Marketing Management Final (CRC)

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MARKETING MANAGEMENT
Paper-17
M.Com. (Final)
Directorate of Distance Education
Maharshi Dayanand University
ROHTAK 124 001
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Copyright 2004, Maharshi Dayanand University, ROHTAK
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ROHTAK 124 001
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Contents
Chapter 1 Marketing: An Introduction 5
Chapter 2 Strategic Marketing Planning 40
Chapter 3 Marketing Environment 69
Chapter 4 Market Segmentation, Targeting and Positioning 101
Chapter 5 Buyer Behavior and Consumer Decision Making Process 167
Chapter 6 Product Concept and Decisions 206
Chapter 7 Branding, Packaging and Labeling 223
Chapter 8 Product Life Cycle 255
Chapter 9 New Product Development 265
Chapter 10 Distribution Channel Management 304
Chapter 11 Retailing and Wholesaling 341
Chapter 12 Physical Distribution System 370
Chapter 13 Pricing Decision and Strategies 389
Chapter 14 Promotion: Communication with a Purpose 443
Chapter 15 Advertising and Sales Promotion 459
Chapter 16 Personal Selling, Publicity and Public Relations 503
Chapter 17 Marketing Research 525
Chapter 18 Marketing Organization and Marketing Control 540
Chapter 19 Social, Ethical and Legal Issues in Marketing 562
Chapter 20 Service Marketing and International Marketing 589
Chapter 21 Recent Development in Marketing 618
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Marketing Management
M.Com. (Final)
Paper-17 Max. Marks.: 100
Time: 3 Hrs
Note: There will be three sections of the question paper. In section A there will be 10 short answer questions of 2
marks each. All questions of this section are compulsory. Section B will comprise of 10 questions of 5 marks each
out of which candidates are required to attempt any seven questions. Section C will be having 5 questions of
15 marks each out of which candidates are required to attempt any three questions. The examiner will set the
questions in all the three sections by covering the entire syllabus of the concerned subject.
Course Inputs:
Unit-1 Introduction: Concept, nature, scope and importance of marketing: Marketing concept and its evolution;
Marketing mix; Strategic marketing planning An overview.
Market Analysis and Selection: Marketing environment-Macro and Micro Components and their impact
on marketing decisions. Market segmentation and positioning, Buyer behaviour, Consumer decision
making process.
Unit-2 Product Decisions: Concept of a product, Classification of products; Major product decisions; Product
line and product mix; Branding, Packaging and labeling, Product life-cycle-strategic implications, New
product development and consumer adoption process.
Unit-3 Distribution Channels and Physical Distribution Decisions: Nature, functions and types of distribution
channels; distribution channel intermediaries; Channel management decisions; Retailing and wholesaling.
Decision areas in the Management of Physical Distribution.
Unit-4 Pricing Decisions: Factors affecting price determination; Pricing policies and strategies; Promotion
Decisions; Communication process; Promotion mix advertising, personal selling, sales promotion, publicity
and public relations; Determining advertising budget; Copy designing and its testing; Media selection;
Advertising effectiveness; Sales promotion tools and techniques.
Unit-5 Marketing Research: Meaning and scope of marketing research; Marketing research process.
Marketing Organisation and Control: Organizing and controlling marketing operations.
Issues and Developments in Marketing; Social, ethical and legal aspects of marketing; Marketing of
services; International marketing; Green marketing; Cyber marketing; Relationship marketing and other
developments in marketing.
Marketing : An Introduction 5
Most of the people define marketing as selling or advertising. It is true that these are
parts of the marketing. But marketing is much more than advertising and selling. In
fact marketing comprises of a number of activities which are interlinked and the decision
in one area affects the decision in other areas.
To illustrate the number of activities that are included in marketing, think about all the
bicycles being peddled with varying degree of energy by bicycle riders in India. Most
bicycle are intended to do the same thingget the rider from one place to another. But
a bicyclist can choose from a wide assortment of models. They are designed in different
sizes, with different frames for men and women and with or without gears. Trekking
cycles have large knobby tyres, and the tyres of racing cycles are narrow. Kids want
more wheels to make balancing easier; clowns want only one wheel, to make balancing
more interesting.
The variety of styles and features complicates the production and sale of bicycles. The
following list shows some of the many things a firm like Atlas Cycles or Hero Cycles
should do before and after it decides to produce a bicycle.
1. Analyze the needs of people who might buy a bicycle and decide if they want
more or different models.
2. Predict what types of bicycles like handle bar styles, type of wheels, weights and
materials different customers will want and decide to which firm will try to satisfy
their need.
3. Estimate how many of these people will be riding bicycles over the next several
years and how many bicycles theyll buy.
4. Predict exactly when these people will want to buy bicycles.
5. Determine where in the India these bicyclists will be and how to get the companys
bicycles to them.
6. Estimate the price they are willing to pay for their bicycles and if the firm can
make a profit selling at that price.
7. Decide which kinds of promotion should be used to tell potential customers about
the companys bicycles.
8. Estimate how many competing companies will be making bicycles, how many
bicycles theyll produce, what kind, and at what prices.
9. Figure out how to provide warranty service if a customer has a problem after
buying the bicycle.
The above activities are not the part of productionactually making goods or performing
services. Rather, they are part of a larger processcalled marketingthat provide
Chapter 1
Marketing : An Introduction
Marketing Management 6
needed direction for production and helps make sure that the right goods and services
are produced and find their way to consumers. In order to understand the concept of
marketing, firstly you must understand what is market ?
Market
The term market originates from the Latin word Marcatus which means a place
where business is conducted. A layman regards market as a place where buyers and
sellers personally interact and finalise deals.
According to Perreault and McCarthy, market is defined as a group of potential customers
with similar needs or wants who are willing to exchange something of value with sellers
offering various goods and/or services to satisfy those needs or wants. Of course,
some negotiation will be needed. This can be done face-to-face at some physical
location (for example, a farmers market). Or it can be done indirectly through a
complex network that links middlemen, buyers and sellers living far apart. Depending
upon what is involved, there are different types of markets which deals with products
and/or services such as :
(1) Consumer Market: In this market the consumers obtain what they need or want
for their personal or family consumption. This market can be subdivided into two
partsfast moving consumer goods market from where the consumers buy the
products like toothpaste, biscuits, facial cream etc. and services like internet,
transportation etc. Another is durables market from where, the consumers buy
the products of longer life like motorcycles, cars, washing machines etc. and
services like insurance cover, fixed deposits in the banks and non-banking financial
companies etc.
(2) Industrial/Business Market: In this market, the industrial or business buyers
purchase products like raw materials (iron ore, coke, crude oil etc.), components
(wind-screen, tyres, picture tubes, micro-processors etc), finished products
(packaging machine, generators etc.), office supplies (computers, pens, paper
etc.) and maintenance and repair items (grease, lubricating oil, broom etc.). Apart
from products, now-a-days due to outsourcing the industrial buyers also require a
number of services like accounting services, security services, advertising, legal
services etc. from the providers of these services.
(3) Government Market: In most of the countries central/federal, state or local
governing bodies are the largest buyers requiring and number of products and
services. Government is also the biggest provider of services to the people,
especially in a developing country like India where army, railways, post and
telegraph etc. services are provided by the Central Government and State Govt.
and local municipality provides services like roadways and police and sewage
and disposal and water supply respectively.
(4) Global Market: The world is rapidly moving towards borderless society thanks
to information revolution and the efforts of WTO to lower the tariff and non-
tariff barriers. The product manufacturers and service providers are moving in
different countries to sustain and increase their sales and profits. Although the
global companies from the developed countries are more in number (AT & T,
McDonalds, Ford Motors, IBM, Sony, Citi Bank etc.); the companies from
developing countries are also making their presence felt in foreign countries
(Aditya Vikram Birla Group, Maruti-Suzuki, Infosys, IRCON etc.). The ultimate
winners are the consumers who are getting world class quality products and
services at an affordable prices.
(5) Non-profit Market: On one hand the society is making progress in every field,
on the other hand the number of problems that it is facing are also increasing.
Most of the people dont care for these problems due to variety of reasons such
aslack of awareness, lack of time, selfish nature etc. So in order to fill the
void, the non-profit organisations came into being. These organisations support a
particular issue or a charity and create awareness among the general public
towards these issues and try to obtain financial and non-financial support. For
example there are NGOs who are working towards the conservation of flora
and fauna, Narmada Bachao Andolan, Chipko Andolan (to conserve the trees in
Himalayan region) etc. These non-profit organisations basically need monetary
support from the individuals, institutions and governments to promote a cause or
a charity like old age home, free dispensary, free education, home for destitutes
etc.
These are the major markets which exist in country. These can also be different
markets which deals in a particular product or service such as Grain market (anaj
mandi), vegetable and fruit market (Subzi Mandi), fish market, political market
(comprising of political parties and voters) etc. which serve a specific need or want of
the consumers and marketers.
Marketing
Numerous definitions were offered for marketing by different authors. Some of the
definitions are as follows :
1. Creation and delivery of a higher standard of living.
2. Marketing is the process that seeks to influence voluntary exchange transactions
between a customer and a marketer.
William G. Zikmund and Michael dAmico
3. Marketing is the process of discovering and translating consumer needs and
wants into products and services, creating demand for these products and services
and then in turn expanding this demand.
H.L. Hansen.
4. Marketing is the business process by which products are matched with markets
and through which transfer of ownership are affected.
Edward W. Cundiff
5. Marketing consists of the performance of business activities that direct the flow
of goods and services from producers or suppliers to consumers or end-users.
American Marketing Association
6. Marketing is a societal process by which individuals and groups obtain what they
need and want through creating, offering and freely exchanging products and
services of value with others. Philip Kotler
7. Marketing is the performance of activities that seek to accomplish an organizations
objectives by anticipating customer or client needs and directing the flow of need
satisfying goods and services from producer to customer or client.
William D. Perreault and E. Jerome McCarthy
Lets take a look at the last definition and try to interpret it .
l Applies to profit and non-profit organisationsThis definition applies to
both profit and non-profit organizations. Profit is the objective for most business
firms. But other type of organisations may seek more members or donations or
acceptance of an idea. Consumer or clients may be individual consumers, business
firms, non-profit organizations, government agencies or even foreign nations.
While most customers and clients pay for goods and services they receive, others
may receive them free of charge or at a reduced price through private or
government support.
l More than just persuading customersMarketing is not just selling and
advertising, as most of the people thinks. In fact, the aim of marketing is to
identify customers needs and meet those needs so well that the product almost
sell itself. This is true whether the product is a physical good, a service or
even an idea. If the whole marketing job has been done well, customers dont
need much persuading. They will be ready to buy. And after consuming the
product if they are satisfied then they will come back for more.
l Begins with customer needsMarketing should begin with potenial customer
needsnot with production process. Marketing should try to anticipate needs
and then it should determine what goods and services are to be developed
including decisions about product design and packaging; prices or fees; credit
and collection policies; use of middlemen; transporting and storing facilities;
advertising and sales policies and after the sale, installation, customer service,
warranty and perhaps even disposal policies.
l Does not do it aloneIt means that marketing by interpreting customers
needsshould provide direction for production activities accounting and financial
activities and research and development activities and try to coordinate them.
Marketing by itself can never be able to satisfy the needs and wants of the
customers. It cannot exist in vacuum. In fact, marketing needs the cooperation
of other functional areas to be successful.
l Builds a relationship with the customerMarketing tries to identify and
satisfy customer needs and wants. Its activities does not end with the single sale
but rather it tries to develop a relationship with the customer. So that in the
future, when the customer has the same need againor some other need that
the firm can meetother sales will follow. The long lasting relationship is beneficial
to both the firm and the customer.
Scope of Marketing
Marketing is typically seen as the task of creating, promoting and delivering goods and
services to consumers and businesses. In fact, marketing people are involved in
marketing 10 types of entities : goods, services, experiences, events, persons, places,
properties, organizations, information and ideas. Marketing concepts can be used
effectively to market these entities.
1. GoodsGood is defined as something tangible that can be offered to market to
satisfy a need or want. Physical goods constitute the bulk of most countries
production and marketing effort. In a developing country like India fast moving
consumer goods (shampoo, bread, ketchup, cigarettes, newspapers etc.) and
consumer durables (television, gas appliances, fans etc.) are produced and consumed
in large quantities every year.
2. ServicesAs economies advance, the share of service in gross domestic product
increases. For example, in USA, service jobs account for 79% of all jobs and 74%
of GDP. A service can be defined as any performance that one party can offer to
another that is essentially intangible and does not result in the ownership of anything.
Its production may or may not be tied to a physical product. Services include the
work of hotels, airlines, banks, insurance companies, transportation corporations
etc. as well as professionals like lawyers, doctors, teachers etc. Many market
offerings consists of a variable mix of goods and services. At the pure service end
would be psychiatrist listening to a patient or watching movie in a cinema hall; at
another level would be the landline or mobile phone call that is supported by a huge
investment in plant and equipment; and at a more tangible level would be a fast
food establishment where the consumer consume both a good and a service.
3. ExperiencesBy mixing several services and goods, one can create, stage and
market experiences. For example water parks, zoos, museums etc. provide the
experiences which are not the part of routine life. There is a market for different
experiences such as climbing Mount Everest or Kanchanjunga, travelling in Palace
on Wheels, river rafting, a trip to Moon, travelling in Trans Siberian Railways across
five time zones etc.
4. EventsMarketers promote timebased, theme-based or special events such as
Olympics, company anniversaries, sports events (Samsung CupIndia Pakistan
Cricket Series), artistic performances (Lata Mangeshkar live concert, Jagjit Singh
live concert), trade shows (International Book Fair at Pragati Maidan, Automobile
fair), award ceremonies (Filmfare awards, Screen awards), beauty contests (Miss
World, Miss Universe, Miss India, Miss Chandigarh), model hunts (Gladrags Mega
Model). There is a whole profession of event planners who work out the details of
an event and stage it. In India event management companies are growing and in
case of organising Miss World at Bangalore and World Cricket Cup (Hero Cup)
they won the acclaim from all over the world. Our Election Commission Organises
biggest event in the worldElections for upper house in the largest democracy in
the world. Other notable example is organising of Ardh Kumbh and Maha Kumbh
at Hardwar, Ujjain, Nasik etc. during different years.
5. PersonsCelebrity marketing has become a major business. Years ago, someone
seeking fame would hire a press agent to plant stories in newspapers and magazines.
Today most of cricket players like Sachin Tendulkar, Saurav Ganguly, Rahul Dravid
etc. are drawing help from celebrity marketers to get the maximum benefit. Even
Star Plus TV channel focussed more on Amitabh Bachhan to promote their
programme Kaun Banega Crorepati and this programme turned around fortunes of
both Star Plus and Amitabh Bachhan. Even in the 14th Lok Sabha election BJPs
election strategy revolves around Mr. Atal Bihari Vajpayee, thats power of
personality. Mr Shiv Khera is busy in building his business empire and is busy
telling others how to achieve this or that through books and lectures.
6. PlacesPlacescities, states, regions and whole nationscompete actively to
attract toutists, factories, company headquarters and new residents. India and
China are competing actively to attract foreign companies to make their production
hub. Cities like Bangalore, Hyderabad and Gurgaon are promoted as centre for
development of software. Bangalore is regarded as software capital of India and
Hyderabad is emerging as the hub of biotechnology industry. Gurgaon and Noida
are competing for call centres to open their offices. Kerala, Himachal Pradesh,
Uttranchal Pradesh and Rajasthan and aggressively promoting themselves to attract
local as well as foreign tourists. Due to its cost effectiveness and competitive
ability of Indian doctors coupled with ancient therapies, India is fast emerging as
country that can provide excellent medical treatment at minimum costs. If developed
properly, Bihar has strong potential to emerge as ultimate destination for Buddists.
7. PropertiesProperties are intangible rights of ownership of either real property
(real estate) or financial property (share and debt. instruments). Properties are
bought and sold, and this requires marketing effort. Property dealers in India work
for property owners or seekers to sell or buy plots, residential or commercial real
estate. In India some builders like Ansal, Sahara Group, both build and market
their residential and commercial real estates. Brokers and sub-brokers buy and
sell securities on behalf of individual and institutional buyers.
8. OrganizationsOrganizations actively work to build a strong, favourable image
in the mind of their publics. We see ads of Reliance Infocomm which is trying to
provide communication at lower rates, Dhirubhai Ambani Entrepreneur programme
to promote entreprenenrship among the Indians. Companies can gain immensly by
associating themselves with the social causes. Universities and colleges are trying
to boost their image to compete successfully for attracting the students by mentioning
their NAAC grades in the advertisements and information brochures.
9. InformationInformation can be produced and marketed as a product. This is
essentially what schools, colleges and universities produce and distribute at a price
to parents, students and communities. Encyclopaedas and most non-fiction books
market information. Magazines such as Fitness and Muscle provide information
about staying healthy, Business India, Business Today and Business World provide
information about business activities that are taking place in various organizations.
Outlook Traveller provides information about various national and international tourist
destination. There are number of magazines which are focussed an automobiles,
architecture and interior designing, computers, audio system, television programmes
etc. which cater to the information needs of the customers. We buy CDs and visit
internet sites to obtain information. In fact, production, packaging and distribution
of information is one of the societys major industry. More and more companies
are using professional research agencies to obtained information they need.
10. IdeasFilm makers, marketing executives and advertising continuously look for a
creative spark or an idea that can immortalise them and their work. Idea here
means the social cause or an issue that can change the life of many. Narmada
Bachao Andolan was triggered to bring the plight of displaced people and to get
them justice. Endorsement by Amitabh Bachhan to Pulse Polio Immunization
drive and pledge by Aishwarya Rai to donate her eyes after her death gave immense
boost to these. Various government and non-government organizations are trying
to promote a cause or issue which can directly and indirectly alter the life of many.
For example
Traffic police urges to not to mix drinks and drive, central and state government
urging not to use polyethelene as carrying bag for groceries.
Nature of Marketing
1. Marketing is both consumer oriented and competitor oriented. The consumer and
competitor orientations can be easily understood by the following diagram.
Minor Competitor Emphasis Major
Customer
Emphasis
Minor
Major
Self-centred Competitor
Oriented
Customer
Oriented
Market
driven
Figure 1.1
(a) Self centred companies does not give any concern to the consumers and
competitors. This type of company can exist in the situation of monopoly.
In the competitive economy, these companies cannot remain in the business
for long.
(b) Competitor oriented companies mainly focus on competitors activities,
what the competitors are doing and what they are likely to do in the near
future are the major areas of concern. The companies can be either reactive
or proactive. The reactive company will follow the moves of competitors.
For example, if the competitor reduce price of its product or service then
the reactive competitor oriented company will also reduce its prices.
Whereas the proactive competitor oriented company will try to identify
what its major competitor is going to do.
(c) Customer oriented companies believes in satisfying the customers at any
cost. These companies obtain inputs from the customers and then develop
their product or service as per customers requirements and then earn
profit through-customer satisfaction. The biggest problem is that they dont
consider what their competitors are doing and in the long run it might prove
counter-productive.
(d) Market driven companies are concerned about customers as well as
competitors. These companies regularly interact with the customers to
know about their satisfaction levels and their future requirements and then
try to develop the product or service which is better than their competitors.
In the era of cut throat competition, these companies one more likely to be
successful than the other companies.
2. Marketing is a dynamic activity because a number of variables keep changing. For
example marketing environment, customers requirements, competitors actions
etc. keep changing thereby necessitating the changes in the companys offer. The
companies may have to modify product, price, place or promotion due to changes
in any of the numerous variables. For example, Indian manufacturers either have
to improve the quality or reduce the cost to meet the competition from foreign
companies.
3. Long term objective of marketing is profit maximization through customer
satisfaction. This is so because a satisfied customer will come back again for the
same or different need to the company. Apart from this, the satisfied customer is
the companys best advertisement because word of mouth communication by the
customer has more credibility than any other form of marketing communication
and hell recommend the companies products/services to his friends and relatives.
4. Marketing is an integrated function and all the marketing decisions are linked with
each other. One decision will automatically lead to another decision. For example
if a company has decided to launch a product for limited number of customers then
its price will be high and that product will be available through exclusive distribution
system and the promotion strategy will depend on the media preferred by the target
market. So, if a company decides the first step then decisions regarding the remaining
steps will follow automatically.
5. Marketing is the core functional area of modern day organisations and is the driving
force behind every organisation. Marketing provides the vital input for corporate
planning which in turn dictates the plans for other functional areas.
6. Marketing is interlinked with other functional areas of the organisation. Marketing
people collects the information regarding (customers requirements and pass it to)
the research and development and engineering people wholl turn the customer
requirements into the product or service features. The finance and accounts people
help in obtaining the money for the development of new product and also helps in
arriving at the final price decision. The human resource department provides the
necessary manpower for carrying out various activities not only in the marketing
area but also in the other functional areas.
Importance of Marketing
(A) To the Society
1. It is instrumental in improving the living standards. Marketing continuously identifies
the needs and wants satisfying products or services which can propel the people to
do an extra to earn money which can be exchanged for the desired products or
services. The people are likely to spend the additional income over and above the
disposable income on the products or services which helps in minimizing the physical
efforts. Thus marketing by indirectly increasing the earning ability will help in
improving the standard of living of the customers.
2. Marketing generates gainful employment opportunities both directly and indirectly.
Directly, marketing provides employment to the people in various areas like in
advertising agency, in the company sales force, in the distributors sales force, in
public relation firms etc. Indirectly, marketing is responsible for selling the offerings
of the organisation. If the organisations products or services are able to satisfy the
customers, then customers will demand organisations products or services again
and again, thereby sustaining the production activities. Thus marketing indirectly
provides employment in other functional areas like finance, production, research
and development, human resource management etc.
3. Marketing helps in stabilising economic condition in the sense that marketing helps
in selling the products or services, which keeps the various organizations functioning
and gainful employment is available to the people. With the earnings from the
employment, the people will purchase the products and/or services, thus sustaining
the demand. This will happen in all the industries, then gainful employment will be
available throughout the time period and economy will remain stable, healthy and
vibrant.
(B) To the firms/companies
1. Marketing sustains the company by bringing in profits. Marketing is the only activity
that brings revenue to the firm, whereas other activities incur expenditure. If the
companys products or services satisfy the customers requirements, then the
satisfied customers will keep the company in business by repeat orders and
recommending other profitable customers. Thus marketing is the driving force
behind a successful company.
2. Marketing is the source of new ideas. New product or service ideas usually comes
from the research laboratories, employees or from marketplace. Its the marketing
people who are in continuous touch with the consumers and marketing intermediaries.
Interaction with them helps in identifying strong and weak points of companys
product or services as well as competitors products or services. This interaction
can also help in identifying unmet needs or wants of the consumers and the features,
consumers are looking into the products or services which can satisfy those unmet
needs or wants. Thus marketing can help immensely in identifying new product or
service ideas which can help in sustaining the firms operations. Successful
companies are those which identifies customers requirements early and provides
the solution earlier than the competitors.
3. Marketing provides direction for the future course. The marketing oriented company
continuously brings out new product and service ideas which provide the direction
for corporate strategic planning for longer time horizon.
(C) To the Consumers
1. Meeting the unmet needs or wants. Marketing identifies those needs or wants
which were not satisfied and helps in developing the product or service which can
satisfy those unmet needs or wants of the people. For example a number of drugs
were invented to treat various physical problems of the people. Again the low cost
formulations were developed to treat the people who are unable to afford the
expensive drugs.
2. Reducing the price of products or services. Marketing helps in popularising the
product or service which attracts the customers as well as competitors towards
that product or service categories. Due to increase in demand, the manufacturing
capacity increase which brings down per unit fixed costs of the product or service.
Furthermore increase in competititon led to decrease in the prices charged by the
firm. Thus the growing demand and increasing competition both help in bringing
down the price of the product or service. For example price of both mobile phone
handset and mobile phone service are showing a continuous downward trend thereby
making the mobile phone service affordable to more and more people.
Core Concepts of Marketing
Marketing can be further understood by defining several of its core concepts.
