organization; others do not spend large sums but hold the potential to do so; and still others use up a large amount of an organization’s resources but contribute little revenue. Clearly there are lines of demarcation between those in the Existing Customer category. As we will see later, identifying this line is critical for marketing success.

Challenge of Managing Customers While on the surface the process for managing customers may seem to be intuitive and straightforward, in reality organizations struggle to accomplish this. One reason for the struggle is that no two customers are the same. What is appealing to one customer may not necessarily work for another. For instance, a marketer may change how it issues coupons to customers by reducing the frequency of issuing coupons by regular mail and instead directing customers to electronic coupons found on its website. The marketer makes this move to encourage customers to visit the website more often with the hope it will lead to cost savings (e.g., sending out traditional coupons by mail requires postage expense), allow the marketer to acquire more customer information (e.g., monitor their activities when they visit the website), and give the marketer the opportunity to sell more product to the customer (e.g., special promotional messages on the website). However, some long time customers may view electronic coupons as requiring more work on their part compared to coupons delivered through regular mail. In this example the introduction of a new feature may satisfy some customers while irritating others.

Customer Contact Points

22

Principles of Marketing Another problem is that customers may interact with organizations at different contact points. A contact point is the method a customer uses to communicate with a company. For instance, consider the different ways customers may interact with an organization:  In-Person – Customers seek in-person assistance for their needs by visiting retail stores and other outlets, and also through discussion with company salespeople who visit customers at their place of business or in their home.  Telephone – Customers seeking to make purchases or have a problem solved may find it more convenient to do so through phone contact. In many companies a dedicated department called a call center handles all incoming customer inquiries.  Internet – The fastest growing contact point is through the Internet. The use of the Internet for purchasing (called electronic commerce) has exploded and is now the leading method for purchasing certain types of products including music. The Internet is also a key area where customers look for help with their purchases.  Kiosks – A kiosk is a standalone, interactive computer, often equipped with a touch-screen, that offers customers several service options including product information, ability to make a purchase, and review of a customer’s account. Kiosks are now widely used for airline checkin, retail job applications, and banking.  In-Person Product Support – Some in-person assistance is not principally intended to assist with selling but is designed to offer support once a purchase is made. Such services are handled by delivery people and service/repair technicians.  Financial Assistance – Customer contact may also occur through company personnel who assist customers with financial issues. For instance, credit personnel help customers arrange the necessary funds to make a purchase while personnel in accounts receivable work with customers who are experiencing payment problems. The challenge of insuring that customers are handled properly no matter the contact point they use is daunting for many companies. For some organizations the customer contact points cited above operate independently of others. For instance, retail stores may not be directly connected to telephone customer service. The result is that for different contact points many companies have developed different procedures and techniques for handling customers. And for some firms there exists little integration between the contact points so customers communicating through one point one day and another point the next day may receive conflicting information. In such cases customers are likely to become frustrated and question the company’s ability to service its customers. The business market is comprised of organizations that, in some form, are involved in the manufacturer, distribution or support of products or services sold or otherwise provided to other organizations. The amount of purchasing undertaken in the business market easily dwarfs the total spending by consumers. Because the business market is so large it draws the interest of millions of companies worldwide that market exclusively to business customers. For these marketers understanding how businesses make purchase decisions is critical to their organizations’ marketing efforts. In some ways understanding the business market is not as complicated as understanding the consumer market. For example, in certain business markets purchase decisions hinge on the outcome of a bidding process between competitors offering similar products and services. In these cases the decision to buy is often whittled down to one concern – who has the lowest price. Thus,

23

Principles of Marketing unlike consumer markets, where building a recognizable brand is very important, for many purchase situations in the business market this is not the case. However, in many other ways business buying is much more complicated. For instance, the demand by businesses for products and services is affected by consumer purchases (called derived demand) and because so many organizations may have a part in creating consumer purchases, a small swing in consumer demand can create big changes in business purchasing. Automobile purchases are a good example. If consumer demand for cars increases many companies connected with the automobile industry will also see demand for their products and services increase (we will later refer to these companies as supply chain members). Under these conditions companies will ratchet up their operations to ensure demand is met, which invariably will lead to new purchases by a large number of companies. In fact, it is conceivable that an increase of just one or two percent for consumer demand can increase business demand for products and services by five or more percent. Unfortunately, the opposite is true if demand declines. Trying to predict these swings requires businesses to not only understand their immediate customers but also the end user, which as we will discuss, may be well down the supply chain from where the business operates.

Who Makes Up the Business Market There are millions of organizations worldwide selling their products and services to other businesses. They operate in many industries and range in size from huge multinational companies with thousands of employees to one-person small businesses. With such a large number of organizations and industries contained within the business market, a marketer can obtain a better picture of who is involved by looking at popular business classification systems set up by international governments, such as the North American Industrial Classification System (NAICS), which covers Canada, Mexico and the United States and the International Standard Industrial Classification (ISIC), which is widely used in Europe. These reports provide descriptions of hundreds of industry classifications. For instance, the table below shows how US operators of “Golf Pro Shops” are listed in the NAICS coding system. Note the numeric sequence that occurs as one “drills down” in order to locate individual industry groups.

Level

NAICS Code

Description

Sector

45

Retail Trade

Subsector

451

Sporting Goods, Hobby, Book, and Music Stores

Industry Group

4511

Sporting Goods, Hobby, and Musical Instrument Stores

Industry

45111

Sporting Goods Stores

US Industry

451110

Golf Pro Shops

24

Principles of Marketing

Once industry codes are known these can be used within various government and industry research reports to locate specific industry information such as number of firms operating in the industry, total industry sales, number of employees and more. For the purposes of this tutorial, however, we will use a broader approach to categorizing businesses choosing to categorize based on the general business function an organization performs rather then by industry. We break the business market down into two broad categories - Supply Chain Members and Business User Markets.

Supply Chain Members The supply chain consists of mostly for-profit companies engaged in activities involving product creation and delivery. Essentially the chain represents major steps needed to manufacture a product that will eventually be sold as a final product. Each member of the supply chain purchases products and services enabling them to carry out its business objectives. When making purchase decisions supply chain members may be motivated by such factors as: product cost, return on investment (i.e., benefits obtained exceed price paid), assurance of consistent supply (i.e., product is available and delivery is on-time), reciprocity with supplying firm (i.e., we buy from you and you buy from us), and much more. Examples of purchasing occurring in the supply chain include: manufacturing and plant equipment, information technology, office supplies, professional business services, etc. In the table below we arbitrarily identify five main categories of supply chain members primarily based on the stage at which they contribute to the manufacturing process. However, it is conceivable that these categories can be further divided in order to flush out more specific activities.

Supply Chain Member

Raw Material Suppliers

What They Do

Example

These companies are generally Copper is mined and extracted considered the first stage in the supply from copper ore. Copper is then chain and provide basic products refined to remove impurities. through mining, harvesting, fishing, etc., that are key ingredients in the production of higher-order products.

Processed Firms at this level use raw materials to Copper is purchased by electrical Materials or Basic produce more advanced materials or wire manufacturers. Component products contained within more

25

Principles of Marketing

Manufacturers

advanced components.

Advanced Component Manufacturers

These companies use basic components to produce products that offer a significant function needed within a larger product.

Product Manufacturers

This market consists of companies that Power supplies are purchased by purchase both basic and advanced manufacturers of desktop components and then assemble these computers. components into a final product designated for a user. These products may or may not be sold as stand-alone products. Some may be included within larger products.

Support Service Firms

These companies offer services at almost any point in the supply chain and also to the business user market. Some services are directly related to the product while others focus on areas of the business not directly related to production.

Electrical wire is purchased by a manufacturer of electrical power supplies.

Distribution companies, such as truck firms and storage facilities, assist in moving products from one supply chain member to another. However, in most cases they do not take ownership of products that pass through the supply chain.

Business User Markets Besides selling final products and services to supply chain companies, several additional user markets also make purchases either for their own consumption or they buy with the intention of redistributing to others. In these purchase situations the buyer generally does not radically change the product from its form when it was purchased from a Product Manufacturer. While technically these markets are also part of the supply chain, members of the business user market do not, in most cases, engage or directly assist in production activities.

Market

Government

What They Do

Made up of Federal, State, Local and International governments. They use purchases to assist with the functioning of the

Considerations When Buying

Mostly require suppliers to be approved, meet specifications and to bid for purchases.

26

What They Buy

Defense equipment, heavy equipment for public works projects, office supplies, pharmaceuticals, etc.

Principles of Marketing

government that may include redistributing to others.

Not-For-Profit

Organizations whose tax structure precludes earning profits from operations and whose missions tend to be oriented to assisting others.

Look for purchases that will fit within tight budgetary restrictions and also within the mission of the organization.

Office equipment and supplies, office rental, professional services, etc.

Reseller

Also called distributors, these companies operate in both the consumer and the business markets. Their function involves purchasing large volumes of products from manufacturers (and sometimes from other resellers) and selling these products in smaller quantities. Includes wholesalers, retailers and industrial distributors.

Seek products that are of Consumer and industrial products to interest to the reseller’s be redistributed to other businesses customers. Other issues and consumers. include how delivery is handled and whether the supplier offers incentives to help the reseller promote the product.

How Business Markets Compare to Consumer Markets For marketers, the selling environment of business markets present uniquely different circumstances when compared to selling to consumers. At the beginning of this tutorial we saw two ways in which consumer and business markets differ: 1) business markets are more likely to be price driven than brand driven, and 2) demand in business markets tends to be more volatile than consumer markets. However, the two markets are dissimilar in other ways requiring marketers to take a different approach when selling to business customers than to consumers. These differences include:  How Decisions Are Made  Existence of Experienced Purchasers  Time Needed to Make Buying Decision  Size of Purchases  Number of Buyers  Type of Promotional Effort Needed to Reach Buyer A further discussion of each of these differences is presented below: In the consumer market a very large percentage of purchase decisions are made by a single person. There are situations in which multiple people may be involved in a consumer purchase

27

Principles of Marketing decision, such as a child influencing a parent to choose a certain brand of cereal or a husband and wife deciding together to buy a house, but most of the time purchases are individual decisions. The business market is significantly different. While single person purchasing is not unusual, especially within a small company, a significant percentage of business buying, especially within larger organizations, requires the input of many. In the marketing literature those associated with the purchase decision are known to be part of a Buying Center, which consists of individuals within an organization that perform one or more of the following roles:  Buyer – responsible for dealing with suppliers and placing orders (e.g., purchasing agent)  Decider – has the power to make the final purchase decision (e.g., CEO)  Influencer – has the ability to affect what is ordered such as setting order specifications (e.g., engineers, researchers, product managers)  User – those who will actually use the product when it is received (e.g., office staff)  Initiator – any Buying Center member who is the first to determine that a need exists  Gatekeeper – anyone who controls access to other Buying Center members (e.g., administrative assistant) For marketers confronting a Buying Center it is important to first identify who plays what role. Once identified the marketer must address the needs of each member, which may differ significantly. For instance, the Decider, who may be the company president wants to make sure the purchase will not negatively affect the company’s bottom line while the Buyer wants to be assured the product will be delivered on time. Thus, the way each Buying Center member is approached and marketed to requires careful planning in order to address the unique needs of each member.

Experienced Purchasers Organizations often employ purchasing agents or professional buyers whose job is to negotiate the best deals for their company. Unlike consumers, who often lack information when making purchase decisions, professional buyers are generally as knowledgeable about the product and the industry as the marketer who is selling to them.

Decision Making Time Depending on the product, business purchase decisions can drag on for an extensive period. Unlike consumer markets where impulse purchasing is rampant, the number of people involved in business purchase decisions results in decisions taking weeks, months or even years.

Larger Purchases For products that are regularly used and frequently purchased, businesses will often buy a larger volume at one time compared to consumer purchases. Because of this business purchasers often demand price breaks (e.g., discounts) for higher order levels.

Number of Buyers 28

Principles of Marketing While there are several million companies worldwide that operate in the overall business market, within a particular market the number is much smaller. For example, while in the United States there are over 95 million households who may shop at a grocery store, there are only a few thousand grocery stores with many of these centrally controlled as part of a chain of stores. Additionally, within some industries buyers are highly concentrated in certain geographic areas. Consequently, compared to consumer products, marketing efforts are confined to a smaller targeted group.

Promotional Focus Companies who primarily target consumers often use mass advertising methods to reach an often widely dispersed market. For business-to-business marketers the size of individual orders, along with a smaller number of buyers, makes person-to-person contact by sales representatives a more effective means of promotion.

Types of Business Purchase Decisions While it would appear business customers face the same four purchase situations faced by consumers (Minor New Purchase, Minor Re-Purchase, Major New Purchase, Major Re-Purchase), the nature of the business market noted above has led many marketing academics to group business purchase situations into only three categories. The reason is that the idea of a minor order may not hold as well in the business market, where buyers tend to place larger orders and where suppliers’ marketing efforts are directed toward the most profitable buyers. 

Straight Re-Purchase - These purchase situations involve routine ordering. In most cases buyers simply reorder the same products or services that were previously purchased. In fact, many larger companies have programmed re-purchases into an automated ordering system that initiates electronic orders when inventory falls below a certain pre-determined level. For the supplier benefiting from the re-purchase this situation is ideal since the purchaser is not looking to evaluate other products. For competitors who are not getting the order it may require extensive marketing efforts to persuade the buyer to consider other product or service options.



Modified Re-Purchase – These purchases occur when products or services previously considered a straight re-purchase are for some reason now under a re-evaluation process. There are many reasons why a product is moved to the status of a modified re-purchase. Some of these reasons include: end of purchase contract period, change in who is involved in making the purchase, supplier is removed from an approved suppliers list, mandate from top level of organization to re-evaluate all purchasing, or strong marketing effort by competitors. In this circumstance the incumbent supplier faces the same challenges they may have faced when they initially convinced the buyer to make the purchase. For competitors the door is now open and they must work hard to make sure their message is heard by those in charge of the purchase decision.



New Task Purchase – As the name suggests, these purchases are ones the buyer has never or rarely made before. In some ways new task purchases can be considered as either minor or major depending on the total cost or overall importance of the purchase. In either

29

Principles of Marketing case the buyer will spend considerably more time evaluating alternatives. For example, if faced with a major new task purchase, which often involves complex items, such as computer systems, buildings, robotic assembly lines, etc., the purchase cycle from first recognizing the need to placement of the order may be months or even years.

How Businesses Buy Business purchasing follows the same five-step buying process faced by consumers:

1. Need Recognition 2. Search 3. Evaluate Options 4. Purchase 5. After-Purchase Evaluation. While the steps are the same as consumer purchasing, the activities occurring within each step are quite different as we discuss below.

1. Need Recognition In a business environment needs arise from just about anywhere within the organization. The Buying Center concept shows that Initiators are the first organizational members to recognize a need. In most situations the Initiator is also the User or Buyer. Users are inclined to identify the need for new solutions (i.e., new products) while Buyers are more likely to identify the need to re-purchase products. But marketers should also understand that more companies are replacing human involvement in re-purchase decisions with automated methods, thus making it more challenging for competitors to replace currently purchased products. In straight re-purchase situations, whether there is human intervention or not, the purchasing process often jumps from Need Recognition to Purchase and little search activity is performed. As part of this step, a specifications document may be generated that lays out the requirements of the product or service to be purchased. Several members of the Buying Center may be involved in creation of the specifications. For the marketer, establishing close contact with those who draw up the specifications may help position the marketer’s product for inclusion in the search phase.

Search

30

Principles of Marketing The search for alternatives to consider as potential solutions to recognized needs is one of the most significant differences between consumer and business purchasing. Much of this has to do with an organization’s motive to reduce costs. While a consumer will probably not search hard to save two cents a gallon on gas, a company that has a large fleet of cars or trucks certainly will. In fact, this step in the purchase process is where professional buyers make their mark. The primary intention of their search efforts is to identify multiple suppliers who meet product specifications and then, through a screening process, offer a selected group the opportunity to present their products to members of the Buying Center. Although in some industries, such as chemicals, online marketplaces and auction sites offer buyers another option for selecting suppliers that may not include supplier presentations. For suppliers, the key to this step of the purchase process is to make sure they are included within the search activities of the Buyer or others in the Buying Center. In some instances this may require that a supplier work to be included within an approved suppliers list. In the case of online marketplaces and auction sites, suppliers should work to be included within relevant sites.

Evaluate Option Once the search has produced options, members of the Buying Center may then choose among the alternatives. In more advanced purchase situations, members of the Buying Center may evaluate each option using a checklist of features and benefits sought by the buyer. Each feature/benefit is assigned a weight that corresponds to its importance to the purchase decision. In many cases, especially when dealing with Government and Not-For-Profit markets, suppliers must submit bids with the lowest bidder often being awarded the order, assuming products or services meet specifications.

Purchase To actually place the order may require the completion of paperwork (or electronic documents) such as a purchase order. Acquiring the necessary approvals can delay the order for an extended period of time. And for very large purchases, such as buildings or large equipment, financing options may need to be explored.

2. After-Purchase Evaluation After the order is received the purchasing company may spend time reviewing the results of the purchase. This may involve the Buyer discussing product performance issues with Users. If the product is well received it may end up moving to a straight re-purchase status thus eliminating much of the evaluation process on future purchases.

31

Principles of Marketing

What is a Market? The simplest way to define a market is to think of it as consisting of all the people or organizations that may have an interest in purchasing a company’s products or services. In other words, a market comprises all customers who have needs that may be fulfilled by an organization’s offerings. Yet just having a need is not enough to define a market. Many people may say they have a need for a California mansion that overlooks the Pacific Ocean but most would not be considered potential customers of a real estate agent who is attempting to sell such a property. So other factors come into play when defining a market. The first factor is that markets consist of customers who are qualified to make a purchase. Qualified customers are defined as those who:

 Seek a solution to a need, and  Are eligible to make a purchase, and  Possess the financial ability to make the purchase, and  Have the authority to make the decision. For some markets the customer may have a surrogate who will handle some of these qualifications for a targeted customer. For instance, a market may consist of pre-teen customers who have a need for certain clothing items but the actual purchase may rest with the pre-teens’ parents. So the parents could possibly assume one or more surrogate roles (e.g., financial ability, authority) that will result in the pre-teen being a qualified customer. A second factor for defining a market rests with the company’s ability to service the market. To an organization a market can only exist if the solutions sought by customers are ones that the company can satisfy with their offerings. If a company identifies a group of customers who are qualified to make purchases they only become a market for the company once the company is in a position to execute marketing activities designed to service those customers. Thus, for the purposes of this tutorial, a market is defined as a group of customers who are qualified to make purchases of products or services that a marketer is able to offer. However, even if an organization can offer products and services to a market, not all markets will fit an organization’s goals and objectives. With this in mind, we now turn our attention to examining the process marketers follow to choose which markets are best to target with their marketing effort.