Needs, wants Product or Value and Exchange and Marketing
and Demands offering Satisfaction Transaction and
Marketing
Management
Needs, Wants and Demands
The marketer must try to understand the target markets needs, wants, and demands.
Needs describe basic human requirements. People need food, air, water, clothing and
shelter to survive. People also have strong needs for recreation, education, and
entertainment. These needs become wants when they are directed to specific object
that might sastisfy the need. An Indian needs food but wants a rice, chhapatis vegetable
and dal. A person in Mauritius needs food but wants a mango, rice, lentils and beans.
Wants are shaped by ones society.
Demands are wants for specific products backed by an ability to pay. Many people
want a big & beautiful house; only a few are able and willing to buy one. Companies
must measure not only how many people want their product but also how many would
actually be willing and able to buy it.
These distinctions shed light on the frequent criticism that marketers create needs or
marketers get people to buy things they dont want. Marketers do not create needs
: Needs preexist marketers. Marketers, along with other societal influences, influence
wants. Marketers might promote the idea that a Mercedes would satisfy a persons
need for social status. They do not, however, create the need for social status.
Product or Offering
People satisfy their needs and wants with products. A product is any offering that can
satisfy a need or want. We mentioned earlier the major types of basic offerings :
goods, services, experiences, events, persons, places, properties, organizations,
information, and ideas.
A brand is an offering from a known source. A brand name such as McDonalds
carries many associations in the minds of people: hamburgers, fun, children, fast food,
Golden Arches. These associations make up the brand image. All companies strive to
build brand strengththat is, a strong, favourable brand image.
Value and Satisfaction
The product or offering will be successful if it delivers value and satisfaction to the
target buyer. The buyer chooses between different offerings on the basis of which is
perceived to deliver the most value. We define value as a ratio between what the
customer gets and what he gives. The customer gets benefits and assumes costs.
The benefits include functional benefits and emotional benefits. The costs include
monetary costs, time costs, energy costs, and psychic costs. Thus value is given by :
Value =
Benefits
Costs
=
Functional benefits + emotional benefits
Monetary costs + time costs + energy cost + psychic costs
The marketer can increase the value of the customer offering in several ways :
Raise benefits
Reduce costs
Raise benefits and reduce costs
Raise benefits by more than the raise in costs
Lower benefits by less than the reduction in costs
The customer who is choosing between two value offerings, V
1
and V
2
, will examine
the ratio V
1
/V
2
. She will favour V
1
if the ratio is larger than one; she will favour V
2
if
ratio is smaller than one; she will be indifferent if the ratio equals one.
Exchange and Transactions
Exchange is only one of four ways in which a person can obtain a product. The person
can self-produce the product or service, as when a person hunts, fishes, or gathers
fruit. The person can use force to get a product, as in a hold up or burglary. The person
can beg, as happens when a homeless person asks for food. Or the person can offer a
product, a service, or money in exchange for something he or she desires.
Exchange, which is the core concept of marketing, involves obtaining a desired product
from someone by offering something in return. For exchange potential to exist, five
conditions must be satisfied :
1. There are at least two parties.
2. Each party has something that might be of value to the other party.
3. Each party is capable of communication and delivery.
4. Each party is free to accept or reject the exchange offer.
5. Each party believes it is appropriate or desirable to deal with the other party.
Whether exchange actually takes place depends upon whether the two parties can
agree on terms that will leave them both better off (or at least not worse off) than
before. Exchange is a value-creating process because it normally leaves both parties
better off.
Exchange is a process rather than an event. Two parties are engaged in exchange if
they are negotiatingtrying to arrive at mutually agreeable terms. When an agreement
is reached, we say that a transaction takes place. A transaction is a trade of values
between two or more parties : A gives X to B and receives Y in return. Ramesh sells
Arun a television set and Arun pays Rs 4000/- to Ramesh. This is a classic monetary
transaction. But transactions do not require money as one of the traded values. A
barter transaction involves trading goods or services for other goods or service, as
when lawyer Vijay writes a will for physician Satish in return for a medical examination.
A transaction involves several dimensions : at least two things of value, agreed upon
conditions, a time of agreement, and a place of agreement. Usually a legal system
exists to support and enforce compliance on the part of the transactors. Without a law
of contracts, people would approach transactions with some distrust, and everyone
would lose.
A transaction differs from a transfer. In a transfer, A gives X to B but does not
receive anything tangible in return. Gifts, subsidies, and charitable contributions are all
transfers. Transfer behaviour can also be understood through the concept of exchange.
Typically, the transferer expects to receive something in exchange for his or her gift for
example, gratitude or seeing changed behaviour in the recipient. Professional fund
raisers provide benefits to donors, such as thank-you notes, donor magazines, and
invitations to events. Marketers have broadened the concept of marketing to include
the study of transfer behaviour as well as transaction behaviour.
In the most generic sense, marketers seek to elicit a behavioural response from
another party. A business firm wants a purchase, a political candidate wants a vote, a
church wants an active member, and a social-action group wants the passionate adoption
of some cause. Marketing consists of actions undertaken to elicit desired responses
from a target audience.
To effect successful exchanges, marketers analyze what each party expects from the
transaction. Simple exchange situations can be mapped by showing the two actors and
the wants and offerings flowing between them.
MARKETING AND MARKETING MANAGEMENT
n Marketing is a societal process by which individuals and groups obtain what they
need and want through creating, offering and freely exchanging products and services
of value with others.
For a managerial definition, marketing has often been described as the art of selling
products. But people are surprised when they hear that the most important part of
marketing is not selling! Selling is only the tip of the marketing iceberg. Peter Drucker,
a leading management theorist, puts it this way:
There will always, one can assume, be need for some selling. But the aim of
marketing is to make selling superfluous. The aim of marketing is to know
and understand the customer so well that the product or service fits him and
sells itself. Ideally, marketing should result in a customer who is ready to buy.
All that should be needed then is to make the product or service available.
When Sony designed its Walkman, when Nintendo designed a superior video game,
and when Toyota introduced its Lexus automobile, these manufacturers were swamped
with orders because they had designed the right product based on careful marketing
homework.
The American Marketing Association offers the following definition :
n Marketing (management) is the process of planning and executing the conception,
pricing, promotion, and distribution of ideas, goods, services to create exchanges
that satisfy individual and organizational goals.
Coping with exchange processes calls for a considerable amount of work and skill.
Marketing management takes place when at least one party to a potential exchange
thinks about the means of achieving desired responses from other parties. We see
marketing management as the art and science of choosing target markets and getting,
keeping, and growing customers through creating, delivering, and communicating superior
customer value.
Apart from these core concepts there are additional concepts which will help in
understanding the marketing. These concepts are as follows :
Target Markets and Segmentation
A marketer can rarely satisfy everyone in a market. Not every one likes the same soft
drink, hotel room, restaurant, automobile, college and movie. Therefore, marketers
start with market segmentation. They identify and profile distinct groups of buyers
who might prefer or require varying products and marketing mixes. Market segments
can be identified by examining demographic, psychographic and behavioural differences
among buyers. The firm then decides which segments present the greatest opportunity
those whose needs the firm can meet in a superior fashion.
For each chosen target market, the firm develops a market offering. The offering is
positioned in the minds of the target buyers as delivering some central benefit(s). For
example, Volvo develops its cars for the target market of buyers for whom automobile
safety is a major concern. Volvo, therefore, positions its car as the safest a customer
can buy.
Traditionally, a market was a physical place where buyers and sellers gathered to
exchange goods. Economists now describe a market as a collection of buyers and
sellers who transact over a particular product or product class (the housing market or
grain market). But marketers view the sellers as constituting the industry and the
buyers as constituting the market. Fig 1.2. shows the relationship between the industry
and the market. Sellers and buyers are connected by four flows. The sellers send
goods and services and communications (ads, direct mail) to the market; in return they
receive money and information (attitutdes, sales data). The inner loop shows an
exchange of money for goods and services; the outer loop shows an exchange of
information.
Figure 1.2: A Simple Marketing System
Communication
Goods/services
Money
Information
Market
(a collection
of buyers)
Industry
(a collecton
of sellers)
Business people often use the term markets to cover various groupings of customers.
They talk about need markets (the diet-seeking market); product markets (the shoe
market); demographic markets (the youth market); and geographic markets (the Indian
market). Or they extend the concept to cover other markets, such as voter markets,
labour markets and donor markets.
Modern economies abound in markets. Five basic markets and their connecting flows
are shown in Figure 1.3. Manufacturers go to resource markets (raw-material markets,
labour markets, money markets), buy resources and turn them into goods and services,
and then sell finished products to intermediaries, who sell them to consumers. Consumers
sell their labour and receive money with which they pay for goods and services. The
government collects tax revenues to buy goods from resource, manufacturer, and
intermediary markets and uses these goods and services to provide public services.
Each nations economy and the global economy consist of complex interacting sets of
markets linked through exchange processes.
Today we can distinguish between a market place and markets pace. The marketplace
is physical, as when one goes shopping in a store; marketspace is digital, as when one
goes shopping on the Internet. Many observers believe that increasing amount of
purchasing will shift from the marketplace.
Figure 1.3: Structure of flows in a Modern Exchange Economy
Mohan Sawhney has proposed the concept of a metamarket to describe a cluster of
complementary products and services that are closely related in the minds of consumers
but are spread across a diverse set of industries. The automobile metamarket consists
of automobile manufacturers, new car and used car dealers, financing companies,
insurance companies, mechanics, spare parts dealers, service shops, auto magazines ,
classified auto ads in newspapers, and auto sites on the Internet. In planning to buy or
buying a car, a buyer will get involved in many parts of this metamarket. This has
created an opportunity for metamediaries to assist buyers to move seamlessly through
these groups, although they are disconnected in physical space. One example is
Edmunds (www.edmunds. com), a Web site where a car buyer can find the stated
prices of different automobiles and easily click to other sites to search for the lowest
price dealer, for financing, for car accessories, and for used cars at bargain prices.
Government
markets
Money Money
Goods and services
Taxes,goods
Services,
money
Taxes,
goods
Goods and services
Services
Taxes
Services,
money
Consumer
markets
Intermediary
markets
Manufacture
markets
Resources
Markets
Relationships and Networks
Transaction marketing is part of a larger idea called relationship marketing. Relationship
marketing has the aim of building long-term mutually satisfying relations with key
partiescustomers, suppliers, distributorsin order to earn and retain their long-term
preference and business. Marketers accomplish this by promising and delivering high-
quality products and services at fair prices to the other parties over time. Relationship
marketing builds strong economic, technical and social ties among the parties. It cuts
down on transaction costs and time. In the most successful cases, transactions move
from being negotiated each time to being a matter of routine.
The ultimate outcome of relationship marketing is the building of a unique company
asset called a marketing network. A marketing network consists of the company and
its supporting stakeholders (customers, employees, suppliers, distributors, retailers, ad
agencies, university scientists, and others) with whom it has built mutually profitable
business relationships. Increasingly, competition is not between companies but rather
between marketing networks, with the prize going to the company that has built the
better network. The operating principle is simple; Build an effective network of
relationships with key stakeholders, and profits will follow.
Marketing Channels
To reach a target market, the marketer uses three kinds of marketing channels. The
marketer uses communication channels to deliver and receive messages from target
buyers. They include newspapers, magazines, radio, television, mail, telephone, billboards,
posters, fliers, CDs, audiotapes, and the Internet. Beyond these, communications are
conveyed by facial expressions and clothing, the look of retail stores, and many other
media. Marketers are increasingly adding dialogue channels (e-mail and toll-free
numbers) to counterbalance the more normal monologue channels (such as ads).
The marketer uses distribution channels to display or deliver the physical product or
service(s) to the buyer or user. There are physical distribution channels and service
distribution channels. They include warehouses, transporation vehicles, and various
trade channels such as distributors, wholesalers, and retailers. The marketer also
uses selling channels to effect transactions with potential buyers. Selling channels
include not only the distributors and retailers but also the banks and insurance companies
that facilitate transactions. Marketers clearly face a design problem in choosing the
best mix of communication, distribution, and selling channels for their offerings.
Supply Chain
Whereas marketing channels connect the marketer to the target buyers, the supply
chain describes a longer channels stretching from raw materials to components to final
products that are carried to final buyers. The supply chain for womens purses starts
with hides, tanning operations, cutting operations, manufacturing, and the marketing
channels bringing products to customers. The supply chain represents a value delivery
system. Each company captures only a certain percentage of the total value generated
by the supply chain. When a company acquires competitors or moves up stream or
downstream, its aim is to capture a higher percnetage of supply chain value.
Competition
Competition includes all the actual and potential rival offerings and substitutes that a
buyer might consider.
We can broaden the picture further by distinguishing four levels of competition, based
on degree of product substitutability :
1. Brand competition: A company sees its competitors as other companies offering
a similar product and services to the same customers at similar prices. Maruti
Zen might see its major competitors as Tata Indica, Santro, and other manufacturers
of medium-price automobiles. It would not see itself as competing with May
bach or with Mahindra Scorpio.
2. Industry competition: A company sees its competitors as all companies making
the same product or class of products. Maruti Zen would see itself as competing
against all other automobile manufacturers.
3. Form competition: A company sees its competitors as all companies
manufacturing products that supply the same service. Maruti Zen would see
itself competing against not only other automobile manufacturers but also against
manufacturers of motorcycles, bicycles and trucks.
4. Generic competition: A company sees its competitors as all companies that
compete for the same consumer rupees. Maruti Zen would see itself competing
with companies that sell major consumer durables, foreign vacations, and new
homes.
Marketing Environment
Competition represents only one force in the environment in which the marketer operates.
The marketing environment consists of the task environment and the broad
environment.
The task environment includes the immediate actors involved in producing, distributing
and promoting the offering. The main actors are the company, suppliers, distributors,
dealers, and the target customers. Included in the supplier group are material suppliers
and service suppliers such as marketing research agencies, advertising agencies, banking
and insurance companies, transportation and telecommunications companies. Included
with distributors and dealers are agents, brokers, manufacturer representatives, and
others who facilitate finding and selling to customers.
The broad environment consists of six components : demographic environment,
economic environment, natural encironment, technological environment, political-
legal environment, and social-cultural environment. These environments contain
forces that can have a major impact on the actors in the task environment. Market
actors must pay close attention to the trends and developments in these environments
and make timely adjustments to their marketing strategies.
Evolution of Marketing
Once upon a time, when the needs and wants were satisfied by the barter trade, there
was no need for marketing. Two parties interested in each others poducts simply
negotiate with each other regarding the quantities of each product that must be exchanged.
Even at the time of industrial revolution when the demand for different products was
far greater than the supply, even in that scenario there was no need for marketing. In
fact producers were focussed on production aspects. With the advancement of
production technology and the increase in competition, the focus shifted through various
functional areas towards marketing. The evolution of marketing can be easily understood
by understanding the company orientations toward the market place.
Company Orientations toward the Marketplace
We have defined marketing management as the conscious effort to achieve desired
exchange outcomes with target markets. But what philosophy should guide a companys
marketing efforts ? What relative weights should be given to the interest of the
organization, the customers, and society ? Very often these interest conflict.
Clearly, marketing activities should be carried out under a well-thought-out philosophy
of efficient, effective, and socially responsible marketing. However, there are five
competing concepts under which organizations conduct marketing activities : the
production concept, product concept, selling concept, marketing concept, and societal
marketing concept.
The Production Concept
The production concept is one of the oldest concepts in business.
l The production concept holds that consumers will prefer products that are widely
available and inexpensive.
Managers of production-oriented businesses concentrate on achieving high production
efficiency, low costs, and mass distribution. They assume that consumers are primarily
interested in product availability and low prices. This orientation makes sense in
developing countries, where consumers are more interested in obtaining the product
than in its features. It is also used when a company wants to expand the market.
Some service organizations also operate on the production concept. Many medical and
dental practices are organized on assembly-line principles, as are some government
agencies (such as unemployment offices and licence bureaus). Although this
management orientation can handle many cases per hour, it is open to charges of
impersonal and poor-quality service.
The Product Concept
Other businesses are guided by the product concept.
l The product concept holds that consumers will favour those products that offer
the most quality, performance, or innovative features.
Managers in these organizations focus on making superior products and improving
them over time. They assume that buyers admire well-made products and can appraise
quality and performance. However, these managers are sometimes caught up in a love
affair with their product and do not realize what the market needs. Management might
commit the better-mousetrap fallacy, believing that a better mouse-trap will lead
people to beat a path to its door.
Product-oriented companies often design their products with little or no customer input.
They trust that their engineers can design exceptional products. Very often they will
not even examine competitors products. A General Motors executive said years ago:
How can the public know what kind of car they want until they see what is available?
GMs designers and engineers would design the new car. Then manufacturing would
make it. The finance department would price it. Finally, marketing and sales would try
to sell it. No wonder the car required such a hard sell ! GM today asks customers
what they value in a car and includes marketing people in the very beginning stages of
design.
The product concept can lead to marketing myopia. Railroad managemnet throught
that travellers wanted trains rather than transportation and overlooked the growing
competition from airlines, buses, trucks and automobiles. That happened in America
and is likely to happen in India where middle class families are opting for their own
vehicle. Slide-rule manufacturers thought that engineers wanted slide rules and
overlooked the challenge of pocket calculators. Colleges, departmental stores, and the
post office will assume that they are offering the public the right product and wonder
why their sales slip. These organizations too often are looking into a mirror when they
should be looking out of the window.
The Selling Concept
The selling concept is another common business orientation.
l The selling concept holds that consumers and businesses, if left alone, will ordinarily
not buy enough of the organizations products. The organization must, therefore,
undertake an aggressive selling and promotion effort.
This concept assumes that consumers typically show buying inertia or resistance and
must be coaxed into buying. It also assumes that the company has a whole battery of
effective selling and promotion tools to stimulate more buying.
The selling concept is practised most aggressively with unsought goods, goods that
buyers normally do not think of buying, such as insurance etc. These industries have
perfected various sales techniques to locate prospects and hard-sell them on their
products benefits.
The selling concept is also practised in the non-profit area by fund-raisers, college
admissions offices, and political parties. A political party vigorously sells its candidate
to voters. The candidate moves through voting precincts from early morning to late
evening, shaking hands, kissing babies, meeting donors, and making speeches. Countless
money is spent on radio and television advertising, posters, and mailings. The candidates
flaws are concealed from the public because the aim is to make the sale, not worry
about post purchase satisfaction. After the election, the new official continues to take
a sales-oriented view. There is little reaearch into what the public wants and a lot of
selling to get the public to accept the politician the party wants.
Most firms practise the selling concept when they have overcapacity. Their aim is to
sell what they make rather than make what the market wants. In modern industrial
economies, productive capacity has been built up to a point where most markets are
buyer markets (the buyers are dominant) and sellers have to scramble for customers.
Prospects are bombarded with TV commercials, newspaper ads, direct mail, and sales
calls. At every turn, someone is trying to sell something. As a result, the public often
identifies marketing with hard selling and advertising.
But marketing based on hard selling carries high risks. It assumes that customers who
are coaxed into buying a product will like it; and if they dont, that they wont bad-
mouth it or complain to consumer organizations and will forget their disappointment and
buy it again. These are indefensible assumptions. One study showed that dissatisfied
customers may bad-mouth the product to 10 or more acquaintances; bad news travels
fast.
The Difference Between Selling and Marketing
Before we move on to the marketing concept, let us analyse the difference between
selling and marketing.
Marketing is much wider than selling, and much more dynamic. In fact, there is a
fundamental difference between the two. Selling revolves around the needs and interests
of the seller; marketing revolves around the needs and interests of the buyer. Selling
starts with the existing products of the corporation and views business as a task of
somehow promoting these products. Marketing on the contrary starts with the
customerspresent and potentialand views business as a task of meeting the needs
of the customers by producing and supplying those products and services that would
meet such needs. Selling seeks profits by pushing the products on the buyers.
Marketing too, seeks profits, but not through aggressive pushing of products, but by
meeting the needs of customers and by creating value satisfactions for them. In other
words, marketing calls upon the corporation to choose products, prices and methods of
distribution and promotion, which will meet the needs of the customers. It does not
unwisely limit its role to persuading the customers to accept what the corporation already
has or what it can offer readily.
To quote Theodore Levitt, The difference between selling and marketing is more than
semantic. A truly marketing-minded firm tries to create value-satisfying goods and
services which the consumers will want to buy. What it offers for sale is determined
not by the seller but by the buyer. The seller takes his cues from the buyer and the
product becomes the consequence of the marketing effort, not vice-versa. Selling
merely concern itself with the tricks and techniques of getting the customers to exchange
their cash for the companys products; it does not bother about the value satisfactions
that the exchange is all about. On the contrary, marketing views the entire business as
consisting of a tightly integrated effort to discover, create, arouse and satisfy customer
needs.
Chart 1.1: The Difference Between Selling and Marketing
Selling Marketing
Selling starts with the seller, and is preoccupied
all the time with the needs of the seller.
Seller is the centre of the business universe;
activities start with the sellersexisting products.
Emphasises on saleable surplus available within
the corporation.
Seeks to quickly convert products into cash.
Concerns itself with the tricks and techniques of
getting the customers to part with their cash for
the products available with the salesman.
Views business as a goods producing
process.
Overemphasises the exchange aspect, without
caring for the value satisfactions inherent in the
exchange.
Marketing starts with the buyer and focuses
constantly on the needs of the buyer.
Buyer is the centre of the business universe;
activities follow the buyer and his needs.
Emphasi ses on i denti fi cati on of a market
opportunity.
Seeks to convert customer needs into products.
Emphasi ses on ful fi l l i ng the needs of the
customers.
Vi ew busi ness as a customer sati sfyi ng
process.
Concerns itself primarily and truly with the value
satisfactions that should flow to the customer
from the exchange.
Contd....
Sellers preference dominates the formulation of
the marketing mix.
The firm makes the product first and then figures
out how to sell it and make profit.
Emphasis on staying with the existing technology
and reducing costs.
Sellers motives dominate marketing
communications.
Cost determines the price.
Transportation, storage and other distribution
functions are perceived as mere extensions of
the production function.
Emphasis is on somehow selling : there is no
coordination among the different functions of the
total marketing task.
Different departments of the business operate as
separate watertight compartments.
In firms practising selling, production is the
central function of the business.
Selling views the customer as the last link in the
business.
The Marketing Concept
The marketing concept is a business philosophy that challenges the three business
orientations we just discussed. Its central tenets crystallized in the mid-1950s.
l The marketing concept holds that the key to achieving its organizational goals
consists of the company being more effective than competitors in creating, delivering,
and communicating customer value to its chosen target markets.
The marketing concept has been expressed in many colorful ways :
Meeting needs profitably.
Find wants and fill them.
Love the customer, not the product.
Have it your way. (Burger King)
Youre the boss. (United Airlines)
Buyer determines the shape the marketing mix
should take.
What is to be offered as a product is determined
by the customer.
The firm makes a total product offering that will
match and satisfy the identified needs of the
customer.
The product is the consequence of the marketing
effort; the marketing effort leads to products that
the customers actually want to buy in their own
interest.
Emphasis on innovation in every sphere; on
providing better value to the customer by adopting
better technology.
Marketing communications is looked upon as the
tool for communicating the benefits/satisfactions
provided by the product.
Consumer determines price; price determines
costs.
They are seen as vital services to be provided to
the customer, keeping customers convenience in
focus.
Emphasis is on integrated marketing; an integrated
strategy covering product, promotion, pricing and
distribution.
All departments of the business operate in a highly
integrated manner, the sole purpose being
generation of consumer satisfaction.
In firms practising marketing, marketing is the
central function of the business; the entire
company or business is organised around the
marketing function.
Marketing views the customer as the very purpose
of the business; sees the business from the point
of view of the customer; customer consciousness
permeates the enti re organi sati onal l
departments and all people in the organisation
all the time.
Putting people first. (British Airways)
Partners for profit. (Milliken and Company)
Theodore Levitt of Harvard drew a perceptive contrast between the selling and marketing
concepts:
Selling focuses on the needs of the seller; marketing on the needs of the
buyer. Selling is preoccupied with the sellers need to convert his product
into cash; marketing with the idea of satisfying the needs of the customer by
means of the product and the whole cluster of things associated with creating,
delivering and finally consuming it.
The marketing concept rests on four pillars : target market, customer needs, integrated
marketing, and profitability. They are illustrated in Figure 1.5, where they are contrasted
with a selling orientation. The selling concept takes an inside-out perspective. It starts
with the factory, focuses on existing products, and calls for heavy selling and promoting
to produce profitable sales. The marketing concept takes an outside-in perspective. It
starts with a well-defined market, focuses on customer needs, coordinates all the activities
that will affect customers, and produces profits by satisfying customers.
Figure 1.5: Selling vs marketing concept
Target Market
Companies do best when they choose their target market(s) carefully and prepare
tailored marketing programs. Palmolive is offering different types of soaps depending
on the different types of skins.
Customer Needs
A company can define its target market but fail to understand correctly the customers
needs.
Understanding customer needs and wants is not always simple. Some customers have
needs of which they are not fully conscious. Or they cannot articulate these needs. Or
they use words that require some interpretation. What does it mean when the customer
asks for an inexpensive car, a powerful, a fast lathe, an attractive shirt, or a
restful hotel ?
Starting point
Focus Means Ends
Factory Products Products
Consider the customer who says he wants an inexpensive car. The marketer must
probe further. We can distinguish among five types of needs :
1. Stated needs (the customer wants an inexpensive car)
2. Real needs (the customer wants a car whose operating cost, not its initial price,
is low)
3. Unstated needs (the customer expects good services from the dealer)
4. Delight needs (the customer would like the dealer to include a gift of a Indian
road atlas.
5. Secret needs (the customer wants to be seen by friends as a savvy consumer).
Reponding only to the stated need may shortchange the customer. Consider a woman
who enters a hardware store and asks for a sealant to seal glass window panes. This
customer is stating a solution, not a need. The salesperson might suggest that tape
would provide a better solution. The customer may appreciate that the salesperson
met her need, not her stated solution.
A distinction needs to be drawn between responsive marketing, anticipative marketing
and creative marketing. A responsive marketer finds a stated need and fills it. An
anticipative marketer looks ahead into what needs customers may have in the near
future. A creative marketer looks ahead into what needs customers may have in the
near future. A creative marketer discovers and produces solutions customers did not
ask for but to which they enthusiastically respond. Hamel and Prahalad believe that
companies must go beyond just asking consumers what they want :
Customers are notoriously lacking in foresight. Ten or 15 years ago, how
many of us were asking for cellular telephones, fax machines, and copiers
at home, 24-hour discount brokerage accounts, multivalve automobile
engines, compact disc players, cars with on-board navigation systems, hand-
held global satellite positioning receivers, automated teller machines, MTB,
or the Home Shopping Network ?
Sony exemplifies a creative marketer because it has introduced many successful new
products that customers never asked for or even thought were possible : Walkmans,
VCRs, videocameras, CDs, and so on. Sony goes beyond customer-led marketing; it is
a market-driving firm, not just a market-driven firm. Akio Morita, its founder, proclaimed
that we doesnt serve markets; we create markets.
Why is it supremely important to satisfy target customers ? Because a companys
sales in each period come from two groups : new customers and repeat customers.
One estimate is that attracting a new customer can cost five times as much as pleasing
an existing one. And it might cost sixteen times as much to bring the new customer to
the same level of profitability as the lost customer. Customer retention is thus more
important than customer attraction.
Integrated Marketing
When all the companys departments work together to serve the customers interest,
the result is integrated marketing. Unfortunately, not all employees are trained and
motivated to work for the customer. An engineer once complained that the salespeople
are always protecting the customer and not thinking of the companys interest! He
went on to blast customers for asking for too much. The following example highlights
the coordination problem :
The marketing vice president of a major European airline wants to increase
the airlines traffic share. His strategy is to build up customer satisfaction
through providing better food, cleaner cabins, better trained cabin crews,
and lower fares. Yet he has no authority in these matters. The catering
department chooses food that keeps down food costs; the maintenance
department uses cleaning services that keep down cleaning costs; the human
resources department hires people without regard to whether they are naturally
friendly; the finance department sets the fares. Because these departments
generally take a cost or production point of view, the vice president of
marketing is stymied in creating an integrated marketing mix.
Integrated marketing takes place on two levels. First, the various marketing functions
sales forces, advertising, customer service, product management, marketing research
must work together. Too often the sales force thinks product managers set prices or
sale quotas too high; or the advertising director and a brand manager cannot agree on
an advertising campaign. All these marketing functions must be coordinated from the
customers point of view.
Second, marketing must be embraced by the other departments; they must also think
customer. According to David Packard of Hewlett-Packard : Marketing is far too
important to be left only to the marketing department! Marketing is not a department
so much as a companywide orientation. Xerox goes so far as to include in every job
description an explanation of how that job affects the customer. Xerox factory managers
know that visits to the factory can help sell a potential customer if the factory is clean
and efficient. Xerox accountants know that customer attitudes are affected by Xeroxs
billing accuracy and promptness in returning calls.
To foster teamwork among all departments, the company carries out internal marketing
as well as external marketing. External marketing is marketing directed at people
outside the company. Internal marketing is the task of hiring, training, and motivating
able employees who want to serve customers well. In fact, internal marketing must
precede external marketing. It makes no sense to promise excellent service before the
companys staff is ready to provide it.
Managers who believe the customer is the companys only true profit center consider
the traditional organization chart in Figure 1.6 (a)a pyramid with the president at the
top, management in the middle, and front-line people and customers at the bottom
obsolete. Master marketing companies invert the chart, as shown in Figure 1.6 (b). At
the top are the customers; next in importance are the front-line people who meet,
serve, and satisfy the customers; under them are the middle managers, whose job is to
support the front-line people so they can serve the customers well; and at the base is
top management, whose job is to hire and support good middle managers. We have
added customers along the sides of Figure 1.6 (b) to indicate that all the companys
managers must be personally involved in knowing, meeting, and serving customers.
Profitability
The ultimate purpose of the marketing concept is to help organizations achieve their
objectives. In the case of private firms, the major objective is profit; in the case of non-
profit and public organizations, it is surviving and attracting enough funds to perform
useful work. Private firms should not aim for profits as such but to achieve profits as
a consequence of creating superior customer value. A company makes money by
satisfying customer needs better than its competitors.
How many companies actually practise the marketing concept ? Unfortunately, too
few. Only a handful of companies stand out as master marketers : Procter & Gamble,
Hindustan Lever Limited, Maruti Suzuki, Hero Honda, Sony, Nirma. These companies
focus on the customer and are organized to respond effectively to changing customer
needs. They all have well-staffed marketing departments, and all their other
departmentsmanufacturing, finance, research and development, personnel,
purchasingalso accept the concept that the customer is king.
Most companies do not embrace the marketing concept until driven to it by circumstances.
Various developments prod them to take the marketing concept of heart :
l Sales decline: When sales fall, companies panic and look for answers. Today,
newspapers are experiencing declining circulation as more people rely on radio,
TV and the internet for their news. Some publishers now realize that they know
little about why people read newspapers. These publishers are commissioning
consumer research and attempting to redesign newspapers to be contemporary,
relevant, and interesting to readers. They are also starting Web pages.
l Slow growth: Slow sales growth leads some companies to search for new markets.
They realize they need marketing skill to identify and select new opportunities.
Figure 1.6: Traditional Organization Chart versus Modern Customer-Oriented
Company Organization Chart
Top
Top
manage-
manage-
ment
ment
Middle management
Middle management
Front-line people
Front-line people
Customers
Customers
C
C
u
u
s
s
t
t
o
o
m
m
e
e
r
r
(a) Traditional organization chart
(b) Modern customer-oriented chart
l Changing buying patterns: Many companies operate in markets characterized
by rapidly changing customer wants. These companies need more marketing know-
how if they are to track buyers changing values.
l Increasing competition: Complacent companies may suddenly be attacked by
powerful competitors. AT&T was a regulated, marketing-naive telephone company
until the 1970s, when the government began allowing other companies to sell
telecommunications equipment. AT&T plunged into the marketing waters and
hired the best marketers it could find to help it compete. Companies in deregulated
industries all find it necessary to build up marketing expertise. Otherwise theyll be
out of the business.
l Increasing marketing expenditures: Companies may find their expenditures for
advertising, sales promotion, marketing research and customer service to be poorly
done. Management then decides it is time to undertake a serious marketing audit
to improve its marketing.
In the course of converting to a marketing orientation, a company faces three hurdles:
organized resistance, slow learning, and fast forgetting.
Some company departments (often manufacturing, finance and R&D) believe a stronger
marketing function threatens their power in the organization. Initially, the marketing
function is seen as one of several equally important functions in a check-and-balance
relationship. Lack of demand leads marketers to argue that their function is more
important. A few enthusiasts go further and say marketing is the major function of the
enterprise, for without customers there would be no company. Enlightened marketers
clarify the issue by putting the customer rather than marketing at the center of the
company. They argue for a customer orientation in which all functions work together
to respond to, serve, and satisfy the customer. Some marketers say that marketing still
needs to command a central position if customers needs are to be correctly interpreted
and efficiently satisfied.
Resistance is especially strong in industries where marketing is being introduced for the
first timefor instance, in law offices, colleges, deregulated industries, and government
agencies. But in spite of resistance, many companies manage to introduce some marketing
thinking into their organization. The company president establishes a marketing
department; marketing talent is hired; key managers attend marketing seminars; the
marekting budget is substantially increased; marketing planning and control systems
are introduced. Even with these steps, however, learning comes slowly.
Even after marketing has been installed, management must fight a tendency to forget
basic principles especially in the wake of success. For example, many U.S. companies
entered European markets in the 1950s and 1960s expecting to achieve outstanding
success with their sophisticated products and marketing capabilities. A number of
them failed because they forgot the basic marketing maxim : Know your target market
and how to satisfy it.
The Societal Marketing Concept
Some have questioned whether the marketing concept is an appropriate philosophy in
an age of environmental deterioration, resource shortages, explosive population growth,
world hunger and poverty and neglected social services. Are companies that do an
excellent job of satisfying consumer wants necessarily acting in the best long-run interests
of consumers and society ? The marketing concept sidesteps the potential conflicts
among consumer wants, consumer interest, and longrun societal welfare.
Consider the following criticism :
The fast-food hamburger industry offers tasty but unhealthy food. The
hamburgers have a high fat content, and the restaurants promote fries and
pies, two products high in starch and fat. The products are wrapped in
convenient packaging, which leads to much waste. In satisfying consumer
wants, these restaurants may be hurting consumer health and equsing
environemtnal problems.
Situations like this one call for a new term that enlarges the marketing concept. Among
those suggested are humanistic marketing and ecological marketing. We propose
calling it the societal marketing concept.
l The societal marketing concept holds that the organizations task is to determine
the needs, wants and interests of target markets and to deliver the desired
satisfactions more effectively and efficiently than competitors in a way that preserves
or enhances the consumers and the societys well-being.
The societal marketing concept calls upon marketers to build social and ethical
considerations into their marketing practices. They must balance and juggle the often
conflicting criteria of company profits, consumer want satisfaction, and public interest.
Yet a number of companies have achieved notable sales and profit gains by adopting
and practising the societal marketing concept.
Exhibit: Marketing Concept Put into Practice by British Airways
When I joined British Airways customer relations department in 1991, I found that the
department took more than 12 weeks on an average, to respond to customer grievances.
It lost 60 per cent of calls from customers on any given day. And, the cost of
compensating customers was rising rapidly.
BA takes a new approach to customer relations : The new team in customer
relations, decided to take a proactive role in retaining customers. The new motto was
: To champion the customer, as opposed to defending the company.
Find out why customers defected : Making quick amendments when a service
failure occurred and eliminating the operational weaknesses behind them became the
focus. We had first to improve our understanding of why customers defected. Some
customers left BA though they had no complaint; their reasons ranged from a job
change to another airlines new frequent fliers programme. As for customers who
had some grievances, 50 per cent chose not to tell us anything; they simply defected to
other airlines. Out of those who did contact someone at BA about their grievances, 87
per cent did not defect.
Make customers into champions : The conclusion was that those who wished to
tell us about the service they had received could be turned around. We found out more
about these customers and ultimately developed a model Making Customers into
Champions.
Transforming BAs traditional defensive role : We have first we have to transform
our culture and methods. All along, customer relations had served as an investigator
and adjudicator and had pursued four basic objectives :
(i) To insulate the company from unhappy customers. Accordingly, customer relations
was highly centralised, conducted little analysis of customer data, and mostly did
not disseminate it.
(ii) To assign blame for poor service, rather than to help the organisation learn how
to prevent or fix problems. As a result, line functions saw the customer relations
department as an adversary.
(iii) To buy dissatisfied customers silence for the lowest possible price. Framing
detailed rules for compensation was the result.
(iv) To focus on the volume of grievance handling activityto process the largest
possible number of customer complaints. Consequently, the level of service to
complaining customers was lost sight of. Customers did not find customer relations
easily accessible.
The new objectives : The new team insitituted four new objectives :
(i) To use customer feedback more effectively for improving the service quality.
We installed systems to collect and analyse customer data, and to distribute the
findings to BAs operations around the world.
(ii) To strive to prevent future service problems through teamwork. We tried to
achieve this objective by having line operations join us in monthly reviews to
discuss how customers were perceiving service quality.
(iii) To change our approach to customer compensation so that it would meet
customers needs. For this, we instituted a policy of dealing with all cases
individually and began holding internal reviews each month to identify the most
effective means of retaining customers.
(iv) To practise customer retention, not adjudication. Accordingly, we changed the
way of measuring our performance. We started assessing it on the basis of
customer-retention rates, that is, on the basis of the divisions effectiveness in
retaining customers with the resources available. Preventing customer defection
became the main aim. It was translated into modus operandi of retain, invest,
prevent, which was incorporated into all training programmes, coaching sessions
and performance criteria.
Retaining the customer is job one : First and foremost, we had to retain the customer.
Debating whether the customer was correctly perceiving facts was a non-issue. We
had to deal with their perception, if we were going to hold on to them. In training, we
helped staff to understand the following :
l If BA replies to a customer and claims that events did not happen as the customer
had stated, then the customer perceives BA to be calling him a liar.
l If after investigating, BA reports back that events indeed took place as the customer
claimed, then the customer could become even more agitated because he infers
that BA did not believe him at first.
l If BA passes on some information to the customer to the effect that he did not
know, he may think that BA is finding excuses for poor service.
To deal with these issues, customer relations developed a four-step process and
incorporated it into all our technical and human systems.
l Apologise and own the problem. Customers do not care whose fault it was or who
was to blame; they want an apology and they want someone to champion their
cause.
l Do it quickly. Aim to reply to the customer the same day, and if that is not possible,
certainly do it within 72 hours.
l Assure the customer that the problems are being fixed.
l Do it by phone.
Towards obtaining information and responding to complaints quickly, we invested in a
re-engineering effort that included :
Computerised customer case history : We introduced an image-based computer
system, Caress (for Customer Analysis and Retention System), eliminating all paper.
Caress also allowed a customers case history to be shared easily and quickly across
the organisation and makes it easier to spot trends.
Redesigning the customer-service process : In conjunction with Caress, we
overhauled the number of administrative steps required to serve a customer from 13 to
3.
Throwing out the rule book : The rule book mindset was eliminated. Instead, each
customer relations employee was fully autorised to use whatever resources he thought
were necessary for keeping a customers business. The new system for assessing the
divisions effectiveness in retaining customers ensured that expenditures did not
skyrocket.
Building interpersonal skills : Whereas, previously the focus of training had been
on writing grammatically correct letters, the new emphasis was on coaching employees
on how to allay customers anger, how to negotiate a win-win situation for the customer
and company, how to listen and empathise and how to be assertive without being
defensive. In addition, employees were trained to help each other cope with their
emotionally gruelling jobs, lest they took it out on customers.
Encouraging customers to communicate : Our research found that less than 10
per cent of customers ever communicated with the airline about service issuesgood
or bad. Of those with complaints, only 8 per cent contacted customer relations. These
customers turned out to be our most loyal : They not only stayed with BA, they also
provided invaluable information on service quality. The key, therefore, was to get more
customers to communciate back.
Customer retention policy pays back : Data told us that this pursuit was well
worth it : for every single pound invested in our customer retention efforts. BA
received two pounds back. The benefit was made up of three components. First, by
resolving more and more customer problems up front, BA now, had to spend much less
on retaining customers. Second, the satisfied customers now gave BA more of their
business. Finally, these customers helped win additional business by actively promoting
BA to others.
BA listens to customers intently : Customer relations employed new measures to
increase its approachability. The first was the establishment of listening posts. These
included an international, postage-paid card that customers could use to mail in comments;
customer forums attended by BA executives where customers could air grievances;
and the Fly with Me programme, in which, BA representatives and customers would
fly together, to experience customer problems first hand.
Prevent it from happening again : Finally, success of the strategy required partnerships
among customer relations and other BA departments. Only with such partnerships
could BA move from cure to prevention, utilising all information to spot service failures
and to design an early warning mechanism on potential service failures.
Marketing Mix
Marketing is a process of creating and delivering value. What is the mechanism through
which a marketer carries out the value delivery process ? The marketer delivers value
to the customer basically through his market offer. He takes care to see that the offer
fulfils the needs of the customers. He also ensures that the customer perceives the
terms and conditions of the offer as more attractive, vis-a-vis other competing offers.
How is this actually accomplished ? If we turn to the nuts and bolts of this task, we can
see that in the first place, the marketer creates the product that will meet the identified
needs of the consumer. Second, he carries out functions such as transportation, so that
the product can conveniently reach the consumer. Third, he communciates the benefits
of the offer to the consumer by carrying out various promotional activities such as
personal selling, advertising and sales promotion. Lastly, he tackles the price mechanism
and consummates the marketing task by arriving at a price that is acceptable to the
consumer. These are the elements with which the marketer accomplishes his value-
delivering task.
The four elements mentioned aboveproduct, distribution, promotion and pricing
constitute the marketing mix of the firm. The marketing mix is the sole vehicle for
creating and delivering customer value.
It can be easily seen that all activites and programmes, which a marketer designs and
carries out in his effort at winning customers, relate to one or the other of the above
four elementsproduct, distribution, promotion and pricing. It can also be seen that in
each of these elements, there are several sub-elements. For example, packaging is one
of the sub-elements of product and warehousing is one of the sub-elements of distribution.
It was James Culliton, a noted marketing expert, who coined the expression marketing
mix and described the marketing manager as a mixer of ingredients. To quote him.
The marketing man is a decider and an artista mixer of ingredients, who, sometimes
follows a recipe developed by others and sometimes prepares his own recipe. And,
sometimes he adapts his recipe to the ingredients that are readily available and sometimes
invents some new ingredients, or, experiments with ingredients as no one else has tried
before. The dynamics of the marketing process and the versatility of the marketing
mix tool cannot be described any better.
Marketers use numerous tools to elicit desired responses from their target markets.
These tools constitute a marketing mix.
Figure 1.7: The Four P Components of the Marketing Mix
l Marketing mix is the set of marketing tools that the firm uses to pursue its marketing
objectives in the target market.
McCarthy classified these tools into four broad groups that he called the four Ps of
marketing : product, price, place and promotion. The particular marketing variables
under each P are shown in Figure 1.7. Marketing-mix decisions must be made for
influencing the trade channels as well as the final consumers. Figure 1.8 shows the
company preparing an offering mix of products, services, and prices, and utilizing a
promotion mix of sales promotion, advertising, sales force, public relations, direct-mail,
telemarketing, and Internet to reach the trade channels and the target customers.
Figure 1.8: Marketing mix strategy.
Marketing Mix
Product
Product variety
Quality
Design
Features
Brand name
Packaging
Sizes
Services
Warranties
Return
Price
List price
Discounts
Allowances
Payment period
Credit terms
Promotion
Sales promotion
Advertising
Sales force
Public relations
Direct marketing
Place
Channels
Coverage
Assortments
Location
Inventory
Transport
G
G
G
G
Offering mix
Company
Products
Services
Prices
Promotion mix
Sales
promotion
Advertising
Sales force
Public
Relation
Direct mail,
telemarketing,
and Internet
Distribution
Channels
Target
customer
Typically, the firm can change its price, sales force size, and advertising expenditures in
the short run. It can develop new products and modify its distribution channels only in
the long run. Thus the firm typically makes fewer period-to-period marketing-mix
changes in the short run than the number of marketing-mix decision variables might
suggest.
Note that the four Ps represent the sellers view of the marketing tools available for
influencing buyers. From a buyers point of view, each marketing tool is designed to
deliver a customer benefit. Robert Lauterborn suggested that the sellers four Ps
correspond to the customers four Cs.
Four Ps Four Cs
Product Customer solution
Price Customer cost
Place Convenience
Promotion Communication
Winning companies will be those who can meet customer needs economically and
conveniently and with effective communication.
The First ElementProduct
The term product refers to what the business or non-profit organization offers to its
prospective customers or clients. The offering may be a tangible good, such as a car;
a service, such as an insurance plan; or an intangible idea, such as the importance of
donating eyes after the death.
Product A good, service, or idea that offers a bundle of tangible and intangible attributes to satisfy
consumers of marketing, because they can be controlled and manipulated by the market.
Because customers often expect more from an organization than a simple, tangible
product, the task of marketing management is to provide a complete offering a total
productthat includes not only the basic good or service but also the extras that go
with it. The core product of a D.T.C. may be rides or transportation, for exmaple, but
its total product offering should include courteous service, buses that run on time, and
assistance in finding appropriate bus routes.
The product the customer receives in the exchange process is the result of a number of
product strategy decisions. Developing and planning a product involves making sure
that it has the characteristics and features customers want. Selecting a brand name,
designing a package, developing appropriate warranties and service plans, and other
product decisions are also part of developing the right product.
As you will see, product strategies must take into consideration the other three elements
of the marketing mix. Price, distribution and promotion enhance the attractiveness of
the product offering.
The Second ElementPlace
Place (distribution) : The element of the marketing mix that encompasses all aspects of getting
products to the consumer in the right location at the right time.
Place, or distribution, activities involve bridging the physical separation between buyers
and sellers to assure that products are available at the right place. Determining how
goods get to the customer, how quickly, and in what condition are decisions that are
made to place products where and when buyers want them. Transportation, storage,
materials handling, and the like are physical distribution activities. Selecting wholesalers
and retailers or choosing to be an e-commerce company operating exclusively on the
Internet are decisions about the structure and extent of distribution.
The examples so far have shown that every organization engages in marketing. Not
every organization, however, has the resources or ability to manage all the activities
that make up the distribution process. Thus, organizations may concentrate on activities
in which they have a unique advantage and rely on wholesalers, retailers, and various
other specialists to make the distribution process more efficient. For example, the
Pepsi-Cola Corporation, which specializes in the production and promotion of soft drinks,
finds it efficient to utilize independent bottlers and retailers to distribute its products to
the ultimate consumer.
Channel of distribution : The sequence of marketing organizations involved in bringing a product
from the producer to the consumers.
A channel of distribution is the complete sequence of marketing organizations involved
in bringing a product from the producer to the consumer. Its purpose is to make possible
transfer of ownership and/or possession of the product. Figure 1.9 illustrates a basic
channel of distribution consisting of the manufacturer, the wholesaler, the retailer, and
the ultimate consumer. Each of these four engages in a transaction that involves
movement of the physical good and/or a transfer of title (ownership) of that product.
As you look at Figure 1.9, consider the following definitions :
A manufacturer is an organization that recognizes a consumer need and produces a
product from raw materials, components parts, or labour to satisfy that need.
A wholesaler is an organization that serves as an intermediary between manufacturer
and retailer to facilitate the transfer of products or the exchange of title to those products,
or an organization that sells products to manufacturers or institutions that resell the
products (sometimes in another form). Fig 1.9 shows the type of wholesaler that sells
to retailers. Wholesalers neither produce nor consume the finished product.