Selecting Target Markets through Market Segmentation The market selected by a company as the target for their marketing efforts (i.e., target market) is critical since all subsequent marketing decisions will be directed toward satisfying the

32

Principles of Marketing needs of these customers. But what approach should be taken to select markets the company will target? One approach is to target at a very broad level by identifying the market as consisting of qualified customers who have a basic need that must be satisfied. For example, one could consider the beverage market as consisting of all customers that want to purchase liquid refreshment products to solve a thirst need. While this may be the largest possible market a company could hope for (it would seem to contain just about everyone in the world!) in reality there are no commercial products that would appeal to everyone in the world since individual nutritional needs, tastes, purchase situations, economic conditions, and many other issues lead to differences in what people seek to satisfy their thirst needs. Because people are different and seek different ways to satisfy their needs, nearly all organizations, whether for-profits or not-for-profits, industrial or consumer, domestic or international, must use a Market Segmentation approach to target marketing. This approach divides broad markets, consisting of customers possessing different characteristics, into smaller market segments in which customers are grouped by characteristic shared by others in the segment. To successfully target markets using a segmentation approach, organizations should engage in the following three-step process.

 Identify segments within the overall market  Choose the segment(s) that fits best with the organization’s objectives and goals  Develop a marketing strategy that appeals to the selected target market(s)

Identify Market Segments The first step in targeting markets is to separate customers who make up large, general markets into smaller groupings based on selected characteristics or variables (also referred to as bases of segmentation) shared by those in the group. General markets are most often associated with basic product groups, such as automobile, beverage, footwear, home entertainment, etc. The purpose of segmentation is to look deeper within the general market in order to locate customers with more specific needs within the product group (e.g., seek hybrid automobiles) AND who also share similar characteristics (e.g., college educated, support environmental issues, etc.). When grouped together these customers may form a smaller segment of the general market. By focusing market research on these smaller segments the marketer can learn a great deal about these customers and with this information can begin to craft highly targeted marketing campaigns. We take the approach that the variables used to segment markets can be classified into a three-stage hierarchy with higher stages building on information obtained from lower stages in order to reach greater precision in identifying shared characteristics. Yet, the more precise a marketer wishes to be with their segmentation efforts the more this process requires sufficient funding and

33

Principles of Marketing strong research capabilities. For instance, a marketer entering a new market may not have the ability to segment beyond the first two stages since the precision available in Stage 3 segmentation may demand an established relationship with customers in the market. The three-stage segmentation process presented below works for both consumer and business markets (e.g., manufacturers, reseller, etc.), though, as one might expect, the variables used to segment these markets may be different. Each segmentation stage includes an explanation along with suggestions for variables the marketer should consider. This is not meant to be an exhaustive list, as other variables are potentially available, but for marketers who are new to segmentation these will offer a good starting point for segmenting markets.

Stage 1 Segmentation Variables Stage 1 segmentation consists of variables that can be easily identified through demographics (i.e., statistics that describe a population), geographics (i.e., location issues) and financial information. For both consumer and business segmentation this information focuses mostly on easy to obtain data from such sources as government data (e.g., census information), examining secondary data sources (e.g., news media), trade associations and financial reporting services. While Stage 1 segmentation does not offer the segmentation benefits available with higher-level stages, the marketer benefits from accomplishing the segmentation task in a short time frame and at lower cost. Segmentation Variables Consumer Markets

Segmentation Variables Business Markets

Demographics

Demographics

age group (e.g., teens, retirees, young adults), gender, education level, ethnicity, income, occupation, social class, marital status

type (e.g., manufacturer, retailer, wholesaler), industry, size (e.g., sales volume; number of retail outlets), age (e.g., new; young growth, established growth, mature)

Geographic

Geographic

location (e.g., national, regional, urban/suburban/rural, international), climate

location (e.g., national, regional, urban/suburban/rural, international), climate

Business Arrangement ownership (e.g.,. private versus public, independent versus chain), financial condition (e.g., credit rating, income growth, stock price, cash flow)

Stage 2 Segmentation Variable Some firms, especially companies with limited funds or those who feel they need to move quickly to get their product to market will stop the search for segmentation variables at the Stage 1 level. However, moving beyond Stage 1 segmentation offers a rich amount of customer information that will allow marketers to more effectively and efficiently target customers’ needs. To segment using Stage 2 variables marketers must use market research techniques that help gain insight into customers’ current purchase situation and the environment in which the customer operates. Information at this stage includes learning what options customers have chosen to satisfy their needs, what circumstances within customers’ environment could affect how purchases are 34

Principles of Marketing made, and understanding local conditions that could impact purchase decisions. Marketers might locate some of this information through the same sources used in Stage 1 (e.g., may find out brands most frequently purchased) but most of these variables require the marketer to engage in at least casual contact with customers in the market. This can be done through primary research methods, such as surveying the market, having sales personnel contact customers, purchasing research reports from commercial research firms or hiring consultants to undertake research projects. The cost and time needed to acquire this information may be significantly greater than that of Stage 1 segmentation.

Segmentation Variables Consumer Markets

Current Purchasing Situation brands used, purchase frequency, current suppliers Purchase Ready possess necessary equipment, property, knowledge and skill sets Local Environment cultural, political, legal

Segmentation Variables Business Markets

Current Purchasing Situation brands used, purchase frequency, current suppliers Purchase Ready possess necessary equipment, property, knowledge and skill sets Local Environment cultural, political, legal Customers Served by the Business identify the business’ market Business’ Perceived Image identify how targeted businesses are perceived by their customers

Stage 3 Segmentation Variables Marketers choosing to segment at the Stage 3 level face an enormous challenge in gathering useful segmentation information but, for those who do commit to segmenting at this level, the rewards may include gaining competitive advantage over rivals whose segmentation efforts have not dug this deep. However to reach the reward the marketer must invest significant time and money to amass the detailed market intelligence needed to achieve Stage 3 segmentation. Additionally much of what is needed at Stage 3 is information that is often well protected and not easily shared by customers. In fact, many customers are unwilling to share certain personal information (e.g., psychological) with marketers with whom they are not familiar. Consequently, segmenting on Stage

35

Principles of Marketing 3 variables is often not an option for marketers new to a market unless they purchase this access via other means (e.g., hire a consultant who knows the market to undertake customer research). To get access to this information, marketers who already serve the market with other products may be able to use primary research such as focus groups, in-depth interviews, observation research and other high level market research techniques.

Segmentation Variables Business Markets

Segmentation Variables Consumer Markets Benefits Sought price, overall value, specific feature, ease-of-use, service, etc. Product Usage how used, situation when used, etc. Purchase Conditions time of day/month/year when purchased, credit terms, trade-in option, etc. Characteristics of Individual Buyer purchase experience, how purchase is made, influencers on purchase decision, importance of purchase Psychographics personality, attitudes, and lifestyle combined with demographics

Benefits Sought price, overall value, specific feature, services, profit margins, promotional assistance; etc. Product Usage how used (e.g., raw material, component product, major selling item at retail level), situation when used, etc. Purchase Conditions length of sales cycle, set product specifications, bid pricing, credit terms, trade-in option, product handling, etc. Characteristics of Buying Center purchase experience, number of members, make-up of key influencers, willingness to assume risk;

Choosing Market Segments The second step in selecting target markets requires the marketer to critically evaluate the segments identified in Step 1 in order to select those which are most attractive. For small firms this step may not be very involving since they may lack the resources needed to do it effectively. So they are often left with using their own intuition or judgment to determine which segments are the most promising. For companies with the time and money to commit to this step, the results may identify the segments that are primary candidates for current marketing efforts and also present segments that are future targets for the company’s offerings.

36

Principles of Marketing In determining whether a segment is worthy of being a target market, the marketer needs to address the following questions:  Is the segment large enough to support the marketer’s objectives? This is an especially critical question if the marketer is entering a market served by many competitors.  Is the segment showing signs of growth? One of the worst situations for a marketer is to enter a market whose growth is flat or declining, especially if competitors already exist.  Does the company have the necessary skills, knowledge and expertise to service the segment? The company should understand and be able to communicate with the customers in the segment, otherwise they may face a significant learning curve in understanding how to effectively market to a segment.  Does the segment meet the mission of the company? The segment should not extend too far beyond the direction the company has chosen to take. Once one or more segments have been identified the marketer must choose the most attractive option(s) for their marketing efforts. At this point the choice becomes the firm’s target market(s).

Develop Marketing Strategy to Appeal to Target Market(s) The result of analyzing market segments leads the marketer to consider one of the following target marketing strategies. 

Undifferentiated or Mass Marketing – Under this strategy the marketer attempts to appeal to one large market with a single marketing strategy. While this approach offers advantages in terms of lowering development and production costs, since only one product is marketed, there are few markets in which all customers seek the same benefits. While this approach was very popular in the early days of marketing (e.g., Ford Model-T), few companies now view this as a feasible strategy.



Differentiated or Segmentation Marketing – Marketers choosing this strategy try to appeal to multiple smaller markets with a unique marketing strategy for each market. The underlying concept is that bigger markets can be divided into many sub-markets and an organization chooses different marketing strategies to reach each sub-market it targets. Most large consumer products firms follow this strategy as they offer multiple products (e.g., running shoes, basketball shoes) within a larger product category (e.g., footwear).