A retailer is an organization that sells products it has obtained from a manufacturer or
wholesaler to the ultimate consumer. Retailers neither produce nor consume the product.
The ultimate consumer is the individual who buys or uses the product for personal
consumption.
The actual distribution path that a product or title takes may be simpler or much more
complex than the one illustrated. For example, a computer manufacturer such as Dell
may provide information about its products on the Internet, allow customers to place
orders on the Internet, and then ship directly to a buyer.
Excluded from the channel of distribution are numerous specialists that perform specific
facilitating activities for manufactuers, wholesalers, or retailersfor example, the truck
or the railways that transports a product from Bangalore to New Delhi or the advertising
agency like Mudra that creates the advertising message and selects the appropriate
media. These specialists, or collaborators, are hired because they can perform a
certain marketing activity in a basic marketing channel more effiiciently or more
effectively than a producer can. However, they are not among the organizations included
in our definition of channel of distribution.
Figure 1.9: Who is involved in a Basic Channel of Distribution?
It is important to realize that distribution mixes vary widely even among companies
selling directly competititve products. For example Amway use sales representatives
selling directly to consumers as their primary source of distribution; Gillette and Colgate-
Palmolive, selling similar goods, deal with many wholesalers and retailers in their
distribution systems. Further, a single organization may use different methods of
distribution in different parts of the world.
The Third ElementPromotion
Promotion : The element of the marketing mix that includes all forms of marketing communciation.
Marketers need to communicate with consumers. Promotion is the means by which
marketers talk to existing customers and potential buyers. Promotion may convey a
message about the organization, a product, or some other element of the marketing mix,
such as the new low price being offered during a sale period. Simply put, promotion is
marketing communication.
Advertising, personal selling, publicity and sales promotion are all forms of promotion.
Each offers unique benefits, but all are forms of communication that inform, remind, or
persuade. For example, advertising that tells us Thanda Matlab Coca-Cola or Chhotta
Coke reminds us of our experiences with a familiar cola. Or, when an IBM sales
representative delivers a personal message during a sales presentation, this personal
selling effort may be designed to explain how IBMs experience on the Internet and its
computer servers help provide business solutions. The essence of all promotion is
communication aimed at informing, reminding, or persuading potential buyers.
Flow of Product
or Title
Manufacturer
Definition
Producer of a finished product from
raw material or component parts.
Examples
Colgate-Palmolive
Wholesaler
An intermediary who neither produces
nor consumes the finished product but
sells to retailers, manufacturers, or
institutions that use the product for
ultimate resale (perhaps in another
product form).
Bhiwani
Wholesaler
Retailer
An intermediary who neither produces
nor consumes the finished product but
sells to the ultimate customer.
General store located
near your home
Customer A person who buys or uses the
finished product.
You
Different firms emphasize different forms of promotional communication, depending
on their marketing objectives. Some firms advertise heavily, for example, whereas
others advertise hardly at all. A firms particular combination of integrated
communication tools is its promotional mix.
THE FOURTH ELEMENTPRICE
The moneyor something else of valuegiven in exchange for something is its price.
In other words, price is what is exchanged for a product. The customer typically buys
a product with cash or credit, but the price may be a good or service that is traded. In
not-for-profit situations, price may be expressed in terms of volunteered time or effort,
votes, or donations.
Marketers must determine the best price for their products. To do so, they must ascertain
a products value, or what it is worth to consumers. Once the value of a product is
established, the marketer knows what price to charge. However, because consumers
evaluations of a products worth change over time, prices are subject to rapid change.
According to economists, prices are always, on trial. Pricing strategies and decisions
require establishing appropriate prices and carefully monitoring the competititive
marketplace.
Price : The amount of money or other considerationthat is, something of valuegiven in exchange
for a product.
THE ART OF BLENDING THE ELEMENTS
A manager selecting a marketing mix may be likened to a chef preparing a meal. Each
realizes that there is no one best way to mix ingredients. Different combinations may
be used, and the result will still be satisfactory. In marketing, as in cooking, there is no
standard formula for a successful combination of ingredients. Marketing mixes vary
from company to company and from situation to situation.
Marketing Mix
Element Company or Organization Example
Product
Product development NOKIA NOKIA-1100 Made for India (Shock & dust
resistant mobile phone).
Gillette Company Gillette MACH-3 (Triple blade shaving
system)
Product modification Colgate-Palmolive Colgate Total (toothpaste)
ICICI Bank Net Banking (Check your account on-line)
Citizen Eco-Drive Wrist watch (Never need a
battery)
Branding Bajaj Auto Bajaj WIND 125 (The world bike)
Trademark Asian Paints Gattu
Onida Devil
Warranty Panasonic 5 yr. warranty on Television.
PLACE (DISTRIBUTION)
Channels of distribution Hindustan Lever Limiter Ships to wholesalers in different cities
who then delivers to the retailers.
Asian Sky Shop Sells through franchisee (One in each city)
Physical distribution Text Book Publishers Use Courier services to send sample
copy to faculty members.
Contd....
PROMOTION
Advertising Hutch (1) Hi, (2) Wherever you go our network.
Fevicol Lagta hai Fevicol Ka Jod hai, tootega nahin.
PRODUCT
Personal selling Eureka Forbes Water filter & Vacuum Cleaner.
ICICI Bank/HDFC Bank New Account Opening; Salary Account;
Loans (Home & Car)
Sales promotion Britannia Ind. Ltd. Britannia Khao, Cricketer Ban Jao
HLL Lifebuoy : Buy 3, Get 1 Free
HLL Clinic Plus : Buy 1, Get 1 Free
Publicity Film Stars & Crickets Opening Boutique & Beauty Parlour
PRICE
Price strategy Colorplus Premium ready to wear.
Bazee.com Website that offers products at low prices.
Figure 1.10
Figure 1.10, provides examples of many marketing mix elements. The vast majority of
marketers agree that the blending of these elements is a creative activity. For example,
though both firms are successful at selling motorcycles, the marketing mix strategies of
Hero Hondas Splender and Kawasaki Bajajs Eliminator differ greatly. For greater
differences can be seen in marketing mixes for different products, such as Godrej GE
washing machine and Cadbury Chocolates. The field of marketing encompasses such
differing approaches because the design, implementation, and revision of a marketing
mix is a creative activity.
Some experts claim that marketing isor could bea science. Certain aspects of
marketing, such as the gathering and analyzing of information by marketing researchers,
are indeed scientific in nature. The fact remains, however, that there are no pat solutions
in marketing. Even frequently encountered problems have unique aspects requiring
creative solutions. This absence of certainity may annoy those who are accustomed to
solving math or accounting problems and arriving at one right answer. But marketing
is different. Its relationship to the everchanging environment requires that it be dynamic,
constantly altering its approaches to suit the marketplace. Each products marketing
mix must be critically analyzed and altered as the environment changes and new problems
develop.
Chart 1.2: Marketing Mix/Four Ps of Marketing
Product
Product design, features, brand name, models,
style, appearance.
Product quality.
Warranty.
Package : Design type, material, size,
appearance and labelling.
Service : Pre-sale and after-sale, service
standards, service charges.
Place
Channels of distribution : Channel design, types
of intermediaries, location of outlets, channel
remune-ration, dealer-principal relations, etc.
Physical distribution : Transportation,
warehousing, inventory levels, order processing,
etc.
Price
Pricing policies, margins, discounts and rebates.
Terms of delivery, payment terms, credit terms
and instalment purchase facilities.
Resale price maintenance.
Promotion
Personal selling : Selling expertise, size of
sales force and quality of sales force.
Advertising : Media mix, vehicles, programmes.
Sales promotion.
Publicity and public relations.
Nature, Importance and Scope of Strategic Planning
Strategic planning is the management task concerned with the growth and future of a
business enterprise. Strategic planning can be viewed as a stream of decisions and
actions that lead to effective strategies and which, in turn, help the firm achieve its
growth objectives. The process involves a thorough self-appraisal by the corporation,
including an appraisal of the businesses it is engaged in and the environment in which it
operates.
Rapid Changes in Environment Necessitate a Strategic Perspective
It is no exaggeration to say that it is the fluctuating environment that renders strategic
planning an indispensable task for the business firm. If the environment is by-and-large
stable, things will be more predictable and convenient for the firm; it can stay with
existing strategies, structures, products and markets. But, it is not so in actual practice.
In the present times, in particular, the environmentand all its constituentsare changing
fast. In fact, practically everything outside the four walls of the firm is changing and
changing fast, resulting in a discontinuity with the past. The things happening are totally
disconnected from the past experiences of the firm. Strategic planning navigates the
corporate ship through the uncertain and turbulent environmetal waters.
Strategic Planning Provides the Direction to the Corporation and Indicates
How Growth is to be Achieved?
A business firm cannot afford to travel in haphazard manner; it has to travel with the
support of a road map. Strategic planning provides the road map for the corporation. It
ensures that the enterprise keeps moving in the right direction. It serves as the hedge
against risk and uncertainty, the hedge against costly mistakes and overnight vulnerability.
It lends a framework for the corporation, which can ensure that decisions concerning
the futuredecisions on matters like product-market choices, and investmentsare
taken in a systematic and purposeful way. The focus of the corporation thus gets decided
through this process.
Strategic planning works as the pathfinder to the various business opportunities;
simultaneously, it serves as a corporate defence mechanism, which helps a firm avoid
costly mistakes.
Enables Long-term Decisions Concerning the Firm
Starting from the corporation's mission and philosophy, down to choice of businesses
and strategies, all vital aspects in the governance of business are chartered through
strategic planning. It is through strategic planning that a corporation takes decisions
concerning its mission, the businesses it will pursue and the markets it will serve it is
through strategic planning, that it lays down its growth objective and formulates its
Chapter 2
Strategic Marketing Planning
Strategic Marketing Planning 41
strategies. In other words, all decisions of high significance and consequence to a
corporation are taken through the strategic planning process.
Strategy is not something that can be taken out of one's hat and pushed into the market.
To forge appropriate strategies, a company has to go through the strategic planning
process. It has to do a good deal of homework. It has to bring to the fore the corporation's
ambitions, identify its core competencies and competitive advantages, decide the
businesses in which it should stay, the business it should quit, and the ones it should
enter. It has to then decide on the actual strategies to employ.
Ensures Optimum Utilisation of Resources
Usually, the resources available to any business firm are limited. Naturally, the firm
has to utilise its resources creatively and optimally. Strategic planning ensures such
utilisation. It lends a frame of reference for investment decisions. It aids the concentrated
application of the resources on vital areas, i.e. areas of best potential.
Prepares the Firm to Face the Future
Strategic planning is not a matter of merely projecting the future. It also prepares a
corporation to face the future. It even shapes the future in the corporation'a favour. Its
ultimate burden is to influence the mega environs in the corporation's favour, working
into the environs and shaping them, instead of merely watching them, or getting carried
away by them.
Strategic planning also helps a firm acquire the benfit of a lead time for all its crucial
decisions and actions, as it helps the firm anticipate trends.
Helps Acquire Relevant Competitive Advantages
Strategic planning has the burden of equipping a corporation with the relevant competitive
advantages in its fight for survival and growth. The more intense the competition, the
more critical is the need for competitive advantage. And, they emanate through strategic
planning.
Chart 2.1: Nature, Importance and Scope of Strategic Planning
l Serves as a road map for the corporation.
l Lays down the growth objectives of the
firm and also provides the strategies need
for achieving them.
l Serves as a hedge against uncertainty
arising from environmental turbulence.
l Ensures that the firm remains a prepared
organisation.
l Helps the firm understand trends in
advance and provides the benefit of a
lead time for taking crucial decisions and
actions.
l Helps avoid haphazard response to
environment.
l Provides the best possible fit between the
firm and the external environment.
l Ensures that the firm's businesses, products
and markets are chosen wisely.
l Ensures best utilisation of the firm' resources
among the product-market opportunities.
l Helps build competitive advantages and core
competencies.
l Prepares the firm to not only face the future
but even to shape the future in its favour;
helps the firm influence its mega environs in
its favour to the extent possible.
l Draws from both institution and logic.
Overview
The environment within which marketing operates includes a number of factors directed
by top management and others by marketing. To coordinate these factors and provide
guidance for decision making, it is helpful to deploy a formal strategic planning process.
To marketers, such a process consists of two main components: a strategic business
plan and a strategic marketing plan.
Figure 2.1: McDonalds: The Clear Srategic Vision of the Market Leader
Strategic planning involves both a strategic business plan and a strategic marketing plan.
A strategic business plan describes the overall direction an organization will pursue
within its chosen environment and guides the allocation of resources and effort. It also
provides the logic that integrates the perspectives of functional departments and operating
units, and points them all in the same direction. It has (1) an external orientation (2) a
process for formulating strategies; (3) methods for analyzing strategic situations and
alternatives; and (4) a commitment to action.
A strategic marketing plan outlines the marketing actions to undertake, why they are
needed, who is responsible for carrying them out, when and where they will be completed,
and how they will be coordinated. Thus, a marketing plan is carried out within the
context of a firm's broader strategic plan.
Our discussion of strategic planning and marketing is presented early in this book for
several reasons. One, strategic planning gives a firm direction and better enables it to
understand the dimensions of marketing research, consumer analysis, and the marketing
mix. It is a hierarchical process, moving from company guidelines to specific marketing
decisions. Two, a strategic plan makes sure each division's goals are integrated with
McDonald's vision is to be the
world's best quick-service restaurant
experience. Being the best means
providing outstanding quality, service,
cleanliness and value so that we make
every customer in every restaurant
smile. To achieve our vision, we are
focused on three worldwide strategies :
be the best employer for our people
in each community around the world;
deliver operational excellence to our
customers in each of our restaurants; and
achieve enduring profitable growth by
expanding the brand and leveraging
the stregth of the McDonald's System
through innovation and technology.
firmwide goals. Three, different functional areas are encouraged to coordinate efforts.
Four, strategic planning forces a firm to assess its strengths and weaknesses and to
consider environmental opportunities and threats. Five, the alternative actions or
combinations of actions a firm can take are outlined. Six, a basis for allotting resources
is set. Seven, the value of assessing performance can be seen. Figure 2.1 highlights
how a firm can have a clear and directive strategic plan.
Marketing's Role in Strategic Planning
is Indeed a Crucial Ine
The contribution to strategic planning and implementation begins with the analysis of
market segments and an assessment of a firms ability to satisfy customer needs. This
includes analyzing demand trends, competition, and in industrial markets, competitive
conditions. Marketing also plays a key role by working with top management to define
business purpose, in terms of customer-need satisfaction. In a market-oriented view of
the strategic planning process, financial goals are seen as results and rewards, not the
fundamental purpose of business.
In this Chapter we discuss a total quality approach to strategic planning, various kinds
of strategic plans, relationships between marketing and other functional areas, and the
strategic planning processand show how strategic marketing plans may be outlined
and applied.
A Total Quality Approach to Strategic Planning
When devising strategic plans, any firmsmall or large, domestic or global, manufacturing
or services drivenshould adopt a total quality viewpoint. Total quality is a process
and output-related philosophy, whereby a firm strives to fully satisfy customers in an
effective and efficient manner. To flourish, a total quality program needs a customer
focus; top management commitment; an emphasis on continuous inprovement; and
support from employees, suppliers, and distribution intermediaries:
l Process-related philosophyTotal quality is based on all the activities that create,
develop, market, and deliver a good or service for the customer. A firm gains a
competitive advantage if it offers the same quality good or service at a lower cost
or if it offers better quality than other companies.
l Output-related philosophyAlthough process-related activities give a good or
service its value, the consumer usually can only judge the total quality of the finished
product that he or she purchases. Many consumers care about what they buy,
rather than how it was made.
l Customer satisfactionTo the consumer, total quality refers to how well a good or
service performs. Thus, customer service is a key element in a person's ultimate
satisfaction, which is affected by the gap between that person's expectations of
product performance and actual performance.
l EffectivenessTo a marketer, this involves how well various marketing activities
(such as adding new product features) are received by consumers.
l EfficiencyTo marketer, this involves the costs of various marketing activities. A
firm is efficient when it holds down costs, while offering consumers the appropriate
level of quality.
l Customer focusWith a total quality viewpoint, a firm perceives the consumer as
a partner and seeks input from that partner as it creates, develops, markets, and
delivers a good or service.
l Top management commitmentSenior executives must be dedicated to making a
total quality program work and to ensuring that corners are not cut in an attempt to
be more efficient. In the best firms,total quality becomes ingrained as part of the
corporate culture.
l Continuous improvementIn most cases, today's total quality will become
tomorrow's suboptimal quality; so, a firm must continuously improve its quality. A
complacent firm will be hurt by the dynamics of the marketplace and fast-paced
technological and global marketplace trends.
l Employee support and involvementFor a total quality program to work, employees
must buy into it. Empowering employees not only gets them involved in the total
quality process, but it also assures that customer problems are promptly addressed
and resolved in the customer's favour.
l Supplier and distributor support and involvementDue to their involvement in
creation total quality, suppliers and resellers can greatly affect it. They too must
buy into firm's total quality efforts.
Figure 2.2 shows how a successful total quality program works. At the left are the
participants in a total quality program, who together create total quality. There is an
interchange among the parties and between the parties and the process. Through this
process, a good's or service's effectiveness and efficiency are influenced; likewise,
those factors are considered during the process. Total quality is the output of the process.
The process and total quality itself are regularly improved. If a consumer feels a goods
or service has superior total quality, a purchase is made. When experience with a good
or service is pleasing, customer satisfaction occurs. Since one effectiveness measure
is customer satisfaction, there is an impact arrow. Finally, satisfaction is feedback that
Figure 2.2: The keys to a Successful Total Quality Program
Level of
Customer
Satisfaction
Consumer
Purchase
Total Quality
Efficiency
Process that
Creates Total
Quality
Effectiveness
Distribution
Intermediaries
Suppliers
Employees
Top
Management
Consumer
Input
Feedback
Continuous
Improvement
affects the consumers future input into the process. The consumers central focus is
evident because the consumer appears three times: consumer input, consumer purchase,
and customer satisfaction.
Sometimes, the total quality process breaks down in a way that may be difficult to fix.
For example, many firms have had glitches with their Web sites, including heavy traffic
causing system overloads, poor inventory and shipping coordination, too long a time for
replies to E-mail, and so forth. These problems require expensive and time-consuming
solutions.
Kinds of Strategic Plans
Strategic plans can be categorized by their duration, scope, and method of development.
They range from short run, specific, and department generated to long run, broad, and
management generated.
Plans may be short run (typically one year), moderate in length (two to five years), or
long run (5 to 10 or even 15 years). Many firms rely on a combination: Short-run and
moderate-length plans are more detailed and operational in nature than long-run plans.
At Japan's Canon, the maker of cameras, machines, and optical products: For 30
years from its foundation, Canon focused on expanding its business in the field of
cameras. In the next 30 years, we used camera-related technologies as a base for
diversification into new businesses. Throughout our history, we have developed our
operations while remaining attentive to the needs of the times. Now, as we target the
next stage of growth, we have set multimedia as the key factor that will let us contribute
in a continually advancing network society. In line with the digitization and integration
of products from input (scanners and cameras) to output devices (printers and displays),
we are working aggressively to take a leading role in the information and
communications industries, the key sectors of the future.
The scope of strategic plans also varies. There may be separate marketing plans for
each of a firm's major products; a single, integrated marketing plan encompassing all
products; or a broad business plan with a section devoted to marketing. Separate
marketing plans by product line are often used by consumer-goods manufacturers; a
single, integrated marketing plan is often employed by service firms; and a broad
business plan is often utilized by industrial-goods manufacturers. A firm's diversity and
the number of distinct market segments it seeks both have a strong influence here.
Last, plans may be devised by a bottom-up, top-down, or combination approach. In
bottom-up planning, input from salespeople, product managers, advertising people, and
other marketing areas is used to set goals, budgets, forecasts, timetables, and marketing
mixes. Bottom-up plans are realistic and good for morale. Yet, it may be hard to
coordinate bottom-up plans and to include different assumptions about the same concept
when integrating a companywide plan. Shortcomings of bottom-up plans are resolved
in the top-down approach, whereby senior managers centrally direct planning. A top-
down plan can use complex assumptions about competition or other external factors
and provide a uniform direction for marketing. Input from lower-level managers is not
actively sought and morale may diminish.
A combination of the two approaches could be used if senior executives set overall
goals and policy, and marketing personnel form plans for carrying out marketing activities.
As the chief executive of one firm once remarked : You can't have a workable
strategy forced down from the top. Empowering middle managers is a necessity. They
manage what we as a corporation want to accomplish. To make them think strategically
comes from sharing the direction and from having set of supportive organizational
systems. So it's real work, not sermons, that makes us and our middle managers strategic
thinkers.
Strengthening Relationships Between Marketing and other Functional Areas
in an Organization
An organization's strategic planning must accommodate the distinct needs of marketing
and other functional areas. This is not always simple, due to the different orientations of
each area, as shown in Table 2.1. Marketers may seek tailor-made products, flexible
budgets, non-routine transactions, many product versions, frequent purchases, customer
driven new product, employee compensation incentives, and aggressive actions against
competitors. This may conflict with goals of other functional areas to seek mass
production (production), stable budgets(finance), routinized transactions (accounting)
limited models (engineering), infrequent orders (purchasing), technology-driven new
products (research and development), fixed employee compensation (Personnel), and
passive actions against competitors (legal).
Top management's job is to make sure every functional area sees the need for a balanced
view in company decision making and has input on decisions. While some degree of
tension among departments is inevitable, conflict can be reduced by encouraging
interfunctional contact; seeking personnel with both technical and marketing expertise;
forming multifunctional task forces, committees, and management-development
programs; and setting goals for each department that take other deparments into account.
Table 2.1: The Orientations of Different Functional Areas
Functional Area Major Strategic Orientation
Marketing To attract and retain a loyal group of consumers through a unique
combination of product, distribution, promotion, and price factors.
Production To utilize full plant capacity, hold down per-unit production costs,
and maximize quality control.
Finance To operate within established budgets, focus on profitable items,
control customer credit, and minimize loan costs for the company.
Accounting To standardize reports, detail costs fully, and routinize transactions.
Engineering To develop and adhere to exact product specifications, limit models
and options, and concentrate on quality improvements.
Purchasing To acquire items via large, uniform orders at low prices and maintain
low inventories.
Research and Development To seek technological break throughs, improvements in product
quality, and recognition for innovations.
Personnel To hire, motivate, supervise, and compensate employees in an
efficient manner.
Legal To ensure that a strategy is defensible against challenges from the
government, competitors, channel members, and consumers.
The Strategic Planning Process
The strategic planning process has seven interrelated steps: defining organizational
mission, establishing strategic business units, setting marketing objectives, performing
situation analysis, devloping marketing strategy, implementing tactics, and monitoring
results. Because the process encompasses both strategic business planning and strategic
markiting planning it should be combination of senior company executives and
marketers. It is depicted in Figure 2.3.
Figure 2.3:The Strategic planning Process
This process applies to small and large firms, consumer and industrial firms, goods and
services based firms, domestic and international firms, and profit-oriented and non-
profit oriented institutions. Planning at each step in the process may differ by type of
firm, but using a thorough strategic plan is beneficial for any company.
The steps in strategic planning are discussed in the following sections.
Defining Organizational Mission
Organizational mission refers to a long-term commitment to a type of business and
a place in the market. It describes the scope of the firm and its dominant emphasis
and values, based on that firm's history, current mangement preferences, resources,
and distinctive competences, and on environmental factors.
An organizational mission can be expressed in terms of the customer group (s) served,
the goods and services offered, the functions performed, and/or the technologies utilized.
It is more comprehensive than the line of business concept. And it is considered
implicitly whenever a firm seeks a new customer group or abandons an existing one,
introduces a new product (good or service) category deletes an old one, acquire another
company or sells a business, engages in more marketing functions (a wholesaler opening
retail stores) or in fewer marketing functions (a small innovative toy maker licensing
1.
Defining
Organizational
Mission
2.
Establishing
Strategic Business
units
Feedback
7.
Monitoring
Results
6.
Implementing
Tactical Plans
5.
Developing
Marketing
Strategy
4.
Performing
Situation
Analysis
3.
Setting
Marketing
Objectives
its inventions to an outside company that produces, distributes, and promotes them),
or shifts its technological focus (a phone manufacturer placing more emphasis on
cellular phones). Organizations that diversify too much may not have a clear sense of
direction.
At the Coca-Cola Company, our mission is to maximize share-owner value over time.
To achieve this mission, we must create value for all the constituents we serve, including
our consumers, our resellers, our bottlers, and our communities. The Company creates
value by executing a comprehensive strategy guided by six key beliefs: (1) Consumer
demand drives everything we do. (2) Brand Coca-Cola is the core of our business.
(3) We will serve consumers a broad selection of the nonalcoholic ready-to-
drink beverages they want to drink throughout the day. (4) We will be the best
marketers in the world . (5) We will think and act locally. (6) We will lead as a model
corporate citizen. The ultimate objectives of our strategy are to increase volume,
expand our share of worldwide nonalcoholic ready-to-drink beverage sales, maximize
our long-term cash flows, and create economic-value-added by improving economic
profit.
Exhibit 2.1. Examples of Mission Statements
Unilever: The mission of our company, as William Hasketh Lever saw it, is to make
cleanliness commonplace, to lessen work for women, to foster health and to contribute
to personal attractiveness, so that life may be more enjoyable for the people who use
our products.
Merck: To preserve and improve human life.
McKinsey & Co: To help business corporations and governments to be more
successful.
Cadbury India: To attain leadership position in the confectionery market and achieve
a strong national presence in the food drinks sector.
Tata Information Systems: To be India's most successful and most respected IT
company.
Reliance Industries: To become a major player in the global chemicals business and
simultaneously grow in other growth industries like infrastructure.
Mukund Steel: Mukund Steel has spelt out its mission elaborately. A company
characterised by explosive growth. Growth in business terms. Growth in character. A
company with an attitude of constant achievement, movement, and inner strength. But
always with feelings of warmth humanity and above all, pride in ouselves. These are
the foundation of our company and they constantly amaze and thrill us.
Establishing Strategic Business Units
After defining its mission, a firm can form strategic business units. Each strategic
business unit (SBU) is a self-contained division, product line or product department in
an organization with a specific market focus and a manager with complete responsibility
for integrating all functions into a strategy. An SBU may include all products with the
same physical features or products bought for the same use by customers, depending
on the mission of the organization. Each SBU has these general attributes:
l A specific target market.
l Its own senior marketing executive.
l Control over its resoursces.
l Its own marketing strategy.
l Clear-cut competitors.
l Distinct differential advantages.
The SBU concept lets firms indentify the business units with the most earnings potential
and allocate to them the resources needed for growth. For instance, at General Electric,
every SBU must have a unique purpose, identifiable competitors, and all its major
business functions (manufacturing, finance, and marketing) within the control of that
SBU's manager. Units not performing up to expectations are constantly reviewed and,
if necessary, consolidated with other units, sold, or closed down.
The proper number of SBUs, depends on a firm's organizational mission, its resources,
and the willingness of top management to delegate authority. A small or specialized
firm can have as few as one SBU, a diversified one up to 100 or more.
Setting Marketing Objectives
A firm needs overall marketing objectives, as well as goals for each SBU. Objectives
are often described in both quantitative terms (rupee sales, percentage profit growth,
market share, etc.) and qualitative terms (image, level of innovativeness, industry
leadership role, etc.)
Small firms goals are often less ambitious than those set by their larger counterparts,
but they are no less important. The goals are necessay to focus the firm and to be able
to monitor the level of success or failure. Without Goals, how can a firm really measure
its performance ?
Exhibit Corporate Objectives-Example of Reliance Industries
Taking into account the opportunities emerging in the environment and its own growth
ambitions, strengths, and past performance, Reliance Industries has set its corporate
objectives for the period 19972002 as follows:
l Shareholder value of Reliance would be doubled by the year 2002.
l Sales revenue would reach Rs 20,000 crore by the year 2002.
l In petrochemicals, production capacity would be raised by 50 per cent from 6
million tonnes to 9.3 million tonnes.
l In Earnings Per Share and Return on Net worth 20 percent Compounded Annual
Growth Rate
l A dividend of around 25 per cent would be paid out every year.
l The company will be choosing the 'best in class' technologies in all its businesses;
emphasis would be on gaining strength in advanced process control and computer
integrated manufacturing.
l There will be substantial investment towards enhancing the expertise of staff.
The company will set up a Management Development Centre.
l Best of attention will be given to community health, safety and environmental
protection, consistent with the company's position as a signatory to the Global
Voluntary Responsible Care Initiative.
Performing Situation Analysis
In situation analysis, also known as SWOT analysis, an organization identifies its
internal strengths (S) and weaknesses (W), as well as external opportunities (O) and
threats (T). Situation analysis seeks to answer: Where is a firm now? In what direction
is it headed? Answers are derived by recognizing both company strengths and
weaknesses relative to competitors, studying the environment for opportunities and
threats, assessing the firm's ability to capitalize on opportunities and to minimize or
avoid threats, and anticipating competitor,' responses to company strategies.
Situation analysis can, and should be, conducted at any point in a firm's life. Consider
this example.
What might Nike's customers want besides shoes and running apparel? When the
company started asking that question a few years ago, it realized runners needed
specialized sunglasses and watches. Then, it devised a speed-and-distance monitor
that attaches the watch to the footwear; then a light weight wearable MP3 music
player. What Nike calls its equipment business is doing $400 million a year and growing
fast. On a much larger, industrial scale, GE's Power Systems business asked a similar
question when it hit hard times several years ago and found that its customersmajor
electric utilitieswere eager to buy a wide range of consulting and maintenance services.
This was more than a good source of bonus revenue; margins on those services are
considerably higher than on turbines and transformers, Power Systems' core products.
This strategy is useful anytime, but a downturn often provides the motivation to make it
happen
Here's what an accounting firm's SWOT analysis might look like: Strengths: experienced
associates, prime location, reputation/image, income tax expertise. Weaknesses:
seasonality dependence on senior partner, limited funds. Opportunities: idle resources
during off-season (offices, computers, employees), joint marketing arrangements with
noncompeting firms, fee-based seminars, tax reform. Threats: learning required
to be expert in new regulations, technology (enabling self-preparation), IRS policies
that simplify tax returns, competition from newer types of firms (such as online tax
preparers).
Sometimes, situation analysis reveals weaknesses or threats that cannot be overcome,
and a company opts to drop or sell a product line or divison.
Chart 2.2: Strength-Weakness Appraisal
Manufacturing/Operations
l Size or capacity of production
l Locational advantage
l Production facilities
l Post-production facilities
l Capacity utilisation
l Raw materialstheir cost, quality and delivery
l Maintenance
l Cost of production
l Break-even position
l Productivity
l Inventory management
l Value engineering capability
l Experience curve benefit
l Flexibility
l Automation
R&D
l Nature, depth and quality of R&D capability
l Resource allocation for R&D
l Quality, expertise and experience of R&D
personnel
l Speed of R&D
l Capability for engineering products based on
R&D
l Record of patents generated/innovation
l Comparisons of R&D investment vs new
products launched
Human resources
l Quality, knowledge, expertise and
experience of personnel
l Morale and motivation of personnel
l Personnel turnover
l Labour costs
l Industrial relations
General factors: Image, relative priority
assigned by the corporation, etc.
l Image of the unit
l Quality of management at the unit level
l Innovation record
l Performance record in recent years
l Organisational structure, especially marketing
organisaton
l Adequacy of organisation for current and
future strategies
l Share of corporate resources to the unit,
priority assigned by the corporation
l Resources available in terms of money,
people, materials, technology and facilities
l Adequacy of resources
l Use of ITextent of use and degree of
sophistication
Factors to be analysed in each function
Marketing
l Market standing
l Market share
l Innovation in marketing
l Customer satisfaction level
l Customer service level
l New product capability
l Pricing
l Channel position
l Marketing communications on the whole
l Advertising
l Sales promotion
l Personal selling
l Market research capability
l Marketing organisation
l Marketing costs
l Product mix and product lines
Product-wise position with respect to:
l Profitability
l Product quality
l Stage of the product life cycle
l Product design
l Product's sophistication/technological
strength
l Differentiation
l Positioning
l Brand power
l Marketing capability in total
Finance
l Assets
l Liquidity
l Leverage
l Cash flow
l Cost of capital
l Profitability
l Costs
l Quality of financial management
l Knowledge and dynamism in tax planning
l Overall resource position/resource
allocation by the corporation
Chart O-T Profile Developed by a Passenger Car Firm in India
Environmental factor Opportunity Threat
I. Macro environmental
factors
Political Environment
Social Environment
Economic Environment
Technology Environment
Natural Environment
Legal Environment
II. Environmental factors specific to the industry
The Consumer/Demand
There is political stability in the country,
though the days of single party rule are
over. Democratic form has taken firm
roots. There is political consensus on
pitching the growth targets at a high level.
Socialist moorings of the past have
disappeared. Economic reforms have
come to stay. On the whole, the political
environment is investment friendly and
enterprise supportive.
Burgeoning middle class. Double income,
nuclear families with more disposable
income on the rise. Socially, they are
upwardly mobile. Increased urbanisation.
Major changes are taking place in lifestyle.
Demand for productsdurable, soft,
servicesall going up. Demand for
prsonal transport is high. Upper end of
middle class is moving up from two-
wheelers to cars. Living on credit facilities
becomes the accepted pattern.
Economic reforms, liberalisation and
globalisation carry good opportunities.
Collaboration with foreign firms possible.
FDI has also become easy. Big growth is
taking place in services sector. Exchange
rate and inflation are not too bothersome.
Technology import has been liberalised.
Within the country too, efforts are on at
technology development. One can move
up the technology ladder through right
strategies.
Generally conducive. India being a major
producer of steel , raw materi al i s
ensured.
World recognises India's legal system as
sound, fair and open. This is a great plus
point for the international players; it will
support inflow of foreign investment and
MNCs commitment.
Large consumer base; growing urban
middle class. Increasing affluence; Double
income families; aspirational life style;
Two persons daily commuting for job will
keep pushing up demand for personal
transport, including cars. The wide choice
available in cars, supported by easy
facilities of hire-puchasing, has enhanced
Since the government survives on
slim majority, the policy environment
lacks dynamism and boldness.
Rapid changes in consumption
habits and lifestyles impose a
degree of vul nerabi l i ty on
corporates.
Liberalisation plus encouragement
to foreign investment has made the
passenger car industry highly
competitive. All global players are
here. One has to match them;
otherwi se, the game i s up.
Petroleum products are becoming
more scarce and costly. There is
search for alternative energy.
Those who cannot compete in
technology are vulnerable.
Though availability of the main raw
materialsteelis no problem, cost
competi ti veness i s l acki ng;
Producti -vi ty has to i mprove
compared to i nter-nati onal
standards. A petroleum deficit
country , i t may i mpact the
passenger car business.
The legal process is rather slow.
Labour law being stringent, exit for
entrepreneurs is difficult.
Consumers are becoming more
choosy while buying cars. They
look for styling, comfort, etc., in
addition to fuel efficiency. Now that
Indian buyers have seen variety,
they wait for new models.
Contd...
The Industry/Competition
Technology
Chart Strength-Weakness profile of Asian Paints
Area/Function: Marketing Strength Weakness
Market standing
Market coverage
Market share
Innovation in marketing
Product mix
Packaging
New product capability
Pricing
Physical distribution
service level
consumer interest. Consumers no longer
see it as luxury; it has become a utility.
Change in lifestyle and aspirations will
support demand for passenger cars in
the mid-price segment too. Demand is
constantly on the increase, especially for
small compact cars.
Demand wi l l go up further when
government policies, especially excise
rates, help bring down prices of cars. A
growth industry over the short as well as
medium term. Though the industry is 50
years old, only now has it entered the
real growth phase. Now, it is poised for
high growth. Industry attractiveness/
profitability generally good in the medium
term. Industry is gaining export orientation.
Those who command the best tech-
nology have the scope to stay on top.
People are keen to buy a well-designed
and well-made car.
The rapid change in the industry-
structure consequent to
liberalisation, (de-licensing of the
industry and permission of foreign
investment) has taken away the
protecti on enj oyed by the
incumbent domestic players. For
the new entrants too, competition
is a major factor to reckon with.
Intense competi ti on and
overcrowding likely to lead to a
shakeout in the coming years. The
demand cannot support so many
players.
Technology is in the hands of a
few MNCs. The others will find the
going tough. Now that the window
to the world of technology has
been opened, buyers are satisfied
with nothing but the best. More
i nvestments and effort i n
technology and R&D are required
on the part of every car maker.
Strong presence in the market; Steady
growth in sales
Nationwide coverage; semi-urban and
rural areas also well covered.
Market leader in decoratives; closest
competitor does not have even half of AP's
share.
Very innovative, especially in distri-bution
Wide range; a large number of shades
and pack sizes; 40 different decoratives,
some in 150 shades and 8 different pack
sizes
Small packs, a major strength
Limited strength
Costs are controlled and prices pegged;
High volumes are realised.
High; 85 per cent as against 50-60 per
cent for competition; 100 fastest moving
SKUs monitored daily for sales/stacking
Weak position in industrial paints;
Asian Paints is far behind the leader
Nerolac. Since this is the major
growth segment, a lag here will be
a major weakness.
Market share in industrial paints is
unsatisfactory.
Wide product mix puts strain on
production, distribution, accounting
and administration. Competitors go
in for hi-tech with spot mixing/
automated paint blending in retail
points. J&N's Instacolour, ICI's
Touch Colour, and Berger's Colour
Bank, have become popular. AP
has just joined the rest with it
Colour World.
Innovati on i n new products
inadequate.
Contd...
Inventory management
Channel strength
Marketing communica-
tion/promotion/adertising
Personal selling
Marketing organisation
Marketing costs
Brand power
Credit policy
Market research
Marketing capabllity
overall
Developing Marketing Strategy
A marketing strategy outlines the way in which the marketing mix is used to attract and
satisfy the target market(s) and achieved an organization's goals. Marketing-mix
decisions center on product distribution, promotion, and price plans. A separate
strategy is necessary for each SBU in an organization; these strategies must be
coordinated.
A marketing strategy should be explicit to provide proper guidance. It should take into
account a firm's mission, resources, abilities, and standing in the marketplace; the status
of the firm's industry and the product groups in it (such as cola versus non-cola soft
drink); domestic and global competitive forces; such environmental factors as the
economy and population growth; and the best opportunities for growthand the threats
that could dampen it. For instance, IBM does a lot of image advertising as part of its
overall marketing strategy in order to enhance its stature in the business community.
Four strategic planning approaches are presented next: product/market opportunity matrix,
Boston Consulting Group matrix, General Electric business screen, and Porter generic
strategy model.
Very good. Finished products inventory
at 28 days against 51 days for the industry
as a whole. Inventory holding cost
lowest in the industry.
14,000 retail dealers in its fold. High market
penetration in semi-urban and rural
markets. 200-250 retailers added annually.
Highly motivated channel
Quite effective
Effective
Nationwide marketing outfit; 4 regional
offices, 35 branch offices/depots, sales
supervisor, representa-tives, plus 14,000
retailers
Marketi ng costs bel ow competi tors,
Modern systems plus efficient marketing
keep costs under check
Has good brands in different price slots,
like Utsav for rural lower-end markets, and
Apcolite, Ace, and Apex for higher-end
markets. Logo Gattu is very popular
Efficient credit control. Credit Outstanding
bel ow 25 days sal e, compared to
competition's 40 days
A good MR outfit. Fully computerised
MIS.90 per cent accurate sales forecast
helps finetune production, marketing and
inventory control
High; AP's corporate success is largely
an outcome of its high marketing capability
Ever expanding product mix exerts
some strai n on i nventory
management.
Competitors operate through a few
whol esal e di stri butors.
Admi ni stra-ti vel y, thi s i s
conveni ent. AP' s system i s
complex.
High involvement in distribution
coupl ed wi th ever-enl argi ng
product range, keep pushing up
costs.
Rural bias of Logo, Gattu. It is likely
to contradict the new positioning
for the premium brands meant for
urban markets.
More innovation needed for the
future; Competition is catching up
fast; hi -tech faci l i ti es gi ves
abundant choice. AP has to catch
up wi th the trend to sustai n
leadership.
The Product/Market Opportunity Matrix
The product/market opportunity matrix identifies four alternative marketing strategies
to mainatain and/or increase sales of business units and products : market penetration,
market development, product development, and diversification. See Figure 2.5. The
choice of an alternative depends on the market saturation of an SBU or product and
the firm's ability to introduce new products. Two or more alternatives may be combined.
Market penetration is effective when the market is growing or not yet saturated. A
firm seeks to expand the sales of its present products in its present markets through
more intensive distribution, aggressive promotion, and competitive pricing. Sales are
increased by attracting nonusers and competitors' customers and raising the usage
rate among current customers.
Figure 2.5: The product/Market Opportunity Matrix
Market development is effective when a local or regional business looks to widen its
market, new market segments are emerging due to changes in consumer life styles
and demographics, and innovative uses are discovered for a mature product. A firm
seeks greater sales of present products from new markets or new product uses. It can
enter new territories, appeal to segments it is not yet satisfying, and reposition existing
items. New distribution methods may be tried; promotion efforts are more descriptive.
Product development is effective when an SBU has a core of strong brands and a
sizable consumer following. A firm develops new or modified products to appeal to
present markets. It stresses new models, better quality, and other minor innovations
closely related to entrenched productsand markets them to loyal customers.
Traditional distribution methods are used ; promotion stresses that the new product is
made by a well-established firm.
Diversificaltion is used so a firm does not become too dependent on one SBU or
product line. The firm becomes involved with new products aimed at new markets.
These products may be new to the industry or new only to the company. Distribution
and promotion orientaions are both different from those usually followed by the firm.
Here is how the product/market opportunity matrix can be applied to United Parcel
ServiceUPS.
Market penetration UPS is the world's largest package-delivery firm. It advertises
extensively on TV and in magazines. The current slogan is Moving at the Speed of
Business. It handles 1.8 million customers through its automatic daily pickup
service.
Market
Penetration
Strategy
Diversification
Strategy
Product
Development
Strategy
Market
Development
Strateegy
Market
Present
New
Present
New
Product
Market development It is stepping up efforts around the world, where client use of
delivery services tends to be much less than in the United States. In 1990, UPS
International operated in 40 nations; now, it is in more than 200 countries and territories.
The firm's Web site is accessible in 15 languages and dialects, and has dedicated content
for 112 countries.
Product development It now offers more shipping choices than ever before, including
Best Flight Same Day, Next Day Air Early A.M., Next Day (Air, Next Day), Air
Saver, 2nd Day Air A.M., 2nd Day Air, 3 Day Select, Ground Next Day Air, and
Worldwide Express services.
Diversification- While UPS' major focus is package delivery, it also runs such
subsidiaries as UPS Worldwide Logisticswhich offers inventory management, facilities
planning, site location, and other services; UPS Business Communications Services, E-
commerce, quality measurement, and telecommunications consulting; and UPS
professional Servicesa global management consulting group that delivers strategic
business solutions through innovative technologies, financial analysis, and logistics know-
how.
The Boston Consulting Group Matrix
The Boston Consulting Group matrix lets a firm classify each SBU in items of market
share relative to key competitors and annual industry growth. A firm can see which
SBUs are dominant compared to competitors and whether the industries in which it
operates are growing, stable, or declining. The matrix highlights these SBUs: star, cash
cow, question mark, and dog, as well as the strategies for them. See Figure 2.6.
The assumption is that the higher an SBU's market share, the better its long-run
marketplace position because of rather low per-unit costs and high profitability. This is
due to economies of scale (larger firms can automate or standardize production, service
tasks, distribution, promotion, and so on), experience (as operations are repeated, a firm
becomes more effective), and better bargaining power. At the same time, the industry
growth rate indicates a firm's need to invest. A high growth rate means a big investment
will be needed to maintain or expand the firm's position in a growing market.
A star is a leading SBU (high market share) in an expanding industry (high growth).
The main goal is to sustain differential advantages despite rising competition. It can
generate substantial profits but needs financing to grow. Market share can be kept or
increased by intensive advertising, product introductions, greater distribution, and/or
price reductions. As industry growth slows, a star becomes a cash cow.
A cash cow is a leading SBU (high market share) in a mature or declining industry (low
growth). It often has loyal customers, making it hard for competitors to woo them.
Since sales are rather steady, without high cost for product development and the like, a
cash cow produces more cash (profit) than needed to keep its market share. Profits
support the growth of other company SBUs. Marketing is oriented to reminder ads,
periodic price discounts, keeping up distribution channels, and offering new styles or
options to encourage repurchases.
A question mark is an SBU that has had little impact (low market share) in an expanding
industry (high growth). There is low consumer support, differential advantages are
weak, and competitors are leaders. To improve, a big marketing investment is needed
in the face of strong competition. A firm must decide whether to beef up promotion,
Relative Mardet Share
High
Industry
Growth
Rate
High
Low
Low
SBU
Designation : Star
SBU
Designation
Marketing
Strategy :
: Dog
Reduce efforts
or divest
SBU
Designation
Marketing
strategy :
: Cash Cow
Use profits to aid
growing SBUs,
maintain position
SBU
Designation
Marketing
Strategy :
: Question Mark
Intensify marketing
efforts or leave the
Market
Marketing
strategy :
Large marketing
efforts to maintain or
Increase market share
add distributors, improve product attributes and cut pricesor to abandon the market.
The choice depends on whether a firm believes the SBU can compete successfully
with more support and what that support will cost.
A dog is an SBU with limited sales (low market share) in a mature or declining
industry (low growth). Despite time in the marketplace, it has a small customer
followingand lags behind competitors in sales, image, and so on. A dog usually has
cost disadvantages and few growth oppotunities. A firm with such an SBU can appeal
to a specialized market, harvest profits by cutting support, or exit the market.
The General Electric Business Screen
The General Electric business screen categorizes SBUs and products in terms of
industry attractiveness and company business strengths. It uses more variables than
the product/market opportunity matrix or the Boston Consulting Group matrix. Industry
attractiveness factors include market size and growth, competition, technological
advances, and social & legal environment. Company business strengths embody
differential advantages, market share, patent protection, marketing effectiveness, control
over prices, and economies of scale.An SBU may have high, medium, or low industry
attractiveness, as well as high, medium, or low business strengths; it would be positioned
accordingly on the screen in Figure 2.7.
SBUs in green are investment/growth areas. They are in strong industries and performing
well. They are similar to stars in the Boston Consulting Group matrix. Full marketing
resources are proper, and high profits are expected. Innovations, product-line extensions,
product and image ads, distribution intensity, and solid price margins are pursued.
SBUs in yellow are selectivity/earnings areas. They are not positioned as well as
investment/growth ones. An SBU may be strong in a weak industry (as a cash cow),
okay in a somewhat attractive industry, or weak in an attractive industry (as a question
mark). A firm wants to hold the earnings and strength of cash cows, and use marketing
to maintain customer loyalty and distribution support. For question marks, a firm must
decide whether to raise its marketing investment, focus on a specialized market niche,
acquire another business in the industry, or trim product lines. The medium/medium
SBU is an opportunity to appeal to underserved segments and to invest selectively in
marketing.
Figure 2.6: The Boston Consulting Group Matrix
Figure 2.7: The General Electric Business Screen.
SBUs in red represent harvest divest areas. They are similar to dog in the Boston
Consulting Group matrix. A firm can minimize its marketing effort, concentrate on a
few products rather than a product line, divest, or close down the SBU. Profits are
harvested because investments are minimal.