Concentrated or Niche Marketing –This strategy combines mass and segmentation marketing by using a single marketing strategy to appeal to one or more very small markets. It is primarily used by smaller marketers who have identified small sub-segments of a larger segment that are not served well by larger firms that follow a segmentation marketing approach. In these situations a smaller company can do quite well marketing a single product to a narrowly defined target market.



Customized or Micro-Marketing - This newest target marketing strategy attempts to appeal to targeted customers with individualized marketing programs. For micro-marketing segmentation to be effective the marketer must, to some degree, allow customers to “build37

Principles of Marketing their-own” products. This approach requires extensive technical capability for marketers to reach individual customers and allow customers to interact with the marketer. The Internet has been the catalyst for this target marketing strategy. As more companies learn to utilize the Internet micro-marketing is expected to flourish.

Product Positioning No matter which target marketing strategy is selected, the overall marketing strategy should involve the process of positioning the firm’s offerings in ways that will appeal to targeted customers. Positioning is concerned with the perception customers hold regarding a product or company. In particular, it relates to marketing decisions an organization undertakes to get customers to think about a product or company in a certain way compared to its competitors. The goal of positioning is to convince customers to believe the marketer’s offerings are different in some way from its competitors on an important benefit sought by the market. For instance, if a customer has discovered she has a need for an affordable laptop computer, a company such as Dell may come to mind since their marketing efforts position their products as offering good value at a reasonable cost. To position successfully the marketer must have thorough knowledge of the key benefits sought by the market. Obviously the more effort the marketer expends on segmentation (i.e., reached Stage 3) the more likely they will know the benefits sought by the market. Once known, the marketer must: 1) tailor marketing efforts to ensure their offerings satisfy the most sought after benefits, and 2) communicate to the market in a way that differentiates the marketer’s offerings from competitors. For firms that seek to appeal to multiple target markets (i.e., segmentation marketing), positioning strategies may differ for each market. For example, a marketer may sell the same product to two different target markets, but in one market the emphasis is on styling while in another market the emphasis is on ease-of-use benefits. The important point is that the overall market strategy must be evaluated for each target market since what works well in one market may not work as well in another market.

Product Decisions Marketing starts with the product since it is what an organization has to offer its target market. As we’ve stressed many times in this tutorial, organizations attempt to provide solutions to a target market’s problems. These solutions include tangible or intangible (or both) product offerings marketed by an organization. In addition to satisfying the target market’s needs, the product is important because it is how organizations generate revenue. It is the “thing” that for-profit companies sell in order to realize profits and satisfy stakeholders and what non-profit organizations use to generate funds needed to sustain itself. Without a well-developed product strategy that includes input from the target market, a marketing organization will not have long-term success. Categories of Business Products

38

Principles of Marketing

Categories of Business Products The amount spent on business purchasing far exceeds consumer purchasing. Products sold within the b-to-b market fall into one of the following categories:  Raw Materials – These are products obtained through mining, harvesting, fishing, etc., that are key ingredients in the production of higher-order products.  Processed Materials – These are products created through the processing of basic raw materials. In some cases the processing refines original raw materials while in other cases the process combines different raw materials to create something new. For instance, several crops including corn and sugar cane can be processed to create ethanol which has many uses including as a fuel to power car and truck engines.  Equipment – These are products used to help with production or operations activities. Examples range from conveyor belts used on an assembly line to large buildings used to house the headquarters staff of a multi-national company.  Basic Components – These are products used within more advanced components. These are often built with raw material or processed material. Electrical wire is an example.  Advanced Components – These are products that use basic components to produce products that offer a significant function needed within a larger product. Yet by itself an advanced component does not stand alone as a final product. In computers the motherboard would be an example since it contains many basic components but without the inclusion of other products (e.g., memory chips, microprocessor, etc.) would have little value.  Product Component – These are products used in the assembly of a final product though these could also function as stand alone products. Dice included as part of a children’s board game would be an example.  MRO (Maintenance, Repair and Operating) Products – These are products used to assist with the operation of the organization but are not directly used in producing goods or services. Office supplies, parts for a truck fleet and natural gas to heat a factory would fall into this category.

Components of a Product On the surface it seems a product is simply a marketing offering, whether tangible or intangible, that someone wants to purchase and consume. In which case one might believe product decisions are focused exclusively on designing and building the consumable elements of goods, services or ideas. For instance, one might think the key product decision for a manufacturer of floor cleaners is to focus on creating a formula that cleans more effectively. In actuality, while decisions related to the consumable parts of the product are extremely important, the Total Product consists of

39

Principles of Marketing more than what is consumed. The total product offering and the decisions facing the marketer can be broken down into three key parts: 1. Core Benefits 2. Actual Product 3. Augmented Product

1. Core Benefits: While many needs are addressed by the consumption of a product or service, some needs are not. For instance, customers may need to be perceived highly by other members of their group or need a product that is easy to use or need a risk-free purchase; people make buying decisions that satisfy their needs. While many needs are addressed by the consumption of a product or service, some needs are not. For instance, customers may need to be perceived highly by other members of their group or need a product that is easy to use or need a risk-free purchase. In each of these cases, and many more, the core product itself is the benefit the customer receives from using the product. In some cases these core benefits are offered by the product itself (e.g., floor cleaner) while in other cases the benefit is offered by other aspects of the product (e.g., the can containing the floor cleaner that makes it easier to spread the product). Consequently, at the very heart of all product decisions is determining the key or core benefits a product will provide. From this decision, the rest of the product offering can be developed.

2. Actual Product: The core benefits are offered through the components that make up the actual product the customer purchases. For instance, when a consumer returns home from shopping at the grocery store and takes a purchased item out of her shopping bag, the actual product is the item she holds in her hand. Within the actual product is the consumable product, which can be viewed as the main good, service or idea the customer is buying. For instance, while toothpaste may come in a package that makes dispensing it easy, the Consumable Product is the paste that is placed on a toothbrush. But marketers must understand that while the consumable product is, in most cases, the most critical of all product decisions, the actual product includes many separate product decisions including product features, branding, packaging, labeling, and more. Full coverage of several of these important areas is provided later in this tutorial.

3. Augmented Product: Marketers often surround their actual products with goods and services that provide additional value to the customer’s purchase. While these factors may not be key reasons leading customers to purchase (i.e., not core benefits), for some the inclusion of these items strengthens the purchase decision while for others failure to include these may cause the customer not to buy. Items considered part of the augmented product include:  Guarantee – This provides a level of assurance that the product will perform up to expectations and if not the company marketing the product will support the customer’s decision to replace, have it repaired or return for a refund.

40

Principles of Marketing  Warranty – This offers customers a level of protection that often extends past the guarantee period to cover repair or replacement of certain product components.  Customer Service – This consists of additional services that support the customer’s needs including offering training and assistance via telephone or online.  Complementary Products – The value of some product purchases can be enhanced with add-on products, such as items that make the main product easier to use (e.g., laptop carry bag), enhance styling (e.g., cell phone face plates) or extend functionality (e.g., portable keyboard for PDAs).  Accessibility – How customers obtain the product can affect its perceived value depending on such considerations as how easy it is to obtain (e.g., stocked at nearby store, delivered directly to office), the speed at which it can be obtained, and the likelihood it will be available when needed.

Product Management Responsibilities The reader should understand that no two marketing situations are the same. Yet while some concepts and strategies important to one marketer may not hold the same weight with another, in general, the basic principles of marketing (e.g., satisfying target markets, support decisions using research, etc.) hold no matter the type of industry, type of company or type of product being sold. What is often different between two marketing situations is the level of complication and challenge that arises as a marketer’s scope of responsibility increases. For our purposes a marketer’s level of responsibility is measured in terms of:

• the number and variety of tasks that must be performed (i.e., what has to be done) • the value these tasks represent to the organization (i.e., how important marketing is perceived within the company) • The overall financial stake the marketing position holds (i.e., total sales volume and profit generation). For instance, with regard to product decisions, as a marketer’s responsibilities become greater her or his day-to-day job shifts from being involved in specific product issues (e.g., finding a graphics design company to create a new label) to decisions concerning many products and focusing on setting the future marketing direction of the company (e.g., developing marketing plans for numerous products). We can see this in greater detail by examining the responsibilities associated with four different marketing management levels:  Product Item Level – At this level responsibilities are associated with marketing a single product or brand. By “single” we are limiting the marketer’s responsibility to one item. For 41

Principles of Marketing instance, a startup software development company may initially market just one product. In some organizations the person in charge has the title Product Manager, though in smaller companies this person may simply be the Marketing Manager.  Brand Product Line Level – At this level responsibilities are associated with managing two or more similar product items. By “similar” we are referring to products carrying the same brand name that fit within the same product category and offer similar solutions to customers’ needs. Procter & Gamble, one of the largest consumer products companies in the world, markets Tide laundry detergent in several different packaging sizes (e.g., 50oz., 100oz., 200oz.), in different forms (e.g., powder, liquid) and with different added features (e.g., softener, bleach). Tide’s product line consists of over 100 different versions of the product. Differences in the product offerings indicate these are targeted to different segments within the larger market (e.g., those preferring liquid vs. those preferring powder), however, it may also represent a choice for the same target market who may seek variety. A product line is often measured by its depth, relative to competitors, with deep product lines offering extensive product items. Brand product lines are often managed by a Brand or Product Line Manager.  Category Product Line Level – At this level responsibilities are associated with managing two or more brand product lines within the same product category. In this situation the marketer may manage products that offer similar basic benefits (e.g., clean clothes) but target their offerings to slightly different needs (e.g., product for tough to clean clothing vs. product to clean delicate clothing). Multiple brand product lines allow the marketer to cover the needs of more segments and, consequently, increase their chance to generate sales. Often in larger companies category product lines are the responsibility of the Product Category or Divisional Marketing Manager who may have Brand Product Managers reporting to him/her.  Product Mix Level – At this level responsibilities include two or more category product lines that are directed to different product categories. In some cases the category product lines may yield similar general solutions (e.g., cleaning) but are aimed at entirely different target markets (e.g., cleaning dishes vs. cleaning automobiles). In large companies, the product lines are very diverse and offer different solutions. For example, BIC sells writing instruments, shaving products, and lighters. This diversification strategy cushions against an “all-eggs-in-one-basket” risk that may come if a company directs all resources to one product category. A product mix can be classified based on its width (how many different category product lines) and its depth (how many different brand product lines within a category product line). Generally responsibility for this level belongs to a company’s Vice President for Marketing.