Bausch & Lomb applies the fundamentals of the business screen. It is building its
current eye care businesses, as well as pursuing new opportunities within the global
eye care market: The company is a leading maker of contact lenses and lens care
solution (including the ReNu and Boston brands). In addition to its eye care products,
the firm also makes ophthalmic surgical equipment and prescription and over-the counter
medications. The company has expanded these operations through acquisitions and
increased R&D funding. To focus on and strengthen its core business, Bausch & Lomb
has sold its sunglasses division (including the Ray-Ban brand), its Miracle Ear hearing
aid business, and its Charles Rover Laboratories animal research business.
The Porter Generic Strategy Model
The porter generic strategy model identifies two key marketing planning concepts
and the options available for each: competitive scope (broad or narrow target) and
competitive advantage (lower cost or differentiation). The model pinpoints these basic
strategies cost leadership, differentiation, and focus. See Figure 2.8
With a cost-leadership strategy, an SBU aims at a broad market and offers goods or
services in large quantities. Due to economies of scale, a firm can reduce per-unit costs
and have low prices. This gives it higher profit margins than competitors, responds
better to cost rises, and/or lures price-conscious consumers. Among those using cost
leadership are Aditya Vikram Birla Group (Cement, Steel), Reliance (Yarn).
In a differentiation strategy, an SBU aims at a large market by offering goods or
services viewed as quite distinctive. The goods or services have a broad appeal, yet are
perceived by consumers as unique by virtue of features, availability, reliability, etc.;
price is less important. Among those using differentiation are Hutch, LG, Motorola
Mobile Phones.
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STRONG MEDIUM WEAK
M
A
R
K
E
T

A
T
T
R
A
C
T
I
V
E
N
E
S
S
H
I
G
H

M
E
D
I
U
M

L
O
W
Invest/Grow Selectivity/Earnings Harvest/Divest
Firm pursues a
by targeting niche
market and featuring
distinctive attributes in
goods and/or services.
DIFFERENTIATION
FOCUS STRATEGY
Firm pursues a
by
targeting a niche
market and
featuring low prices.
COST
FOCUS STRATEGY
Firm pursues
a DIRRERENTITATION
STRATEGY by targeting
the mass market and
featuring distinctive
attributes in goods
and/or services.
Firm pursues
a
by targeting
the mass market and
featuring low prices.
COST LEADERSHIP
STRATEGY
Competitive Advantage
Competitive
Scope
With a focus strategy, an SBU (which could be a small firm) seeks a narrow market
segment via low prices or a unique offering. It can control costs by concentrating on
a few key products aimed at specific consumers (cost focus) or by having a specialist
reputation and serving a market unsatisfied by competitors (differentiation focus). For
e.g., HBO (movie channel) Star SportsESPN (Sports Channel) Colorplus (ready-
to-wear garments)
Figure 2.8: Porter Generic Strategy Model
The Porter model shows that a small firm can profit by concentrating on one competitive
niche, even though its total market share may be low. A firm does not have to be large
to do well.
Evaluation of strategic Planning Approaches
The strategic planning approaches just discussed are widely utilizedat least informally.
Many firms assess alternative market opportunities; know which products are stars,
cash cows, question marks, and dogs; recognize what factors affect performance;
understand their industries; and realize they can target broad or narrow customer
bases. Formally, strategic planning models are most apt to be used by larger firms; and
the models are adapted to the needs of the specific firms employing them.
The approaches' major strengths are that they let a firm analyze all SBUs and products,
study various strategies' effects, learn the opportunities to pursue and the threats to
avoid, compute marketing and other resource needs, focus on meaningful differential
advantages, compare performance with designated goals, and discover principles for
improving. Competitors' actions and trends can also be studied.
The approaches' major weaknesses are that they may be hard to use (particularly by
a small firm), may be too simplistic and omit key factors, are somewhat arbitrary in
defining SBUs and evaluative criteria (like relative market share), may not be applicable
to all firms and situations (a dog SBU may be profitable and generate cash), do not
adequately account for environmental conditions (like the economy), may overvalue
market share, and are often used by staff planners rather than line managers.
These techniques only aid planning. They do not replace the need for managers to
engage in hands-on decisions by studying each situation and basing marketing strategies
on the unique aspects of their industry, firm, and SBUs.
Implementing Tactical Plans
A tactical plan specifies the short-run actions (tactics) that a firm undertakes in
implementing a given marketing strategy. At this stage, a strategy is operationalized. A
tactical plan has three basic elements: specific tasks, a time frame, and resource
allocation.
The marketing mix (specific tasks) may range from a combination of high quality, high
service, low distribution intensity, personal selling emphasis, and above-average prices
to a combination of low quality, low service, high distribution intensity, advertising
emphasis, and low prices. There would be a distinct marketing mix for each SBU,
based on its target market and strategic emphasis. The individual mix elements must be
coordinated for each SBU and conflicts among SBUs minimized.
Proper timing (time horizon) may mean being the first to introduce a product, bringing
out a product when the market is most receptive, or quickly reacting to a competitor's
strategy to catch it off guard. A firm must balance its desire to be an industry leader
with clear-cut competitive advantages against its concern for the risk of being innovative.
Marketing opportunities exist for limited periods of time, and the firm needs to act
accordingly.
Marketing investments (resource) are order processing or order generating. Order
processing costs involve recording and handling orders, such as order entry, computer-
data handling, and merchandise handling. The goal is to minimize those costs, subject to
a given level of service. Order-generating costs, such as advertising and personal selling,
produce revenues. Reducing them may be harmful to sales and profits. A firm should
estimate sales at various levels of costs and for various combinations of marketing
functions. Maximum profit rarely occurs at the lowest level of expenditure on order-
generating costs.
Tactical decisions differ strategic decisions in several key ways:
l They are less complex and more structured.
l They have a much shorter time horizon.
l They require a considerably lower resource commitment.
l They are enacted and adjusted more often.
Monitoring Results
Monitoring results involves comparing the actual performance of a firm, business unit,
or product against planned performance for a specified period. Actual performance
data are then fed back into the strategic planning process. Budgets, timetables, sales
and profit statistics, cost analysis, and image studies are just some measures that can
be used to assess results.
When actual performance lags, corrective action is needed. For instance, if
implementation problems persist, it is not (in most instances) because employees mean
to do the wrong thing. It is because they do not know the right thing to do. The first task
in making strategy work is to identify the right behaviourwhich reduces costs, improves
quality, pleases customers, and adds to profits.
Some plans must be revised due to the impact of uncontrollable factors on sales and
costs. Thus, many farsighted firms develop contingency plans to outline their responses
in advance, should unfavourable conditions arise.
Exhibit Corporate Strategy Statement
Firm ITC
Planning Period 2000-2005
Corporate Objectives Income should double from the present level of Rs
6,000 crore per annum Return on Net Worth should
reach 22 per cent.
Businesses/Product Market Foreign exchange earnings in the coming five years
Posture should be doubled that of current five years of US$
1,100 million.
Tobacco and cigarettes;
Hotel and tourism;
Packaging and printing; and
Paper and paperboards will be the main businesses.
In all these businesses, the entire national market plus
attractive foreign markets will be targeted.
Growth Vector Expansion of cigarettes unit through intensification and
integration.
Expansion in hotel business mainly through acquisition
and alliances.
Market development by entering new segments like
semi-luxury and executive class.
Divestment of troubled businesses like agri-business,
financial business, and global trading, in case the
strategy of repositioning and JVs does not work out.
Competitive Advantage In cigarettes:
and Synergy strength in tobacco farming,
strong brands,
60 per cent market share.
BAT connection and the permission to use
BAT international brands in India.
In hotel and tourism:
Sheraton connection;
this will be used to strengthen the Welcome group
chain;
already more than 60 per cent of Welcome group
turnover is in forex, thanks mainly to Sheraton
connection.
In packaging:
the 'leading supplier status' to cigarettes and liquor
industries.
In paperboards:
Bhadrachalam's international quality plus its cost
advantage with the recent modernisation; The new
captive power facility; Captive farms with heavy
expansion in social forestry to provide the raw material
at lower cost;
An international alliance will also be sought to
strengthen Bhadrachalam brand.
The Marketing Process
Planning at the corporate, division, and business levels is an integral part of the marketing
process. To fully understand that process, we must first look at how a company defines
its business.
Figure 2.9: Two views of the Value-Delivery.
The task of any business is to deliver value to the market at a profit. There are at least
two views of the value-delivery process. The traditional view is that the firm makes
something and then sells it [Fig 2.9(a)]. For example, Thomas Edison invents the
phonograph and then hires people to make and sell it. In this view, marketing takes
place in the second half of the value-delivery process. The traditional view assumes
that the company knows what to make and that the market will buy enough units to
produce profits for the company.
Companies that subscribe to this traditional view have the best chance of succeeding in
economies marked by goods shortages where consumers are not fussy about quality,
features, or style. But the traditional view of the business process will not work in more
competitive economies where people face abundant choices. Themass market is
actually splintering into numerous micro markets, each with its own wants, perceptions,
preferences, and buying criteria. The smart company therefore must design the offer
for well-defined target markets.
The Value-delivery Sequence
This belief is at the core of the new view of business processes, which places marketing
at the beginning of the planning process. Instead of emphasizing making and selling,
companies see themselves as part of a value creation and delivery sequence [Figure
2.9(b)]. This sequence consists of three parts.
The first phase, choosing the value, represents the homework that marketing must do
before any product exists. The marketing staff must segment the market, select the
(a) Traditional physical process sequence
(b) Value creation and delivery sequence
Market
selection/
focus
Product
develop-
ment
Pricing
Sourcing
Making
Distributing
Servicing
sales force
Sales
promotion
Strategic marketing
Tactical marketing
Advertising
Service
develop-
ment
Value
positioning
Customer
Segmentation
Choose the Value
Provide the value Communicate the Value
Make the Product
Design
product
Procure Make Price Sell
Advertise/
promote
Distribute Service
Sell the Product
appropriate market target, and develop the offer's value positioning. The formula
segmentation, targeting, positioning (STP) is the essence of strategic marketing.
Once the business unit has chosen the value, the second phase is providing the value.
The tangible product's specifications and services must be detailed, a target price must
be established, and the product must be made and distributed. Developing specific
product features, prices, and distribution occur at this stage and are part of tactical
marketing.
The task in the third phase is communicating the value. Here further tactical marketing
occurs in utilizing the sales force, sales promotion, advertising, and other promotional
tools to inform the market about the product. As Figure 2.9 (b) shows, the marketing
process begins before there is a product and continues while it is being developed and
after it becomes available. The Japanese have further developed this view by
promulgating the following concepts:
l Zero customer feedback time: Customer feedback should be continuously
collected after purchase to learn how to improve the product and its marketing.
l Zero product-improvement time: The company should evaluate all the customers'
and employees' improvement ideas and introduce the most valued and feasible
improvements as soon as possbile.
l Zero purchasing time: The company should receive the required parts and
supplies continuously though just-in-time arrangements with suppliers. By lowering
its inventories, the company can reduce its costs.
l Zero setup time: The company should be able to manufacture any of its products
as soon as they are ordered, without facing high setup time or costs.
l Zero defects: The products should be of high quality and free of flaws.
Steps in the Planning Process
To carry out their responsibilities, marketingwhether at the corporate, division,
business, or product levelfollow a marketing process. Working within the plans set
by the levels above them, product managers come up with a marketing plan for individual
products, lines, or brands.
l The marketing process consists of analyzing marketing opportunities, researching
and selecting target markets, designing marketing strategies, planning marketing
programs, and organizing, implementing, and controlling the marketing effort.
We will illustrate each step here in connection with the following situation:
Zeus, Inc. (name disguised) operates in several industries, including
chemicals, cameras, and film. The company is organized into SBUs.
Corporate management is considering what to do with its Atlas camera
division. At present, Atlas produces a range of 35 mm cameras. The market
for standard cameras is intensely competitive. On a growth-share matrix,
this business is becoming a weak cash cow. Zeus's corporate management
wants Atlas's marketing group to produce a strong turn-around plan.
Marketing management has to come up with a convincing marketing plan,
sell corporate management on plan, and then implement and control it.
The sections that follow apply to marketing planning at all levels of the organization.
Later in this chapter, we will examine the components of a specific marketing plan
developed to support a product line.
Analyzing Market Opportunities
The first task facing Atlas is to identify its potential long-run opportunities given its
market experince and core competencies. Atlas can, of course, develop standard film
cameras with better features. It can also consider designing a line of digital cameras or
video cameras. Or Atlas can use its core competency in optics to design a line of
binoculars and telescopes.
To evaluate its various opportunities, Atlas needs to manage a reliable marketing research
and information system. Marketing research is indispensable marketing tool for assessing
buyer wants and behaviour and assessing market size. The marketing people can
research secondary sources, run focus groups, and conduct telephone, mail and personal
surveys. By analyzing the collected data, Atlas will gain a better picture of the size of
each market opportunity.
Marketing research gathers significant information about the marketing environment.
Atlas's microenvironment consists of all the players who affect the company's ability
to produce and sell camerassuppliers, marketing intermediaries customers, competitors.
Atlas's macroenvironment consists of demographic, economic, physical, technological,
political-legal, and social-cultural forces that affect its sales and profits. An important
part of gathering environmental information includes measuring market potential and
forecasting future demand.
Atlas needs to understand consumer markets. It needs to know: How many households
plan to buy cameras ? Who buys and why do they buy? What are they looking for in the
way of features and prices? Where do they shop? What are their images of different
brands? Atlas also sells cameras to business markets, including large corporation,
professional firms, retailers, and government agencies. Purchasing agents or buying
committees make the decisions. Atlas needs to gain a full understanding of how
organizational buyers buy. It needs a sales force that is well trained in presenting product
benefits. Atlas must also pay close attention to competitors, anticipating its competitors'
moves and knowing how to act quickly and decisively. It may want to initiate some
surprise moves, in which it needs to anticipate how its competitors will respond.
Once Atlas has analyzed its market opportunities, it is ready to select target markets.
Modern marketing practice calls for dividing the market into major market segments,
evaluating each segment, and targeting those market segments that the company can
best serve.
Developing Marketing Strategies
Suppose Atlas decides to focus on the consumer market and develop a positioning
strategy. Should Atlas position its cameras as the Cadillac brand, offering a superior
camera at a premium price with excellent service and strong advertising? Should it
build a simple low-price camera aimed at more price-conscious consumers? Or should
it develop a medium-quality, medium-price camera? Once Atlas decides on its product
positioning, it must initiate new-product development, testing, and launching. Different
decision tools and controls are needed at different stages of the new-product development
process.
After launch, the product's strategy will need modification at the different stages in the
product life cycle: introduction, growth , maturity, and decline. Furthermore, strategy
choice will depend on whether the firm is a market leader, challenger, follower, or
nicher. Finally, strategy will have to take into account changing global opportunities
and challenges.
Planning Marketing Programs
To transform marketing strategy into marketing programs, marketing managers must
make basic decisions on marketing expenditures, marketing mix, and marketing
allocation. First, Atlas must decide what level of marketing expenditures will achieve
its marketing objectives. Companies typically establish their marketing budget at a
percentage of the sales goal. A particular company may spend more than the normal
percentage ratio in the hope of achieving a higher market share. Second, the company
has to decide how to divide the total marketing budget among the various tools in the
marketing mix: product, price, and promotion.
Finally, marketers must decide on the allocation of the marketing budget to the various
products, channels, promotion media, and sales areas. How many dollars should support
Atlas's two or three camera lines? Direct versus distributor sales? Direct-mail
advertising versus trade-magazine advertising ? To make these allocations, marketing
managers use sales-response function that show how sales would be affected by the
amount on money spent in each application.
The most basic marketing-mix tool is productthe firm's tangible offering to the market,
which includes the product quality, design, features, branding, and packaging. As part
of its product offering, Atlas may provide various services, such as leasing, delivery,
repair, and training. Such support services can provide a competitive advantage in the
globally competitive marketplace.
A critical marketing-mix tool is price. Atlas has to decide on wholesale and retail
prices, discounts, allowances, and credit terms. Its price should be commensurate with
the offer's perceived value. Otherwise, buyers will turn to competitors' products.
Place includes the various activities company undertakes to make the product accessible
and available to target customers. Atlas must identify, recruit, and link various marketing
facilitators to supply its products and services efficiently to the target market. It must
understand the various types of retailers, wholesalers, and physical-distribution firms
and how they make their decisions.
Promotion includes all the acitivities the company undertakes to communicate and
promote its products to the target market. Atlas has to hire, train, and motivate
salespeople. It has to set up communication and promotion programs consisting of
advertising, sales promotion, public relations, and direct and on-line marketing.
Managing the Marketing Effort
The final step in the marketing process is organizing the marketing resources and then
implementing and controlling the marketing plan. The company must build a marketing
organization that is capable of implementing the marketing plan. In a small company,
one person might carry out all the marketing tasks. Large companies such as Atlas
will have several marketing specialists: salespeople, sales managers, marketing
researchers, advertising personnel, product and brand managers, market-segment
managers, and customer service personnel.
Marketing departments are typically headed by a marketing vice president who performs
three tasks. The first is to coordinate the work of all of the marketing personnel. The
second task is to work closely with the other functional vice presidents. The third is
selecting, training, directing, motivating, and evaluating marketing personnel.
Figure 2.10: Factors Influencing Company Marketing Strategy
Because of surprises and disappointments as marketing plans are implemented the
company needs feedback and control. There are three types of marketing controls.
1. Annual-plan control is the task of ensuring that the company is achieving its
current sales, profits, and other goals. First, management must state well-defined
goals for each month or quarter. Second, management must measure its
performance in the marketplace. Third, mangement must determine the underlying
causes of any serious performance gaps. Fourth, management must choose
corrective actions to close gaps between goals and performance.
2. Profitability control is the task of measuring the actual profitability of products,
customer groups, trade channels, and order sizes. This is not a simple task. A
company's accounting system is seldom designed to report the real profitability of
different marketing entities and activites. Marketing profitability analysis
measures the profitability of different marketing activities. Marketing efficiency
studies try to determine how various marketing activities could be carried out
more efficiently.
3. Strategic control is the task of evaluating whether the company's marketing
strategy is appropriate to market conditions. Because of rapid changes in the
marketing environment, each company needs to reassess its marketing
effectiveness periodically through a control instrument known as the marketing
audit.
Figure 2.10 presents a grand summary of the marketing process and the environment
shaping the company's marketing strategy.
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Contents of the Marketing Plan
l Executive summary and table of content: The marketing plan should open with
a brief summary of the plan's main goals and recommendations. The executive
summary permits senior management to grasp the plan's major thrust. A table of
contents should follow the executive summary.
l Current marketing situation: This section presents relevant background data
on sales, costs, profits, the market, competitors, distribution, and the
macroenvironment. The data are drawn from a product fact book maintained by
the product manager.
l Opportunity and issue analysis: After summarizing the current marketing
situation, the product manger proceeds to identify the major opportunities/threats,
strengths/weaknesses, and issues facing the product line.
l Objectives : Once the product manager has summarized the issues, he or she
must decide on the plan's financial and marketing objectives.
l Marketing strategy:The product manager now outlines the broad marketing
strategy or game plan to accomplish the plan's objectives. In developing the
strategy, the product manager talks with the purchasing and manufacturing people
to confirm that they are able to buy enough material and produce enough units to
meet the target sales volume levels. The product manager also needs to talk to
the sales manager to obtain sufficient sales force support and to the financial
officer to obtain sufficient funds for advertising and promotion.
l Action programs:The marketing plan must specify the broad marketing programs
for achieving the business objectives. Each marketing strategy element must be
elaborated to answer these questions: What will be done? When will it be done?
Who will do it? How much will it cost?
l Projected profit-and-loss statement: Action plans allow the product manager
to build a supporting budget. On the revenue side, this budget shows the forecast
sales volume in units and the average price. On the expense side, it shows the
cost of production, physical distribution, and marketing, broken down into finer
categories. The difference between revenues and sales is projected profit. Once
approved, the buget is the basis for developing plans and schedules for material
procurement, production scheduling, employee recruitment, and marketing
operations.
l Controls: The last section of the marketing plan outlines the controls for monitoring
the plan. Typically the goals and budget are spelled out for each month or quarter.
Senior management can review the results each period. Some control sections
include contingency plans. A contingency plan outlines the steps management
would take in response to specific adverse developments, such as price wars or
strikes.
Table 2.2: Contents of a Marketing Plan
I. Executive summary and presents a brief overview of the proposed plan.
table of contents
II. Current marketing situation Presents relevant background data on sales, the
market, competi ors, di stri buti on, and the
macroenvironment.
III. Opportunity and issue Identifies the main opportunities/threats, strengths/
analysis weakness, and issues facing the product line.
IV. Objectives Defines the plan's financial and marketing goals in
terms of sales volume, market share, and profit.
V. Marketing strategy Presents the broad marketing approach that will be
used to achieve the plan's objectives.
VI. Action programs Presents the special marketing programs designed to
achieve the business objectives.
VII. Projected profit-and- Forecasts the plan's expected financial outcomes.
loss statements
VIII. Controls Indicates how the plan will be monitored.
Marketing Environment 69
Why Analyse the Marketing Environment?
Knowledge of Marketing Environment is Central to Marketing
Management
Marketing management rests squarely on the knowledge of the marketing environment.
Environment plays a crucial role in marketing and that securing the right fit between the
environment and the firm, using the marketing mix as the tool, is the crux of marketing.
The firm has to know where the environment is heading, what trends are emerging
therein and what should be its response to the environmental changes. Only by analysing
the environment, can the firm grapple with these issues.
Strategic Response to Environment is Possible only with Proper Environment
Analysis
Facilitating the corporations strategic response to the changes taking place in
environmental factors is the ultimate purpose of environment analysis. The firm has to
come up with alternative programmes and strategies in line with environmental realities.
This is possible only with proper environment analysis. It helps strategic response by
highlighting opportunities, the pursuit of which will help the firm attain its objectives. It
helps assess the attractiveness and profitability position of these opportunities, and helps
prepare a shortlist of those which are relevant to the firm and which can be pursued by
it.
Chart 3.1: Purpose of Marketing Environment Analysis.
l To know where the environment is heading; to observe and size up the relevant events and
trends in the environment.
l To discern which events and trends are favourable from the standpoint of the firm, and
which are unfavourable; to figure out the opportunities and threats hidden in the environmental
events and trends.
l To project how the environmenteach factor of the environmentwill be at a future point of
time.
l To assess the scope of various opportunities and shortlist those that can favourably impact
the business.
l To help secure the right fit between the environment and the business unit, which is the crux
of marketing; to help the business unit respond with matching productmarket strategies; to
facilitate formulation of a marketing strategy in the right wayin line with the trends in the
environment and the opportunities emerging therein.
Chapter 3
Marketing Environment
Chart 3.2: Presents in a nutshell the purpose of environment analysis
Spotting the Opportunities and Threats
Spotting the opportunities and threats is the central purpose here. It is in the environment that the
firm finds its opportunities; it is in the environment that it finds the threats it has to encounter; and,
it is by tapping the opportunities present and countering the threats embedded there in that the firm
achieves its growth objective. The starting point is thus to spot the opportunities and threats.
The Task Involved in Marketing Environment Analysis
Marketing environment analysis is the process of gathering, filtering and analysing information
relating to the marketing environment. Involved in the process are the tasks of monitoring the
changes taking place in the environment and forecasting the future position in respect of each of
the factors. The analysis spots the opportunities and threats in the environment, and pinpoints the
ones that are specifically relevant to the firm.
The marketing environment can be divided into two parts :
l The Macro-environment
l The Micro-environment
The Macroenvironment
Macroenvironment : Broad societal forces that shape the activities of every business and non-
profit marketer. The physical environment, socio-cultural forces, demographic factors, economic
factors, scientific and technical knowledge, and political and legal factors are components of the
macroenvironment.
Whether it is the domestic environment, a foreign environment, or the world environment
that is under consideration, the environment can be divided into two categories : the
macroenvironment and the microenvironment. The broad societal forces that influence
every business and non-profit marketer comprise the macroenvironment. Every
company, however, is more directly influenced by a microenvironment consisting of
its customers and the economic institutions that shape its marketing practices.
Figure 3.1
Microenvironment : Environmental forces, such as customers, that directly and regularly influence
a marketers activity.
The macroenvironment consists of the physical environment, sociocultural forces,
demographic forces, scientific and technical knowledge, economic forces and political
and legel forces.
The Physical Environment
Physical environment : Natural resources and other aspect of the natural world that infleunce
marketing activities.
Marketing
mix
Macroenvironment Influences on the Marketing Mix
Political and
legal forces
Economic
forces
Science and
technology
Demographic
forces
Sociocultural
forces
Physical
environment
MARKETING ENVIRONMENT 63
The analysis of the mega environment must also cover aspects like extent of endowment
of natural resources in the country, ecology, climate, etc. These constitute the natural
environment.
Natural resources: Business firms depend on natural resources. The extent to
which the country/region under reference is endowed with these resources has an
impact on the functioning of the firms. Raw materials is one major part of these
resources and firms are concerned with their availability; they need to know whether
there will be a shortage in any of the critical raw materials; they also need to know the
trends governing their costs. Besides raw materials, they are also concerned about
energy, its availability as well as cost. Escalations in energy cost is of particular concern
to any business firm.
The availability of natural resources may have a direct and far-reaching impact on
marketing activities in a geographic region. Areas rich in petroleum, for example, may
concentrate on the production and marketing of fuel oil, kerosene, benzene naphtha,
paraffin, and other products derived from this natural resource.
Climate : Climate is another aspect of the natural environment that is of interest to a
business firm. Firms with products whose demand depends on climate, and firms
depending on climate-dependent raw materials will be particularly concerned with this
factor. These firms have to study the climate in-depth and decide their production
locations and marketing territories appropriately.
Marketing is influenced by many aspects of the natural environment as well. Climate
is one example. It is not difficult to understand why umbrella sales are greater in rainy
Meghalaya than in desert-like Rajasthan or why more winter clothing is sold in Himachal
Pradesh than in Tamil Nadu.
Climate also greatly influences the timing of marketing activities. In India, more than
65 percent of all soft drinks are sold during the blazing hot months of June through
September, for instance. Marketers adapt their strategies to such environemntal
differences.
Ecology : Firms are also concerned with ecology. In modern times, all societies are
very much concerned about ecology, especially about issues like environmental pollution,
protection of wild life and ocean wealth. And, governments are becoming active
bargainers in environmental issues. Business firms will have to know the nature and
dimensions of environmental regulations and to what extent these factors will affect
their business prospects. They also need to know the role of environmental activists in
the region.
Finally, consideration of the physical environment of marketing must include an awareness
of activities or substances harmful to the earths ecology. Smog, acid rain, and pollution
of the ocean are among the many issues in this category. Such issues are highly
interrelated with aspects of the socio-cultural environment.
Green marketing : Marketing ecologically safe products and promoting activities beneficial to
the physical environment.
In the case of India, the country is rich in natural resources like iron, coal, rare minerals,
ocean wealth, etc. The country also receives good rainfall and has a strong network of
rivers. As regards climate, the tropical climate in the country generally favours
agriculture and industry. In the matter of energy, in recent years, costs are constantly
on the rise.
Socio-cultural Forces
Culture : The institutions, values, beliefs, and behaviours of a society, everything people learn,
as opposed to the basic drives with which people are born.
Every society has a culture that guides everyday life. In the environment of marketing,
the word culture refers not to classical music, art and literature but to social institutions,
values, beliefs, and behaviours. Culture includes everything people learn as members
of a society, but does not include the basic drives with which people are born.
Culture is shaped by mankind. It is learned rather than innate. For example, people
are born with a need to eatbut what, when, and where they eat, and whether they
season their food with ketchup or curdled goats is learned from a particular culture.
Similarly, the fact that many European women are free from traditional restraints,
whereas few Saudi women are, is a cultural phenomenon. Material artifacts and the
symbolic meanings associated with them also vary by culture.
Values and Beliefs
Social value : A value that embodies the goals a society view as important and expresses a
cultures shared ideas of preferred ways of acting.
l A social value embodies the goals a society views as important and expresses a
cultures shared ideas of preferred ways of acting. Social values reflect abstract
ideas about what is good, right, and desirable (and bad, wrong, and undesirable).
For example, we learn from those around us that it is wrong to lie or steal. The
following social values reflect the beliefs of most people in the United States :
Freedom: The freedom of the individual to act as he or she pleases is a fundamental
aspect of U.S. culture.
Achievement and success : The achievement of wealth and prestige through
honest efforts is highly valued. Such achievement leads to a higher standard of
living and improves the quality of life.
Work ethic : The importance of working on a regular basis is strongly emphasized.
Those who are idle are considered lazy.
Equality : Most Americans profess a high regard for human equality, especially
equal opportunity, and generally relate to one another as equals.
Patriotism/nationalism : Americans take pride in living in the best country in
the world. They are proud of their countrys democratic heritage and its
achievements.
Individual responsibility and self-fulfillment. Americans are oriented towards
developing themselves as individuals they value being responsible for their
achievements. The U.S. Armys slogan Be all that you can be captures the
essence of the desirability of personal growth.
Belief : A convinction concerning the existence or the characteristics of physical and social phenomena.
l A belief is a conviction concerning the existence or the characteristics of physical
and social phenomena. A person may believe, for example, that a high-fat diet
causes cancer or that chocolate causes acne. Whether a belief is correct or not
particularly important in terms of a persons actions. Even totally foolish beliefs
may affect how people behave and what they buy.
It is the marketers job to read the social environment and reflect the surrounding
cultures values and beliefs in a marketing strategy. For example, a marketer might
consider indications that American womens values
about the importance of careers may be changing.
Research has shown that many women believe
that the stress caused by their multiple roleswife,
mother, career woman, nurse, chauffeuris too
intense. Social values are changing to play down
work and to focus on family and on emotional
enhancement of personal life. In the 21st century, American women will continue to
work, but they will be more interested in leisure and in spending more time with family.
Such changing social values could result in more spending on products that offer fantasy,
romance, humour, and fun.
Values and beliefs vary from culture to culture.
l Social class : Social class is one important concept in socio-cultural environment.
Any society is composed of different social classes. A social class is determined
by income, occupation location of residence, etc., of its members. Each class has
its own standards with respect to lifestyle, behaviour, etc.; they are known as the
class values or class norms. These values have a strong bearing on the consumption
pattern and buying behaviour of the members of the class. Shifts in class values
do take place over time owing to several factors. And, the study of socio-cultural
aspects should include the study of such shifts as well.
l Some facts on socio-cultural environment of India : For a better understanding
of the dimensions of the socio-cultural environment, let us continue with our earlier
reference to India. India is a land of many religions. Almost all the major religions
of the world are present here. As many as seven different religious groups
Hindus, Muslims, Sikhs, Christians, Zorastrians, Buddhists and Jainslive in India
in sizeable numbers. The people of India also speak different languages. With 17
major languages, the language scenario is, in fact, even more diverse than the
religious one. India is also a land of many cultures. We have seen that religion
and language are two elements of a culture. There are other elements such as
education and upbringing. People have the freedom to profess the religion, language
and culture of their choice. Many religions, languages and cultures actually co-
exist and prosper in this large country.
As a general rule, it can be said that the people of the land are tradition bound. And,
these traditions also differ from region to region and segment to segment. This is
reflected in matters like marriage, family life, rituals, etc. When we speak of cultural
factors in Indian society, we must highlight in particular, the significance given to the
institution of family. In recent times, some changes are taking place in the culture
arena, owing to increased exposure to different lifestyles, impact of the media,
increasing industrialisation and consequent mobility of population, and the process of
globalisation.
It is the marketer's job to
"read" the social
environment and reflect
the surrounding culture's
values and beliefs in a
marketing strategy.
Changing position of women : The changing position of women in the society is a
case in point. In India, the position of women, especially in the growing middle-class
segment of the population, is indeed changing fast. From the role of a simple housewife,
she is now being transformed into an educated employed member, sharing the
responsibilities of the home with the man.
In an environmental survey, therefore, one actually looks for such shifts taking place,
since they can end up as opportunities or threats for the firm.
Demographics
Demography : The study of the size, composition, and distribution of the human population in
relation to social factors such as geographic boundaries.
The terms demography and demographics come from the Greek word demos, meaning
people (as does the word democracy). Demography may be defined as the study
of the size, composition (for example, by age or racial group), and distribution of the
human population in relation to social factors such as geographic boundaries. The size,
composition and distribution of the population in any geographic market will clearly
influence marketing. Demographic factors are of great concern to marketing managers.
The U.S. Population
The population of the United States is constantly changing. If marketers are to satisfy
the wants and needs of that population, they must be aware of the changes that are
occurring and the directions in which these changes are moving the population.
The U.S. Bureau of the Census estimated that there were 274 million people living in
the United States when the 21st century began on January 1, 2000. It has been predicted
that the population will reach 300 million in the year 2011. The U.S. birth rate is 14.6
per thousand, and the death rate is 8.6 per thousand. The birth rate is expected to
continue to decline. About 51.2 percent of the population is female, and about 48.8
percent is male.
Migration : Migration has always been an overwhelmingly important demographic
factor in the United States. Much attention has been paid to the effects of Cuban and
Haitian migrations into southern Florida and the general migration into the Sunbelt states.
However, migration into and around the country has been going on for hundreds of
years.
Urbanization : The United Statesand, in fact, the entire worldhas become
increasingly urbanized since the nineteenth century. In the United States, the expansion
of some metropolitan areas has brought neighbouring cities and their suburbs so close
together that they have, for all practical purposes, merged.
In fact, the 1990 census showed that more than half of the people in the United States
live in the 39 metropolitan areas (that is, central cities and suburbs) with populations of
more than million. Apporoximately 80 percent live in the nations metropolitan areas
up from 56 percent in 1950.
Growth in U.S. metropolitan areas has meant growth in the central cities. Crowded
conditions, high crime rates, and other discomforts associated with the life, coupled
with the great numbers of cars owned by Americans, have encouraged the much-
discussed flight to the suburbs of people seeking to enjoy a blend of rural and city
living. It is growth in suburban areas that has caused the populations of metropolital
areas to remain stable and even to rise. Indeed, the most dramatic growth of the past
decade was in the suburbs. Many citizens of these second cities work near their
homes and do not commute into the older metropolitan areas to work or shop.
Age and Generations. When the very first U.S. census was taken in 1790, the
median age of the population was only 16 years. Today, the median age is 32.6 years.
That means that half the population is older and half younger than 32.6.
A consumers age categoryor, as demographers say, age cohorthas a major impact
on his or her spending behaviour. Teenagers spend a great deal of money on movies,
soft drinks, and fast foods, for example. Many senior citizens spend a lot on travel and
prescription drugs. Understanding the age distribution of the population helps marketers
anticipate future trends.
The U.S. population has been growing older in recent decades, and this trend is expected
to continue. The trend has occurred for two reasons. One is a lowering of the death
rate, and the other is aging of the baby boomers. The lowering of the death rate
means that more people are living longer today. The average life expectancy in the
United States has increased to 76 years, and people over 65 years of age constitute a
growing segment of the population. Many of these senior citizens do not fit the stereotype
of an oldster sitting on a rocking chair waiting for a Social Security check. They are
healthy and active, with sufficient finances to enjoy sports, entertainment, international
travel, and other things they may have denied themselves while raising families. Some
estimates indicate that nearly half of all savings account interest is earned by people
over 65. This fact has particular significance to bank marketers but should be considered
by all other marketers as well. The graying of America has been as potent an
influence on U.S. marketing as was the baby boom of years past.
Single-Person and Single-Parent Household. Single-person householdsthat is,
people living aloneaccount for one of every four households, yet they constitute only
9 percent of the population. The fact that there are single-person households demonstrates
that, although many people think a household is the same as a family, it need not be. A
household is a dwelling unit occupied by a group of related people, a single person, or
several unrelated people who share living quarters. Today, according to the Census
Bureau, non-family households account for approximately 30 percent of all households.
There are several reasons for the increase in single-person households. More people
than ever before have never been married, and young singles are remaining single
longer. A high percentage of marriages end in divorce. The longer life expectancy of
women means that widows constitute a sizeable population segment; the number of
households maintained by women with no husband present doubled between 1980 and
1990 (from 5.5 million to 10.7 million). An aging mother (or father) may live alone or
may live in a retirement community that provides meal services and other assistance.
There are also single-parent households, which account for 27.3 percent of all households.
Many of these are headed by women who are divorced or who have never married.
(Approximately 28 percent of all U.S. births are to unmarried women.) But the number
of single-parent households headed by men is growing 2.5 times as fast as the number
headed by women. Buying behaviour in a single-parent household may be different
from that in the two-parent household. For example, a teenager may play the shopper
role and have the primary responsibility for preparing meals.
Working Women : The advent of the modern career-oriented woman is, in itself, a
major change in the American family. With increasing career orientation have come
changes in the age at which women have children and in the numbers of women who
choose not to have children at all.
The number of people in the work force has grown rapidly in the past decade and will
continue to do so. The labour force grew from 128 million workers in 1993 to at least
137 million in 1998. By 2000, women represented 47 percent of the labour force. In
more than 60 percent of married-couple households, both the husband and wife work,
up from about 40 percent in 1960. Forecasters predicted that in 2000, fewer than 20
percent of all households would be traditional husband-wife households with only one
partner employed outside the home.
Obvious changes in the marketplace reflect these developments : Many stores are
open late at least one or two nights per week. Many retailers offer catalogs or Web
sites that permit working people to shop at their convenience. Easily prepared microwave
dinners are commonplace. Take-out food, whether from a restaurant or from the
prepared-foods section of a supermarket, has gained great popularity.
Family and Household income : The U.S. Bureau of the Census defines a family as
a group of two or more persons related by birth, marriage or adoption and residing
together. The annual median family income in the United States was $47,469 in 1998,
up from $29,943 in 1990 and from $21,023 in 1980.
In 1998, 20 percent of U.S. households had incomes above $75,000 and 20 percent had
incomes below $16,200. The top 5 per cent had incomes above $132,000. More than
two-thirds of all households earning more than $100,000 were headed by college
graduates. The average annual income of college graduates was about double that of
high school graduates who did not graduate from college.
In 1998, the wealthiest 20 percent of households earned almost 50 percent of all household
income.
The upper-income group has expanded, in part because of an increase in the number of
affluent two-income married couples. Working wives contribute about 40 per cent of
family income. This affluent group has considerable discretionary income, and it has
an impact on the market for luxury goods.
A Multicultural Population : The United States has a multicultural populationthat
is, a population made up of many different ethnic and racial groups. One out of every
five U.S. residents is African American, Hispanic, Asian, Native American Indian,
Eskimo, or a member of another minority group. Census Bureau statistics show that in
1998, African Americans (Blacks) represented almost 13 per cent of the U.S. population,
Hispanic Americans about 11 per cent, and Asian Americans about 4 per cent. These
three minorities account for approximately 34 million, 30 million, and 10 million people,
respectively. Native Americans account for less than 1 per cent of the population.
World Population
The world population exceeds 6 billion people. Because markets consist of people
willing and able to exchange something of value for goods and services, this total is of
great marketing significance. However, the exponential growth of population, particularly
in less developed countries, puts a heavy burdern on marketing. The distribution of
food, for instance, is a marketing problem whose solution may prove crucial to the
survival of this planet. The world population is expected to grow by at least 140 million
per year during the first decade of the 21st
century. Thats about 16,000 new people per
hour. The United Nations estimates the world
population will reach 8.9 billion in 2050. However,
marketers must also recognize that in certain
regions of the world, such as western Europe,
population is declining. Italians for example, are
marrying later, having babies later, and having
fewer children.
Some facts on the demographic environment of India: If we take the case of
India, we can cite the undermentioned facts as the distinguishing elements of the
demographic environment. India, with a population of over one billion (based on the
2001 census), is the second largest market in the world. Indias population is growing
at the rate of 2 per cent per annum. The average life expectancy is now over 62 years.
The nations literacy rate, though still low, has been steadily growing. Now, it is around
65 percent. It was just 17 per cent in 1951. The country now has a large pool of
educated/skilled manpower, including over three-and-a-half million engineers and
scientists.
Demographic factors of the above kind have to be investigated in-depth and their role
in the overall marketing environment of the firm has to be sized up.
Science and Technology
Science : The accumulation of knowledge about humans and the environment.
Technology : The application of science for practical purposes.
Although the two terms are sometimes used interchangeably, science is the accumulation
of knowledge about human beings and the environment, and technology is the
application of such knowledge for practical purposes. Thus, the discovery that certain
diseases can be prevented by immunization is a scientific discovery, but how and when
immunization is administered is a technological issue.
Like other changes in the macroenvironment, scientific and technological advances
can revolutionise an industry or destroy one. Examples of organizations that suffered
because they did not adapt to changing technology are easy to find. Remington manual
typewriter and electronic typewriters were made obsolete by the computers.
Digital Technology and the Internet: Changing Everything
Historians and anthropologists have pointed out that technological innovations can change
more than the way business is done in an industry. Indeed, major technological innovations
can change entire cultures. For example, the mechanical clock made regular working
hours possible. The invention of the steam engine and railroads and the mass production
of automobiles changed the way people thought about distancethe words near and
far took on new meaning. Television changed the way people think about news and
entertainment.
Vigorous international trade
cannot be effectively
implemented and maintained
unless marketers concern
themselves deeply with what
is going on in the rest of the
world.
Todays computer technology can be characterized by the phrase digital convergence.
Almost all industries, professions, and trades are being pulled closer together by a
common technological bond : the digitizing of the work product into the ones and zeros
of computer language. Digital technology, especially the Internet, is having such a
profound impact on marketing and society that it deserves special attention.
The Internet
The Internet is a worldwide network of computers that gives users access to information
and documents from distant sources. People using the Internet may be viewing
information stored on a host computer halfway around the world. The World Wide
Web (WWW) refers to a system of Internet servers, computers supporting a retrieval
system that organizes information into Hypertext documents called Web pages.
(Hypertext is a computer language that allows the linking and sharing of information in
different formats. HTTP [Hyper Text Transfer Protocol] is the most commonly used
method for transferring and displaying information formatted in HTML [Hyper Text
Markup Language] on the Internet.)
Internet : A worldwide network of private, corporate, and government computers that gives users
access to information and documents from distant sources.
World Wide Web : A portion of the internet; a system of internet serverscomputers that
support specially formatted documents.
The Internet is transforming society. Time is collapsing. Distance is no longer an
obstacle. Instantaneous has a new meaning. The Internet is the most important
communication medium to come along since television. The Internet, as a new medium
for our new era, is a macroenvironmental force that is having a profound impact.
The Internet is changing everythingespecially commerce. e-commerce is the business
model for the millennium and that marketings role has been changed for ever by the
Internet. This does not mean that the familiar neighbourhood brick-and-mortar stores
and all traditional marketing institutions like shopping centers will disappear, but it does
mean that they will adapt and change as new forms of Internet marketing become
more prevalent.
Today, technology is a major force which industry and business have to reckon with.
Technology leads practically all the forces that shape peoples lives. For a business
firm, technology affect not only its final products but also its raw materials, processes
and operations as well as its customer segments. And in the present times, rapid
changes are taking place in the realm of technology. The IT industry is one example.
Telecom is another.
Options available in technology : The firm has to analyse carefully the overall
technology environment and the technology options available in the given industry. The
level of technology prevailing generally in the
country is also a conern for the firm. It has to
assess the relative merits and cost-effeciveness
of alternative technologies. It has also to analyse
technological changes taking place in its industry at the international level. In addition,
it has to assess the scope of substitute products emanating from new technologies.
The Internet is changing
ever yt hi ngespeci al l y
commerce.
Governments approach in respect of technology : Regulations by the government
in matters relating to technology often restrict the freedom of operation of business
firms. There may be areas where the governments may support the use of modern
technology; there may be areas where they may ban technologies that are potentially
unsafe. All such factors demand careful investigation. In modern times, much of the
business opportunities are embedded in technology and firms desiring growth have to
harness technologies; of course with necessary adaptations.
Technology selection: It is possible that several levels of technologies are floating at
the same time in an industry. Firms have to scan the technology environment and
select technologies that will be appropriate for the firm and the given product-market
situation.
They have to forecast technological trends, assess current and emerging technologies,
and develop the inputs for right technology choice. The policies of the government on
technology import is also a concern in this regard. India is adopting a fairly liberal
approach to technology import. It also supports, at the same time, efforts at internal
technology development.
Economic and Competitive Forces
Economic and competitive forces strongly influence marketing activity at all levels. In
this section, we discuss macromarketing concernseconomic systems and general
economic conditions.
Economic Systems
Economic System: The system whereby a society allocates its scarce resources.
A societys economic system determines how it will allocate its scarce resources.
Traditionally, capitalism, socialism, and communism have been considered the worlds
major economic systems. In general, the western worlds economies can be classified
as modified capitalist systems. Under such systems, competition, both foreign and
domestic, influences the interaction of supply and demand. Competition is often discussed
in this context in terms of competitive market structures.
The competitive structure of a market is defined by the number of competing firms in
some segment of an economy and the proportion of the market held by each competitor.
Market structure influences pricing strategies and creates barriers to competitors wishing
to enter a market. The four basic types of competititve market structure are pure
competition, monopolistic competition, oligopoly and monopoly.
Pure competition : A market structure characterized by free entry, a homogeneous product, and
many sellers and buyers, none of whom can control price.
Pure competition exists when there are no barriers to competition. The market
consists of many small, competing firms and many buyers. This means that there is a
steady supply of the product and a steady demand for it. Therefore, the price cannot
be controlled by either the buyers or the sellers. The product itself is homogenous
that is, one sellers offering is identical to all the others offerings. The markets for
basic food commodities, such as rice and banana, approximate pure competition. Petrol
and diesel now marketed by different companies will also fall in this category.
Monopolistic competition : A market structure characterized by a large number of sellers offering
slightly differentiated products and exerting some control over their own prices.
The principal characteristic monopolistic competition is product differentiationa
large number of sellers offering similar products differentiated by only minor differences
in, for example, product design, style, or technology. Firms engaged in monopolistic
competition have enough influence on the marketplace to exert some control over their
own prices. The fast-food industry provides a good example of monopolistic competition.
Oligopoly : A market structure characterized by a small number of sellers who control the market.
Oligopoly, the third type of market structure, exists where a small number of sellers
dominate the market. Oligopoly is exemplified by the commercial aircraft industry,
which is controlled by two large firms : Boeing and Airbus Industries. Getting established
in an oligopoly like the commercial aircraft industry often requires a huge capital
investment, which presents a barrier to new firms wishing to enter the industry. The
distinguishing characteristic of an oligopoly, however, is not the size of the companies
involved, as measured by assets or sales volume, but their control over the marketplace,
as measured by market share. Each of the companies in an oligopoly has a strong
influence on product offering, price, and market structure within the industry. The
companies do not, however, generally compete on price.
Monopoly : A market structure characterized by a single seller in a market in which there are no
suitable substitute products.
Finally, markets with only one seller, such as a local telephone company or electric
utility, are called monopolies. A monopoly exists in a market in which there are no
suitable substitute products Antitrust legislation strictly controls monopolies in the United
States.
Economic Conditions
Economic conditions around the world are obviously of interest to marketers. The
most significant long-term trend in the U.S. economy has been the transition to a service
economy. There has been a continuing shift of workers away from manufacturing and
into services, where almost 80 percent of U.S. jobs are to be found. This shift has
greatly affected economic conditions as well as marketing activity.
The Business Cycle
Business cycle : Recurrent fluctuations in general economic activity. The four phases of the
business cycle are prosperity, recession, depression, and recovery.
The business cycle reflects recurrent fluctuations in general economic activity. The
various booms and busts in the health of an economy influence unemployment, inflation,
and consumer spending and saving patterns which, in turn, influence marketing activity.