Mellow We made an ice cream which is genuinely a consumer product and it is perishable..

Branding Strategy

42

Principles of Marketing By branding approach we are referring to different product identification strategies that can be deployed to establish a product within the market. As we will see, the purpose of these approaches is to build a brand that will exist for the long term. Making smart decisions up front is crucial since a company may have to live with the decision for a long time.

What are Channels of Distribution? We describe a supply chain as consisting of all parties and their supplied activities that help a marketer create and deliver products to the final customer. For marketers, the distribution decision is primarily concerned with the supply chain’s front-end or channels of distribution that are designed to move the product (goods or services) from the hands of the company to the hands of the customer. Obviously when we talk about intangible services the use of the word “hands” is a figurative way to describe the exchange that takes place. But the idea is the same as with tangible goods. All activities and organizations helping with the exchange are part of the marketer’s channels of distribution. Activities involved in the channel are wide and varied though the basic activities revolve around these general tasks:

• • • • • • •

Ordering Handling and shipping Storage Display Promotion Selling Information feedback

Type of Channel Members Channel activities may be carried out by the marketer or the marketer may seek specialist organizations to assist with certain functions. We can classify specialist organizations into two broad categories: resellers and specialty service firms.

Resellers: These organizations, also known within some industries as intermediaries, distributors or dealers, generally purchase or take ownership of products from the marketing company with the intention of selling to others. If a marketer utilizes multiple resellers within its distribution channel strategy the collection of resellers is termed a Reseller Network. These organizations can be classified into several sub-categories including: Retailers – Organizations that sell products directly to final consumers. Wholesalers – Organizations that purchase products from suppliers, such as manufacturers or other wholesalers, and in turn sell these to other resellers, such as retailers or other wholesalers. Industrial Distributors – Firms that work mainly in the business-to-business market selling products obtained from industrial suppliers.

43

Principles of Marketing

Specialty Service Firms: These are organizations that provide additional services to help with the exchange of products but generally do not purchase the product (i.e., do not take ownership of the product):

Agents and Brokers – Organizations that mainly work to bring suppliers and buyers together in exchange for a fee.

Distribution Service Firms – Offer services aiding in the movement of products such as assistance with transportation, storage, and order processing.

Others – This category includes firms that provide additional services to aid in the distribution process such as insurance companies and firms offering transportation routing assistance.

Importance of Distribution Channels As noted, distribution channels often require the assistance of others in order for the marketer to reach its target market. But why exactly does a company need others to help with the distribution of their product? Wouldn’t a company that handles its own distribution functions be in a better position to exercise control over product sales and potentially earn higher profits? Also, doesn’t the Internet make it much easier to distribute products thus lessening the need for others to be involved in selling a company’s product? While on the surface it may seem to make sense for a company to operate its own distribution channel (i.e., handling all aspects of distribution) there are many factors preventing companies from doing so. While companies can do without the assistance of certain channel members, for many marketers some level of channel partnership is needed. For example, marketers who are successful without utilizing resellers to sell their product (e.g., Dell Computers sells mostly through the Internet and not in retail stores) may still need assistance with certain parts of the distribution process (e.g., Dell uses parcel post shippers such as FedEx and UPS). In Dell’s case creating their own transportation system makes little sense given how large such a system would need to be in order to service Dell’s customer base. Thus, by using shipping companies Dell is taking advantage of the benefits these services offer to Dell and to Dell’s customers.

Benefits Offered by Channel Members  Cost Savings in Specialization – Members of the distribution channel are specialists in what they do and can often perform tasks better and at lower cost than companies who do not have distribution experience. Marketers attempting to handle too many aspects of distribution may end up exhausting company resources as they learn how to distribute, resulting in the company being “a jack of all trades but master of none.”

44

Principles of Marketing  Reduce Exchange Time – Not only are channel members able to reduce distribution costs by being experienced at what they do, they often perform their job more rapidly resulting in faster product delivery. For instance, consider what would happen if a grocery store received direct shipment from EVERY manufacturer that sells products in the store. This delivery system would be chaotic as hundreds of trucks line up each day to make deliveries, many of which would consist of only a few boxes. On a busy day a truck may sit for hours waiting for space so they can unload their products. Instead, a better distribution scheme may have the grocery store purchasing its supplies from a grocery wholesaler that has its own warehouse for handling simultaneous shipments from a large number of suppliers. The wholesaler will distributes to the store in the quantities the store needs, on a schedule that works for the store, and often in a single truck, all of which speeds up the time it takes to get the product on the store’s shelves.  Customers Want to Conveniently Shop for Variety – Marketers have to understand what customers want in their shopping experience. Referring back to our grocery store example, consider a world without grocery stores and instead each marketer of grocery products sells through their own stores. As it is now, shopping is time consuming, but consider what would happen if customers had to visit multiple retailers each week to satisfy their grocery needs. Hence, resellers within the channel of distribution serve two very important needs: 1) they give customers the products they want by purchasing from many suppliers (termed accumulating and assortment services), and 2) they make it convenient to purchase by making products available in single location.  Resellers Sell Smaller Quantities – Not only do resellers allow customers to purchase products from a variety of suppliers, they also allow customers to purchase in quantities that work for them. Suppliers though like to ship products they produce in large quantities since this is more cost effective than shipping smaller amounts. For instance, consider what it costs to drive a truck a long distance. In terms of operational expenses for the truck (e.g., fuel, truck driver’s cost) let’s assume it costs (US) $1,000 to go from point A to point B. Yet in most cases, with the exception of a little decrease in fuel efficiency, it does not cost that much more to drive the truck whether it is filled with 1000 boxes containing the product or whether it only has 100 boxes. But when transportation costs are considered on a per product basis ($1 per box vs. $10 per box) the cost is much less for a full truck. The ability of intermediaries to purchase large quantities but to resell them in smaller quantities (referred to as bulk breaking) not only makes these products available to those wanting smaller quantities but the reseller is able to pass along to their customers a significant portion of the cost savings gained by purchasing in large volume.  Create Sales – Resellers are at the front line when it comes to creating demand for the marketer’s product. In some cases resellers perform an active selling role using persuasive techniques to encourage customers to purchase a marketer’s product. In other cases they encourage sales of the product through their own advertising efforts and using other promotional means such as special product displays.  Offer Financial Support – Resellers often provide programs that enable customers to more easily purchase products by offering financial programs that ease payment 45

Principles of Marketing requirements. These programs include allowing customers to: purchase on credit; purchase using a payment plan; delay the start of payments; and allowing trade-in or exchange options.  Provide Information – Companies utilizing resellers for selling their products depend on distributors to provide information that can help improve the product. High-level intermediaries may offer their suppliers real-time access to sales data including information showing how products are selling by such characteristics as geographic location, type of customer, and product location (e.g., where located within a store, where found on a website). If high-level information is not available, marketers can often count on resellers to provide feedback as to how customers are responding to products. This feedback can occur either through surveys or interviews with reseller’s employees or by requesting the reseller allow the marketer to survey customers.

Costs of Utilizing Channel Members Loss of Revenue – Resellers are not likely to offer services to a marketer unless they see financial gain in doing so. They obtain payment for their services as either direct payment (e.g., marketer pays for shipping costs) or, in the case of resellers, by charging their customers more than what they paid the marketer for acquiring the product (termed markup). For the latter, marketers have a good idea of what the final customer will pay for their product which means the marketer must charge less when selling the product to resellers. In these situations marketers are not reaping the full sale price by using resellers, which they may be able to do if they sold directly to the customer.

Loss of Communication Control – Marketers not only give up revenue when using resellers, they may also give up control of the message being conveyed to customers. If the reseller engages in communication activities, such as personal selling in order to get customers to purchase the product, the marketer is no longer controlling what is being said about the product. This can lead to miscommunication problems with customers, especially if the reseller embellishes the benefits the product provides to the customer. While marketers can influence what is being said by training reseller’s salespeople, they lack ultimate control of the message.

Loss of Product Importance – Once a product is out of the marketer’s hands the importance of that product is left up to channel members. If there are pressing issues in the channel, such as transportation problems, or if a competitor is using promotional incentives in an effort to push their product through resellers, the marketer’s product may not get the attention the marketer feels it should receive.

Retailing

46

Principles of Marketing In an ideal business world, most marketers would prefer to handle all their distribution activities by way of the corporate channel arrangement. Such an arrangement provides the marketer with two important benefits. First, being responsible for all distribution means the marketing organization need only worry about making decisions concerning their product. When others, such as resellers, are involved in distribution attention is not given to a single supplier but is stretched across all products the reseller carries. Second, having control on all distribution means the marketer is always in direct contact with buyers of their products, which can make it easier to build strong, long-term relationships with customers. Unfortunately, as we saw in the last tutorial, for many marketing organizations a corporate channel arrangement is not feasible. Whether due to high cost or lack of experience needed to run a channel efficiently, the majority of marketing organizations rely on third parties to get their products into the hands of customers. Now we examine the key parties through which marketers seek distribution assistance. Choosing which parties to aid in product distribution is important since a distributor’s actions can affect how customers view the marketer and the products they offer. As we discussed a customer’s perception of a product affects how they mentally position the product in relation to competitive products. How a product is distributed, including where it is located (e.g., reputation of resellers from whom they purchase) and customer experience with the purchasing process (e.g., how long to receive, condition when received), will impact a customer’s feelings about the product which in turn affects how a customer positions the product in their mind.

What is Retailing? Retailing is a distribution channel function where one organization buys products from supplying firms or manufactures the product themselves, and then sells these directly to consumers. A retailer is a reseller (i.e., obtains product from one party in order to sell to another) from which a consumer purchases products. In the US alone there are over 1,100,000 retailers according to the 2002 US Census of Retail Trade. In the majority of retail situations, the organization from which a consumer makes purchases is a reseller of products obtained from others and not the product manufacturer. But as we discussed some manufacturers also operate their own retail outlets in a corporate channel arrangement. While consumers are the retailer’s buyers, a consumer does not always buy from retailers. For instance, when a consumer purchases from another consumer (e.g., eBay) the consumer purchase would not be classified as a retail purchase. This distinction can get confusing but in the US and other countries the dividing line is whether the one selling to consumers is classified as a business (e.g., legal and tax purposes) or is selling as a hobby without a legal business standing. For consumers the most important benefits relate to the ability to purchase small quantities of a wide assortment of products at prices that are considered reasonably affordable. For suppliers the most important benefits relate to offering opportunities to reach their target market, build product demand through retail promotions, and provide consumer feedback to the product marketer.

Concerns of Retailers 47

Principles of Marketing Retailers are faced with many issues as they attempt to be successful. The key issues include:  Customer Satisfaction – Retailers know that satisfied customers are loyal customers. Consequently, retailers must develop strategies intended to build relationships that result in customers returning to make more purchases.  Ability to Acquire the Right Products – A customer will only be satisfied if they can purchase the right products to satisfy their needs. Since a large percentage of retailers do not manufacture their own products, they must seek suppliers who will supply products demanded by customers. Thus, an important objective for retailers is to identify the products customers will demand and negotiate with suppliers to obtain these products.  Product Presentation – Once obtained products must be presented or merchandised to customers in a way that generates interest. Retail merchandising often requires hiring creative people who understand and can relate to the market.  Traffic Building – Like any marketer, retailers must use promotional methods to build customer interest. For retailers a key measure of interest is the number of people visiting a retail location or website. Building “traffic” is accomplished with a variety of promotional techniques such as advertising, including local newspapers or Internet, and specialized promotional activities, such as coupons.  Layout– For store-based retailers a store’s physical layout is an important component in creating a retail experience that will attract customers. The physical layout is more than just deciding in what part of the store to locate products. For many retailers designing the right shopping atmosphere (e.g., objects, light, sound) can add to the appeal of a store. Layout is also important in the online world where site navigation and usability may be deciding factors in whether of a retail website is successful.  Location – Where to physically locate a retail store may help or hinder store traffic. Well placed stores with high visibility and easy access, while possibly commanding higher land usage fees, may hold significantly more value than lower cost sites that yield less traffic. Understanding the trade-off between costs and benefits of locations is an important retail decision.  Keeping Pace With Technology – Technology has invaded all areas of retailing including customer knowledge (e.g., customer relationship management software), product movement (e.g., use of RFID tags for tracking), point-of-purchase (e.g., scanners, kiosks, self-serve checkout), web technologies (e.g., online shopping carts, purchase recommendations) and many more.

Promotion

48

Principles of Marketing

What is promotion? Promotion is a form of corporate communication that uses various methods to reach a targeted audience with a certain message in order to achieve specific organizational objectives. Nearly all organizations, whether for-profit or not-for-profit, in all types of industries, must engage in some form of promotion. Such efforts may range from multinational firms spending large sums on securing high-profile celebrities to serve as corporate spokespersons to the owner of a one-person enterprise passing out business cards at a local businessperson’s meeting. Like most marketing decisions, an effective promotional strategy requires the marketer understand how promotion fits with other pieces of the marketing puzzle (e.g., product, distribution, pricing, target markets). Consequently, promotion decisions should be made with an appreciation for how it affects other areas of the company. For instance, running a major advertising campaign for a new product without first assuring there will be enough inventory to meet potential demand generated by the advertising would certainly not go over well with the company’s production department (not to mention other key company executives). Thus, marketers should not work in a vacuum when making promotion decisions. Rather, the overall success of a promotional strategy requires input from others in impacted functional areas. In addition to coordinating general promotion decisions with other business areas, individual promotions must also work together. Under the concept of Integrated Marketing Communication marketers attempt to develop a unified promotional strategy involving the coordination of many different types of promotional techniques. The key idea for the marketer who employs several promotional options to reach objectives for the product is to employ a consistent message across all options. For instance, salespeople will discuss the same benefits of a product as mentioned in television advertisements. In this way no matter how customers are exposed to a marketer’s promotional efforts they all receive the same information.

Targets of Marketing Promotions The audience for an organization’s marketing communication efforts is not limited to just the marketer’s target market. While the bulk of a marketer’s promotional budget may be directed at the target market, there are many other groups that could also serve as useful target of a marketing message. Targets of a marketing message generally fall into one of the following categories:  Members of the Organization’s Target Market – This category would include current customers, previous customers and potential customers, and as noted, may receive the most promotional attention.  Influencers of the Organization’s Target Market – There exists a large group of people and organizations that can affect how a company’s target market is exposed to and perceives a company’s products. These influencing groups have their own communication mechanisms that reach the target market and the marketer may be able utilize these

49

Principles of Marketing influencers to its benefit. Influencers include the news media (e.g., offer company stories), special interest groups, opinion leaders (e.g., doctors directing patients), and industry trade associations.  Participants in the Distribution Process – The distribution channel provides services to help gain access to final customers and are also target markets since they must recognize a product’s benefits and agree to handle the product in the same way as final customers who must agree to purchase products. Aiming promotions at distribution partners (e.g., retailers, wholesalers, distributors) and other channel members is extremely important and, in some industries, represents a higher portion of a marketer’s promotional budget than promotional spending directed at the final customer.  Other Companies – The most likely scenario in which a company will communicate with another company occurs when the marketer is probing to see if the company would have an interest in a joint venture, such as a co-marketing arrangement where two firms share marketing costs. Reaching out to other companies, including companies who may be competitors for other products, could help create interest in discussing such a relationship.  Other Organizational Stakeholders – Marketers may also be involved with communication activities directed at other stakeholders. This group consists of those who provide services, support or, in other ways, impact the company. For example, an industry group that sets industry standards can affect company products through the issuance of recommended compliance standards for product development or other marketing activities. Communicating with this group is important to insure the marketer’s views of any changes in standards are known.

Objectives of Marketing Promotions The most obvious objective marketers have for promotional activities is to convince customers to make a decision that benefits the marketer (of course the marketer believes the decision will also benefit the customer). For most for-profit marketers this means getting customers to buy an organization’s product and, in most cases, to remain a loyal long-term customer. For other marketers, such as not-for-profits, it means getting customers to increase donations, utilize more services, change attitudes, or change behavior (e.g., stop smoking campaigns). However, marketers must understand that getting customers to commit to a decision, such as a purchase decision, is only achievable when a customer is ready to make the decision. Customers often move through several stages before a purchase decision is made. Additionally before turning into a repeat customer, purchasers analyze their initial purchase to see whether they received a good value, and then often repeat the purchase process again before deciding to make the same choice. The type of customer the marketer is attempting to attract and which stage of the purchase process a customer is in will affect the objectives of a particular marketing communication effort. And since a marketer often has multiple simultaneous promotional campaigns, the objective of each could be different.

50

Principles of Marketing

Types of Promotion Objectives The possible objectives for marketing promotions may include the following: Build Awareness – New products and new companies are often unknown to a market, which means initial promotional efforts must focus on establishing an identity. In this situation the marketer must focus promotion to: 1) effectively reach customers, and 2) tell the market who they are and what they have to offer.  Create Interest – Moving a customer from awareness of a product to making a purchase can present a significant challenge. As we saw with our discussion of consumer and business buying behavior, customers must first recognize they have a need before they actively start to consider a purchase. The focus on creating messages that convince customers that a need exists has been the hallmark of marketing for a long time with promotional appeals targeted at basic human characteristics such as emotions, fears, sex, and humor.  Provide Information – Some promotion is designed to assist customers in the search stage of the purchasing process. In some cases, such as when a product is so novel it creates a new category of product and has few competitors, the information is simply intended to explain what the product is and may not mention any competitors. In other situations, where the product competes in an existing market, informational promotion may be used to help with a product positioning strategy. Marketers may use promotional means, including direct comparisons with competitor’s products, in an effort to get customers to mentally distinguish the marketer’s product from those of competitors.  Stimulate Demand – The right promotion can drive customers to make a purchase. In the case of products that a customer has not previously purchased or has not purchased in a long time, the promotional efforts may be directed at getting the customer to try the product. This is often seen on the Internet where software companies allow for free demonstrations or even free downloadable trials of their products. For products with an established customerbase, promotion can encourage customers to increase their purchasing by providing a reason to purchase products sooner or purchase in greater quantities than they normally do. For example, a pre-holiday newspaper advertisement may remind customers to stock up for the holiday by purchasing more than they typically purchase during non-holiday periods.  Reinforce the Brand – Once a purchase is made, a marketer can use promotion to help build a strong relationship that can lead to the purchaser becoming a loyal customer. For instance, many retail stores now ask for a customer’s email address so that follow-up emails containing additional product information or even an incentive to purchase other products from the retailer can be sent in order to strengthen the customer-marketer relationship.

Advertising What is Advertising? 51

Principles of Marketing Advertising is a non-personal form of promotion that is delivered through selected media outlets that, under most circumstances, require the marketer to pay for message placement. Advertising has long been viewed as a method of mass promotion in that a single message can reach a large number of people. But, this mass promotion approach presents problems since many exposed to an advertising message may not be within the marketer’s target market, and thus, may be an inefficient use of promotional funds. However, this is changing as new advertising technologies and the emergence of new media outlets offer more options for targeted advertising. Advertising also has a history of being considered a one-way form of marketing communication where the message receiver (i.e., target market) is not in position to immediately respond to the message (e.g., seek more information). This too is changing. For example, in the next few years technologies will be readily available to enable a television viewer to click a button to request more details on a product seen on their favorite TV program. In fact, it is expected that over the next 1020 years advertising will move away from a one-way communication model and become one that is highly interactive. Another characteristic that may change as advertising evolves is the view that advertising does not stimulate immediate demand for the product advertised. That is, customers cannot quickly purchase a product they see advertised. But as more media outlets allow customers to interact with the messages being delivered the ability of advertising to quickly stimulate demand will improve.

Selling Academically, selling is thought of as a part of marketing [, however, the two disciplines are completely different. Sales often forms A separate grouping in a corporate structure, employing separate specialist operatives known as salespeople (singular: salesperson). Selling is considered by many to be a sort of persuading "art". Contrary to popular belief, the methodological approach of selling refers to a systematic process of repetitive and measurable milestones, by which a salesperson relates his or her offering of a product or service in return enabling the buyer to achieve their goal in an economic way. While the sales process refers to a systematic process of repetitive and measurable milestones, the definition of the selling is somewhat ambiguous due to the close nature of advertising, promotion, public relations, and direct marketing Sales departments often form a separate grouping in a corporate structure, employing individuals who specialize in sale specific roles. Selling involves sales which are the pinnacle act of completed of a purchasing activity. Selling also involves salespeople who are the primary agents of facilitating sales. Selling is the profession-wide term, much like marketing defines a profession. Recently, attempts have been made to clearly understand who is in the sales profession, and who is not. There are many articles looking at marketing, advertising, promotions, and even public relations as ways to create a unique transaction. 52

Principles of Marketing

Many believe that the focus of selling is on the human agents involved in the exchange between buyer and seller. Effective selling also requires a systems approach , at minimum involving roles that sell, enable selling, and develop sales capabilities. Selling also involves salespeople who possess specific set of sales skills and knowledge are required to facilitate the exchange of value between buyers and sellers that is unique from marketing, advertising,etc. Within these three tenets the following definition of profession selling is offered by the American Society for Training and Development (ASTD):

Professional Selling is defined as "The holistic business system required to effectively develop, manage, enable, and execute a mutually beneficial, interpersonal exchange of goods and/or services for equitable value.” Many sales positions do not include a strong emphasis on generating customer sales, rather these positions help meet promotional objectives in other ways, such as communicating with people who influence the final buyer, responding to customer-initiated inquiry (e.g., customer carrying product to a retail counter) or serving as support for the organization’s sales team. Yet, for a large percentage of marketers seeking the benefits of personal selling as a promotional tool, success is measured in terms of products sold as a direct result of personal selling efforts (i.e., order getters). For this reason it is important that all marketers fully understand how order-generated selling occurs. Additionally, understanding the selling process is beneficial for many others who do not view themselves in sales roles. For instance, a product manager must convince the VP of Marketing to fund a major market research study. Though what the product manager must do may seem far removed from what most people perceive as selling, the key is whether one person is persuading another person to make a decision. Whether it is convincing someone to make a purchase, accept a point-of-view, change attitudes or an infinite number of other behavioral decisions, it all comes down to mastering persuasive communication or selling.

The Selling Process Many sales positions do not include a strong emphasis on generating customer sales, rather these positions help meet promotional objectives in other ways, such as communicating with people who influence the final buyer, responding to customer-initiated inquiry (e.g., customer carrying product to a retail counter) or serving as support for the organization’s sales team. Yet, for a large percentage of marketers seeking the benefits of personal selling as a promotional tool, success is measured in terms of products sold as a direct result of personal selling

53

Principles of Marketing efforts (i.e., order getters). For this reason it is important that all marketers fully understand how order-generated selling occurs. Additionally, understanding the selling process is beneficial for many others who do not view themselves in sales roles. For instance, a product manager must convince the VP of Marketing to fund a major market research study. Though what the product manager must do may seem far removed from what most people perceive as selling, the key is whether one person is persuading another person to make a decision. Whether it is convincing someone to make a purchase, accept a point-of-view, change attitudes or an infinite number of other behavioral decisions, it all comes down to mastering persuasive communication or selling.

Activities in the Selling Process The selling process is a set of activities undertaken to successfully obtain an order and begin building long-term customer relations. While the activities we discuss apply to all forms of selling and can be adapted to most selling situations (including non-product selling such as selling an idea), we will mainly concentrate on the activities carried out by professional salespeople. For our purposes, we define professional salespeople as those whose principle occupation involves selling products (i.e., goods and services) to buyers and do so for organizations that appreciate and support sellers who are well-trained and ethically responsible. The selling activities undertaken by professional salespeople include:

1. Generating Sales Leads 2. Qualifying Leads 3. Preparation for the Sales Call 4. The Sales Meeting 5. Handling Buyer Resistance 6. Closing the Sale 7. Account Maintenance It should be noted that while we present these activities in an order that is suggestive of a step-by-step approach (i.e., one activity must be carried out before the next), in many selling situations this will not be the case. For example, a buyer for a large retailer may have observed a salesperson’s product being used while visiting a competitor’s store. The buyer, anxious to obtain the product for use in her own stores, contacts the salesperson immediately upon returning to the office. After addressing a few questions from the salesperson confirming the buyer’s status at the retail company and without much prodding by the salesperson, the buyer places an order and agrees to meet the salesperson for lunch the next day. In our example, only activities #2 – Qualifying the Lead, #6 – Closing the Sale and #7 – Account Maintenance are carried out in order to obtain the sale and to begin building a long-term relationship. Additionally, salespeople often find circumstances in which all activities are required but the order these are carried out may be disrupted. For instance, salespeople are often confronted with a 54

Principles of Marketing buyer who is resistant to making a purchase even before the salesperson has made a presentation (e.g., “I don’t think I’m interested in what you’re selling”). This will likely force the salesperson to adjust his or her selling process. In this example it will require the salesperson address the buyer’s resistance before beginning to present the product.

Generating Sales Leads Selling begins by locating potential customers. A potential customer or “prospect” is first identified as sales lead, which simply means the salesperson has obtained information to suggest that someone exhibits key characteristics that lend them to being a prospect. For certain sales positions, locating leads may not be a major task undertaken by the sales force as these activities are handled by others in company. For instance, salespeople may receive a list of sales leads based on inquiries through the company’s website. However, for a large percentage of salespeople lead generation consumes a significant portion of their everyday work. For salespeople actively involved in generating leads, they are continually on the look out for potential new business. In fact, for salespeople whose chief role is that of order getter, there is virtually no chance of being successful unless they can consistently generate sales leads. Sales leads can come from many sources including:  Prospect Initiated – Includes leads obtained when prospects initiate contact such as when they fill out a website form, enter a trade show booth or respond to an advertisement.  Profile Fitting – Uses market research tools, such as company profiles, to locate leads based on customers that fit a particular profile likely to be a match for the company’s products. The profile is often based on the profile of previous customers.  Market Monitoring – Through this approach leads are obtained by monitoring media outlets, such as news articles, Internet forums and corporate press releases.  Canvassing – Here leads are gathered by cold-calling (i.e., contacting someone without pre-notification) including in-person, by telephone or by email.  Data Mining – This technique uses sophisticated software to evaluate information (e.g., in a corporate database) previously gathered by a company in hopes of locating prospects.  Personal and Professional Contacts – A very common method for locating sales leads uses referrals. Such referrals may come at no cost to the salesperson or, to encourage referrals, salespeople may offer payment for referrals. Non-paying methods including asking acquaintances (e.g., friends, business associates) and networking (e.g., joining local or professional groups and associations). Paid methods may include payment to others who direct leads that eventually turn into customers including using Internet affiliate programs (i.e., paid for website referrals).

55

Principles of Marketing  Promotions – The method uses free gifts to encourage prospect to provide contact information or attend a sales meeting. For example, offering free software for signing up for a demonstration of another product.

Qualifying Sales Leads Not all sales leads hold the potential for becoming sales prospects. There are many reasons for this including:  Cannot be Contacted – Some prospects may fit the criteria for being a prospect but gaining time to meet with them may be very difficult (e.g., high-level executives).  Need Already Satisfied - Prospects may have already purchased a similar product offered by a competitor and, thus, may not have the need for additional products.  Lack Financial Capacity - Just because someone has a need for a product does not mean they can afford it. Lack of financial capacity is major reason why sales leads do not become prospects.  May Not Be Key Decision Maker - Prospects may lack the authority to approve the purchase.  May Not Meet Requirements to Purchase - Prospects may not meet the requirements for purchasing the product (e.g., lack other products needed for seller’s product to work properly). The process of determining whether a sales lead has the potential to become a prospect is known as “qualifying” the lead. In some cases, a sales lead can be qualified by the seller prior to making first contact. For instance, this can be done through the use of research reports, such as an evaluation of a company’s financial position using publicly available financial reporting services. More likely, sellers will not be in a position to qualify leads until they establish contact with a lead, which may occur in activities associated with either Preparation for the Sales Call or The Sales Meeting.

Activities in the Selling Process The selling process is a set of activities undertaken to successfully obtain an order and begin building long-term customer relations. While the activities we discuss apply to all forms of selling and can be adapted to most selling situations (including non-product selling such as selling an idea), we will mainly concentrate on the activities carried out by professional salespeople. For our purposes, we define professional salespeople as those whose principle occupation involves selling products (i.e., goods and services) to buyers and do so for organizations that appreciate and support sellers who are well-trained and ethically responsible.

56

Principles of Marketing The selling activities undertaken by professional salespeople include:

1. Generating Sales Leads 2. Qualifying Leads 3. Preparation for the Sales Call 4. The Sales Meeting 5. Handling Buyer Resistance 6. Closing the Sale 7. Account Maintenance It should be noted that while we present these activities in an order that is suggestive of a step-by-step approach (i.e., one activity must be carried out before the next), in many selling situations this will not be the case. For example, a buyer for a large retailer may have observed a salesperson’s product being used while visiting a competitor’s store. The buyer, anxious to obtain the product for use in her own stores, contacts the salesperson immediately upon returning to the office. After addressing a few questions from the salesperson confirming the buyer’s status at the retail company and without much prodding by the salesperson, the buyer places an order and agrees to meet the salesperson for lunch the next day. In our example, only activities #2 – Qualifying the Lead, #6 – Closing the Sale and #7 – Account Maintenance are carried out in order to obtain the sale and to begin building a long-term relationship. Additionally, salespeople often find circumstances in which all activities are required but the order these are carried out may be disrupted. For instance, salespeople are often confronted with a buyer who is resistant to making a purchase even before the salesperson has made a presentation (e.g., “I don’t think I’m interested in what you’re selling”). This will likely force the salesperson to adjust his or her selling process. In this example it will require the salesperson address the buyer’s resistance before beginning to present the product.

Generating Sales Leads Selling begins by locating potential customers. A potential customer or “prospect” is first identified as sales lead, which simply means the salesperson has obtained information to suggest that someone exhibits key characteristics that lend them to being a prospect. For certain sales positions, locating leads may not be a major task undertaken by the sales force as these activities are handled by others in company. For instance, salespeople may receive a list of sales leads based on inquiries through the company’s website. However, for a large percentage of salespeople lead generation consumes a significant portion of their everyday work. For salespeople actively involved in generating leads, they are continually on the look out for potential new business. In fact, for salespeople whose chief role is that of order getter, there is virtually no chance of being successful unless they can consistently generate sales leads.

57

Principles of Marketing Sales leads can come from many sources including:  Prospect Initiated – Includes leads obtained when prospects initiate contact such as when they fill out a website form, enter a trade show booth or respond to an advertisement.  Profile Fitting – Uses market research tools, such as company profiles, to locate leads based on customers that fit a particular profile likely to be a match for the company’s products. The profile is often based on the profile of previous customers.  Market Monitoring – Through this approach leads are obtained by monitoring media outlets, such as news articles, Internet forums and corporate press releases.  Canvassing – Here leads are gathered by cold-calling (i.e., contacting someone without pre-notification) including in-person, by telephone or by email.  Data Mining – This technique uses sophisticated software to evaluate information (e.g., in a corporate database) previously gathered by a company in hopes of locating prospects.  Personal and Professional Contacts – A very common method for locating sales leads uses referrals. Such referrals may come at no cost to the salesperson or, to encourage referrals, salespeople may offer payment for referrals. Non-paying methods including asking acquaintances (e.g., friends, business associates) and networking (e.g., joining local or professional groups and associations). Paid methods may include payment to others who direct leads that eventually turn into customers including using Internet affiliate programs (i.e., paid for website referrals).  Promotions – The method uses free gifts to encourage prospect to provide contact information or attend a sales meeting. For example, offering free software for signing up for a demonstration of another product.

Qualifying Sales Leads Not all sales leads hold the potential for becoming sales prospects. There are many reasons for this including:  Cannot be Contacted – Some prospects may fit the criteria for being a prospect but gaining time to meet with them may be very difficult (e.g., high-level executives).  Need Already Satisfied - Prospects may have already purchased a similar product offered by a competitor and, thus, may not have the need for additional products.

58

Principles of Marketing  Lack Financial Capacity - Just because someone has a need for a product does not mean they can afford it. Lack of financial capacity is major reason why sales leads do not become prospects.  May Not Be Key Decision Maker - Prospects may lack the authority to approve the purchase.  May Not Meet Requirements to Purchase - Prospects may not meet the requirements for purchasing the product (e.g., lack other products needed for seller’s product to work properly). The process of determining whether a sales lead has the potential to become a prospect is known as “qualifying” the lead. In some cases, a sales lead can be qualified by the seller prior to making first contact. For instance, this can be done through the use of research reports, such as an evaluation of a company’s financial position using publicly available financial reporting services. More likely, sellers will not be in a position to qualify leads until they establish contact with a lead, which may occur in activities associated with either Preparation for the Sales Call or The Sales Meeting.

Pricing Decisions What do the following words have in common? Fare, dues, tuition, interest, rent, and fee. The answer is that each of these is a term used to describe what one must pay to acquire benefits from another party. More commonly, most people simply use the word price to indicate what it costs to acquire a product. The pricing decision is a critical one for most marketers, yet the amount of attention given to this key area is often much less than is given to other marketing decisions. One reason for the lack of attention is that many believe price setting is a mechanical process requiring the marketer to utilize financial tools, such as spreadsheets, to build their case for setting price levels. While financial tools are widely used to assist in setting price, marketers must consider many other factors when arriving at the price for which their product will sell.

What is Price? In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction. In fact, price means different things to different participants in an exchange:  Buyers’ View – For those making a purchase, such as final customers, price refers to what must be given up to obtain benefits. In most cases what is given up is financial consideration (e.g., money) in exchange for acquiring access to a good or service. But financial consideration is not always what the buyer gives up. Sometimes in a barter situation a buyer may acquire a product by giving up their own product. For instance, two farmers may 59

Principles of Marketing exchange cattle for crops. Also, as we will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn to use the product).  Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit. For marketing organizations price also serves as a marketing tool and is a key element in marketing promotions. For example, most retailers highlight product pricing in their advertising campaigns. Price is commonly confused with the notion of cost as in “I paid a high cost for buying my new plasma television”. Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For marketing organizations seeking to make a profit the hope is that price will exceed cost so the organization can see financial gain from the transaction. Finally, while product pricing is a main topic for discussion when a company is examining its overall profitability, pricing decisions are not limited to for-profit companies. Not-for-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though it is often not as apparent. For instance, charities seeking to raise money may set different “target” levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other benefits. While a charitable organization may not call it a price in their promotional material, in reality these donations are equivalent to price setting since donors are required to give a contribution in order to obtain something of value.

Price vs. Value For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value. As we discussed back, value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation:

Value = perceived benefits received perceived price paid For the buyer value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial it can also involve other

60

Principles of Marketing things that a buyer may be giving up. For example, in addition to paying money a customer may have to spend time learning to use a product, pay to have an old product removed, close down current operations while a product is installed or incur other expenses. However, for the purpose of this tutorial we will limit our discussion to how the marketer sets the financial price of a transaction.

Importance of Pricing When marketers talk about what they do as part of their responsibilities for marketing products, the tasks associated with setting price are often not at the top of the list. Marketers are much more likely to discuss their activities related to promotion, product development, market research and other tasks that are viewed as the more interesting and exciting parts of the job. Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons pricing is important include:  Most Flexible Marketing Mix Variable – For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to lower price for a potential prospect during a phone conversation. Likewise a marketer in charge of online operations can raise prices on hot selling products with the click of a few website buttons.  Setting the Right Price – Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options.  Trigger of First Impressions - Often times customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen when walking down the aisle of a store. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s product at all based on price alone. It is important for marketers to know if customers are more likely to dismiss a product when all they know is its

61

Principles of Marketing price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price.  Important Part of Sales Promotion – Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product. However, as we noted in our discussion of promotional pricing in the , marketers must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again.

Factors Affecting Pricing Decision For the remainder of this tutorial we look at factors that affect how marketers set price. The final price for a product may be influenced by many factors which can be categorized into two main groups:  Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, can be altered. However, while the organization may have control over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time.  External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market.

62