The business cycle has four phases :
l Prosperitythe phase in which the economy is operating at or near full empolyment
and both consumer spending and business output are high.
l Recessionthe downward phase, in which consumer spending, business output,
and employment are decreasing.
l Depressionthe low phase, in which unemployment is highest, consumer spending
is low, and business output has declined drastically.
l Recoverythe upward phase, when employment, consumer spending, and
business output are rising.
Because marketing activity, such as the successful introduction of new products is
strongly influenced by the business cycle, marketing managers watch the economic
environment closely. Unfortunately, the business cycle is not always easy to forecast.
The phases of the cycle need not be equal in intensity or duration, and the contractions
and expansions of the economy do not always follow a predictable pattern. Furthermore,
not all economies of the world are in the same stage of the business cycle. So a single
global forecast may not accurately predict activity in certain countries.
Marketing strategies in a period of prosperity differ substantially from strategies in a
period of depression. For example, products with frills and extras sell better during
periods of prosperity than in periods when the economy is stagnant or declining. During
periods of depression or recession, when consumers have less spending power, lower
prices become more prominent considerations in spending decisions.
The Health of a Countrys Economy
Two common measures of the health of a countrys economy are gross domestic
product (GDP) and gross national product (GNP). The GDP measures the value
of all the goods and services produced by workers and capital in a country. The GNP
measures the value of all the goods and services produced by a countrys residents or
corporations, regardless of their location. Thus, profits made by U.S. companies on
overseas operations are included in GNP, but not in GDP. Profits that foreign companies
make on operations in the United States are included in the U.S. GDP, but not in the
U.S. GNP. Both GDP and GNP provide economic yardsticks of business output.
Which of these two measures you use has to do with whether you wish to know what
is produced inside our borders or what is produced by Americans around the world.
In the United States, per capital (GDP) was $31,500 and the inflation rate was 1.6
percent in 1998.
An interesting measure of a countrys well-being is Wus Economic Barometer. Gorden
Wu is a Hong Kong billionaire who created an index that describes poor countries
moving toward wealth. According to Wus Economic Barometer, when per capita
income starts coming up, the first thing people do is eat out. Thats why American fast-
food restaurants are spreading rapidly in Asia. After that period, people in developing
countries buy new clothes. The third thing they do is start accumulating new appliances.
After that, they buy motorcycles, cars, and apartments. The fifth stepas the country
moves toward greater affluenceis to travel overseas.
Some facts on the eocnomic environment of India : The Indian economy has
been witnessing good growth in recent years, 6 per cent plus on an average. The year
1998-99 saw the growth rate (at factor cost) accelerating to 6.8 per cent from 5 per
cent in 1997-98. It grew by approximately 6 per cent in 1999-2000. Indias per capita
income, however, continues to be low. Industrial growth (as per the Index of Industrial
Production 1993-94 series) was 6.2 per cent in 1999-2000.
The capital market is an indicator of the sophistication and growth of an economy. In
the case of India, the capital markets grew substantially during the 1980s. And growth
was even more in the first half of the 1990s, immediately following liberalisation. Then,
there was some sluggishnessin the latter half of the 1990s. The main point is that
Indias corporate sector, which for a long time depended largely on external borrowings
and depreciation provisions for its capital formation, has in recent times started mobilising
large funds for investment through the capital market. Foreign direct investment (FDI)
too started flowing into the country in a significant manner. The changes in economic
policies were shown in the following charts :
Chart 3.3
Chart 3.4: The New Industrial Policy : The Main Components
THE NEW ECONOMIC POLICIES
lIBERALISATION MEASURES MACROECONOMIC REFORMS AND
STRUCTURAL ADJUSTMENTS
New Industrial Policy New Trade Policy Macroeconomic Structural
Reforms Adjustments
Lowering of import tariffs
Abol i ti on of i mport
licences
A more open exim regime
Convertibility of rupee
Encouragement to
exports
Encouragement to foreign
investment
Integrati ng Indi a s
economy with the global
economy
Fiscal and
monetary reforms
Banking sector
reforms
Capital market
reforms
Liberalisation of
industrial
licensing
FERA liberalisation
MRTP liberalisation
Curtailment of public
sector
Phasing out subsidies
Dismantling of price
controls and
introduction of market-
driven price
environment
Public sector
restructuring and
disinvestment
Exit policy
De-licensing
l Liberalisation of De-control
industrial licensing De-regulation
Broad banding
Abolition of registration
Liberalisation of foreign investment
l FERA Liberalisation Liberalisation of technology import
Abolition of threshold assets limit
l MRTP Liberalisation No MRTP clearance needed for expansions, mergers
Several industries hitherto reserved for public sector
opened up to private sector
l Curtailment of Public Only eight core industries remain reserved for
Sector the public sector
Purview of BIFR extended to the public sector.
M
a
r
k
e
t
i
n
g

E
n
v
i
r
o
n
m
e
n
t
8
3
MACROECONOMIC REFORMS STRUCTURAL ADJUSTMENTS
Fiscal/Monetary Banking Capital Market Market-Driven Public Sector Exit
Reforms Reforms Reforms Price Restructuring Policy
Banks to operate as
commercial institu-
tions
Phasing out priority
sector lending
Deregulation of
deposit interest
rates
Operational freedom
in lending rates
Adherance to norms
on capital adequacy,
income recognition
and provision for
bad debts
Disinvestment in
public sector banks
Permission for new
private sector banks
Abolition of CCI
and introduction of
free pricing
Strengthening of
SEBI
Opening up of
Indian Capital
markets to FIIs
Allowing foreign
brokers in Indian
capital markets
Allowing private
sector into mutual
funds
Allowing Indian
NBFCs to align with
global finance
companies
Allowing Indian
firms to raise capital
abroad
Phasing out of
subsidies
Dismantling of
price controls
Axe on fertiliser
subsity
Abolition of sugar
subsidy
Axe on petro-
product subsidy
Partial decontrol
& parallel
marketing of
kerosene and LPG
Abolition of
export subsidy
Steel price
decontrol
No new PSUs;
no expansion of
PSUs with govt.
equity
Budgetary
support for PSUs
to be phased out
Preference to
PSUs in govt.
tenders
abolished
Disinvestment of
government
equity in PSUs
Sick PSUs to be
referred to BIFR
Support to
VRS
Creation of
NRF
Reduction of
fiscal deficits
Reforms of tax
systems
Interest rate
reforms
Inflation
control
Chats 3.5: Macroeconomic Reforms and Structural Adjustments
Chart 3.6: The Sea Change in the Industrial, Business and Marketing Environment
I. Entrepreneurial freedom vitalises the industrial scene
l Rush of entrepreneurs.
l Spate of mergers/acquisitions/takeovers; corporates enhance size and synergy.
l The diversification rush
II. FDI goes up and influences investment pattern in industries
III. Ascendancy of multinationals in the Indian markets
l MNCs acquire majority equity in their Indian enterprises and JVs
l Many MNCs enter India anew
l MNCs become big players even in core industries
IV. Banking sector comes under competitive environment
l Competitive existence foisted by deregulation
l Onslaught from New Private Sector Banks (NPSBs) with superior technology and
aggressive marketing.
l Capital markets, FIs, MFs and NBFCs compete with banks
l Public sector banks, in particular come under severe pressure; they are compelled to
operate as viable, commercial institutions
l Travails arising from disinvestment.
V. Insurance sector too experiences competition, with new private players
l Constituted IRDA
l IRDA issues licences/in-principle clearance to several private players and many of them
start operations.
VI. Capital markets undergo radical change
l FIIs enter Indian capital markets in a big way
l Foreign brokers closely follow the FIIs
l NBFCs register growth and form alliances with global finance companies
l Growth of private mutual funds
l Indian firms raise capital globally and form alliances with global finance firms
l Indias capital markets get integrated with global capital markets.
VII. Financial services emerge as a major business
l Emergence of many new financial services and financial service companies.
l Business firms spot financial services as a business and float financial companies of their
own.
VIII. Private sector becomes the dominant component of the economy
l Even in core/infrastructure areas, sector after sector, opened up to private enterprise : Oil,
mining, telecom, road building, railways, ports, civil aviation, EPZ/SPZ, defence production,
all now open to the private sector
l Import trading becomes a fresh business opportunity for the private sector.
Chart 3.7: Marketing Challenges of the Liberalised Economy
I. The destabilisation that came with entrepreneurial freedom
l Cocoon of protection enjoyed by existing players disappears.
l Existing notions on minimum economic size are shaken; many existing players become
uneconomic overnight.
l Industry structure alters in many businesses, forcing players to change strategies.
l Economic Darwinism becomes the order of the day.
II. The MNC onslaught
l With majority equity for the parent MNCs, their Indian enterprises gain a new edge and
make it all the more tougher for others
l MNCs also gain majority equity in JVs and start controlling the show
l The takeover threat
l The brand warMNC brands squeeze Desi brands
l Takeover of brands
l The overall unequal battle
III. The all-pervasive competition
l Competition from several directions and varied sources
l Increased competition from Indian players
l Competition from MNCs
l Competition from imported products
l Competition emanating from easier access to technology.
l Competition is now global in character
IV. The exacting demands of a buyers market
l From shortage to surplus; the compulsion to become price competitive.
l From shoddy products to excellent products; the quality challenge
l Abundance of choice
l The consumer calls the tune
V. As government shrinks its role as a buyer, firms find marketing difficult
VI. The compulsions to go global
l New trade policy and globalisation of the economy, compel firms go global.
l Heat of competition at home, another compulsion
l Going global remains a difficult game for Indian firms.
l Indias lack of competiveness as a nation compounds the problem
VII. The challenge on technology front
l In most industries, technology is the fountainhead of competitive advantage and core
competence
l Investment in R&D and innovation becomes inescapable.
VIII. The need for quick response in product innovation
l Cycle times in new product launches are compressed.
l Faster diffusion/adoption of new products
Contd...
l Product Life Cycle of products become shorter
l Firms face the challenge of speed
IX. Countering the rising vulnerability
l A variety of factors lead to vulnerability
l Vulnerability due to capital inadequacy
l Lack of product clout and brand power
l PSUs become vulnerable due to a combination of factors
l Vulnerability due to loss of monopoly
X. The challenge of achieving marketing excellence under conditions of discontinuity
l Past ceases to be an indicator of the future; marketing at cross-roads
l Marketing capabilities of yesteryears no longer enough; marketing planning and strategy
are now put to severe test
l How to deliver superior value under a rapidly changing environment
becomes the main question.
Political Environment
Political environment : The practices and policies of governments.
Political environment too is a major component of the mega environment for an industrial/
business firm. In fact, economic environment is often a by-product of the political
environment, since economic and industrial policies followed by a nation greatly depend
on its political environment. Moreover, developments on the political front keep affecting
the economy all the time : industrial growth depends to a great extent on the political
environment; legislations regulating business are also often a product of the political
configuration.
Political environment has several aspects. Form of govenment adopted by the country
is the first. Political stability as such is another, for, whatever be the form of government
adopted, stability of government is an essential requisite of economic growth. Elements
like social and religious organisations, media and pressure groups, and lobbies of various
kinds are also part of the political environment.
Some features of Indias political environment : The fact that the democratic
form of government has endured ever since the country became independent, is one
major feature of the political environment of India. Another important feature is that
while in the first 40-odd years since independence, the country had a single party
government at the centre, in recent times, an experiment with coalition governments
has been going on. And, it is also significant that the country has been enjoying a fair
amount of political stability despite the absence of a single-party government at the
centre. Another significant fact is that a political consensus has emerged to the effect
that the country must set and achieve a much higher rate of economic growth. A
political consensus of sorts also seems to have emerged on the need for economic
reforms. The country has also started moving towards a market economy from the
earlier socialist moorings and public sector dominated economy.
Politics and Laws
The political environmentthe practices and policies of governmentsand the
legal environmentlaws and regulations and their interpretationaffect marketing
activity in several ways. First, they can limit the actions marketers are allowed to
takefor example, by barring certain goods from leaving a country, as when Congress
passed the Export Administration Act, which prohibited the export of strategic high-
technology products to nations such as Iran and Libya. Second, they may require
marketers to take certain actions. For instance, cookies called chocolate chips cookies
are required to contain chips made of real chocolate, and the surgeon generals warning
must appear on all cigarette packages. Last policies and laws may absolutely prohibit
certain actions by marketersfor example, the sale of products such as narcotic drugs
and nuclear weaponsexcept under the strictest of controls. Political processes in
other countries may have a dramatic impact on international marketers. For example,
the dissolution of the former Soviet Union was a historic political action that totally
changed the business climate and opened new markets in newly independent states
such as Russia, Lithuania and Ukraine. When the British ended their 156 years colonial
control of Hong Kong in 1997, Hong Kong embarked on an uncertain new era under
the sovereignity of Communist China. It remains to be seen how this major political
change will affect marketers who do business in Hong Kong in the 21st century.
Laws, in particular, tend to have stable, long-term influence on marketing strategy. For
example, almost all countries with commercial airlines have long-standing bans on foreign
ownership of these businesses.
Legal Environment/Business Legislation
Legal environment : Laws and regulation and their interpretation.
Businesses have to operate within the framework of the prevailing legal environment.
They have to understand the implications of all the legal provisions relating to their
business. In recent times, the world over, legislation regulating businesses has been
steadily increasing. And it is particularly true for India. Over the past four or five
decades, a great deal of legislation concerning business and industry has entered the
statute books. Though a reversal of this trend has commenced with the recent reforms
and liberalisation, business firms operating in India are still required to grapple with a
heavy load of legislation.
Business legislation can be classified into the following broad categories, based on the
area covered by them.
l Corporate affairs
l Consumer protection
l Employee protection
l Sectoral protection
l Corporate protection (protecting companies from each other, preventing unfair
competition)
l Protection of society as a whole against unbridled business behaviour
l Regulations on products, prices and distribution
International Laws
Companies operating their businesses in global markets must pay attention to international
laws and the laws of foreign lands. Laws and legal systems that govern the marketing
of products in foreign countries vary tremendously. For example, in Brazil, advertisers
found guilty of harming or misleading consumers may be fined up to $500,000 or given
a prison sentence of up to 5 years. This is a harsh punishment by U.S. standards. The
rules of competition, trademark rights, price controls, product quality laws, and a number
of other legal issues in individual countries may be of immense importance to a global
marketer, such as Coca-Cola, Pepsi, Tata Group, AVB Group, Wipro, Infosys etc.
Furthermore, not only individual countries, but also multinational bodies, have legal
systems to deal with international commerce, Multinational marketing groups are
groups of countries aligned to form a unified market with minimal trade and tariff
barriers among participating member countries. An example is the European Union
(formerly called the Common Market). The European Parliament and the Court of
Justice deal with legal issues for the European Union.
Environmental Interactions
Before concluding this discussion of the macroenvironment, we should emphasize that
the parts of the macroenvironment interact with each other. Therefore, effective
marketers must consider the whole of the marketing macroenvironment, not just its
parts. For example, natural phenomena such as the eruption of volcanoes can affect
tourism, agriculture, weather patterns, and radio and television transmission; can heighten
public interest in disaster movies and books; and can even inspire race-track customers
to bet on horses whose names suggest volcanic explosions.
There are many examples of interactions between changes in the economic,
technological and social environments. When the U.S. economy is in a period of decline,
the divorce rate also declines, because fewer couples can afford the expense of divorce.
When medical science reduces the infant mortality rate in a country, that countrys
birth rate eventually declines, because parents realize that their children can be expected
to survive to adulthood. These kinds of interactions make the job of environemtal
analysis a complex one. Nonetheless, marketing success cannot be achieved without
a careful consideration of environmental constraints and opportunities.
The MicroenvironmentThe Four Cs
Microenvironment : A company, its customers, and the other economic institutions that influence
its marketing practices.
The macroenvironment, the broad societal forces that affect every business and non-
profit marketer, was discussed. Marketers, however, are more directly influenced by
their individual microenvironments. A microenvironment consists of a company, its
customers, and the other economic institutions that regularly influence its marketing
practices.
Four Cs : The microenvironmental participants that perform essential business activities : company,
customers, competitors, and collaborators.
To explain the dramatic impact of the microenvironment, it is useful to organize all
microenvironmental forces into four basic categoriescompany, customers,
competitors and collaborators. Each of these represents a participant that performs
essential business acivities. We will call these the four Cs.
Fig 3.2. illustrates how macroenvironmental forces shape a companys microenvironment,
which in turn afects the marketing mix decisions the company makes.
COMPANY
Company : A business or organization that offers products and services to consumers.
The first of the four Cs is the company, the business or organization itself. Marketing,
although very important, is only one functional activity of an organization. Every marketer
must work with people in the organization who perform non-marketing tasks. For
example, in a large manufacturing company, manufacturing, engineering, purchasing,
accounting, finance, and personnel are all part of the internal company environment.
These functional activities, the level of technology, and the people who perform them
have an impact on marketing. Marketers, for example, work within the framework of
the corporate mission set by top managers who are responsible for the companys
operations. Companies like 3M, Sony, and Disney have several divisions and market
many different goods and services. The way one product is marketed often affects the
marketing of other company products.
Figure 3.2: The Macroenvironment and the Microenvironment:
Forces That Shape the Marketing Mix
Entrepreneur : A risk-taking individual who sees an opportunity and is willing to undertake a
venture to create a new product or service.
Owners and managers in todays companies must strive to be flexible to keep up with
dynamically changing business environments. In doing so, they often take an
entrepreneurial approach to running the business. An enterpreneur is someone willing
to undertake a venture to create something new. In the traditional view, an entrepreneur
is a single individual who sees an opportunity and is willing to work long and hard to turn
an idea into a business. Entrepreneurs are typically creative, optimistic, and hard-
working individuals who risk their own money to start small companies to make something
happen. The story of the entrepreneurial development of the personal computer is well
known. Starting out in a garage, two risk-taking individuals with a vision built the first
personal computers and then developed Apple Computer into a multinational corporation.
Entrepreneurs who assume all the risks associated with their innovative ideas have
always been in the forefront of new product development.
Intrapreneurial organisation. An organization that encourages individuals to take risks and gives
them the autonomy to develop new products as they see it.
The top managers of many large organizations try to instill an entrepreneurial spirit in
their employees. To avoid confusion with the traditional definition of entrepreneur, we
define an intrapreneurial organization as a large organization that encourages
Physical environment
Sociocultural environment
Demographic environment
Science & Technology
Economic forces
Political & Legal forces
Company
Customers
Collaborators
Competitors
Product
Promotion
Place
Price
Marketing Mix Micro-environment Macro-environment
individuals to take risks and gives them the autonomy to develop new products as they
see fit.
Managers of intrapreneurial companies try to create company cultures that encourage
employees to be proactive. That is, these companies favour organizational structures
that allow employees to initiate marketing action swiftly rather than forcing them to
follow rigid bureaucratic procedures before taking action.
CUSTOMERS
Customer : One who buys a companys goods or services.
Customers are the lifeblood of every company. A company that does not satisfy its
customers needs will not stay in business over the long run. It is difficult to think of a
more direct influence on marketing than the gaining or losing of customers.
Economic utility : The ability of a good or service marketed by an organization to satisfy a
consumers wants or needs. Economic utility includes form utility, place utility, time utility and
possession utility.
Historically, consumer needs have been discussed in terms of economic utility. Economic
utility is the ability of a good or service marketed by an organization to satisfy some
aspect of a consumers wants or needs. There are four specific types of economic
utility : form utility, place utility, time utility and possession utility.
Form utility : Economic utility created by conversion of raw materials into finished goods that
meet consumer needs.
In converting raw materials into finished goods, an organizations production department
alters the materials form. It creates form utility. However, transforming leather and
thread into a purse does not create form utility unless the new shape formed by the
materials satisfies a consumer need. Marketing helps production create form utility by
interpreting consumers needs for products of various configurations and formulations.
Place utility : Economic utility created by making goods available where consumers want them.
Bridging the physical separation between buyers and sellers is where marketings roots
lie. Products available at the right placethat is, where buyers want themhave
place utility. A bottle of Pepsi-Cola at a bottling plant far from a consumers hometown
has considerably less place utility than does a Pepsi in a consumers refrigerator.
Time utility : Economic utility created by making goods available when consumers want them.
Making products or services available when consumers need them creates time utility.
A bank may close at 6:00 p.m., but by maintaining a 24-hour automatic teller machine,
it produces additional time utility for its customers.
Possession utility : Economic utility created by transfer of physical possession and ownership of
the product to the consumer.
The fourth type of utility is created at the conclusion of a sale, when the transfer of
ownership occurs. House owners enjoy greater freedom to alter their homes, such as
the right to paint walls bright orange, than do house renters; they have possession
utility. Possession utility satisfies the counsumers need to own the product and to
have control over its use or consumption.
These economic utilities serve as the underlying bases of competition, discussed in the
following section.
Competitors
Competitor : One of two or more rival companies engaged in the same business.
Hero Honda and Yamaha are competitors. So are two general stores in your
neighbourhood. Competitors are rival companies engaged in the same business. Your
competitors are interested in selling their products and services to your companys
customers and potential customers. One of the fundamental marketing tasks is identifying
and understanding the competition. The marketer does this by analyzing product classes,
product categories, and brands.
Product category : A subset of a product class containing products of a certain type.
Product categories are subsets of a product class. For example, household cleaners,
taken together, constitute a product class, but the subdivisions of powders, and sprays
are product categories. Similarly, car is a product class. There are a number of product
categories within that class, including expensive cars midprice cars and economy cars.
Product class : A broad group of products that differ somewhat but perform similar functions or
provide similar benefits.
Brand : A name or some other identifying feature that distinguishes one marketers product. Much
competition is among brands.
To complete their view of competition, marketing managers must consider matter of
brand. Brands identify and distinguish one marketers product from those of its
competitors. You are familiar with hundreds of brands of products. For example, the
bathing soap category includes brands such as Lux, Liril, Rexona, Fa, Lifebuoy and
many more.
All three groupingproduct class, product category, and brandmust be considered
in answering the question Who is the competition ? A liquid cleaner like Top Job can
be used to clean floors. So can a powdered cleaner like Spic Span. Liquid Lysol can do
anything that spray Lysol can do, except provide the convenience of the spray can
itself.
In a sense, any bathing soap, car, or hotel can compete against any other members of
its product class. However, brands of products compete primarily within product
categories. A marketer must of course be aware of the entire class of goods or services
being marketed, but it is the product category that contains the most competitors, because
the category reflects a specific consumers wants, needs and desires.
The Four Types of Competition : There are four general types of competition
price, quality, time and location. These types of competition are related to the utilities
described earlier.
Price competition : Competition based on price. It is especially important in the marketing of
products that are not distinctive, such as raw materials. Price competition is associated with
possession utility.
To obtain possession utility, consumers must pay a price. That is, they must exchange
something of value, called a price, for the good or service they desire. Economists
have spent a great deal of time investigating price competition, in general, a price
that is lower than competitors prices will attract customers. However, note that
economic price theory is based on the ceteris paribus assumption. That is, all things
other than price are assumed to remain the same.
Quality-based competition : Competition based on quality. Quality-based competition is
associated with form utility.
Form utility increases as product quality improves. Many businesses choose to compete
on the basis of product quality rather than on the basis of price.
Quality based competition is more complex than price competition because consumers
define quality in many different ways. Durability and reliability are traditionally associated
with quality. So are design, colour, style and many other attributes that determine the
physical nature of products. Prompt, polite, and friendly service is also associated with
consumers perception of quality. If all other things, including price, are equal, the
higher the perceived quality, the more likely consumers are to buy a product.
Time-based competition : Competition based on providing time utility by delivering a product
when the consumer wants it.
Time-based competition is directly associated with time utility. To put it simply,
buyers prefer to take possession of their goods exactly when they need them, which is
often as soon as possible. Time-based competition is very important in many industries,
especially those in which customers view competing products as virtually identical.
Moreover, time is becoming more important as a competitive weapon in a world of
ever-faster global communications. A marketing manager in todays competitive
environment has to think like a fighter pilot. When things move so fast, you cant
always make the right decisionso you have to learn to adjust to correct more quickly.
Insurance claims representatives once used ballpoint pens, paper, and stacks of huge
manuals in their offices to estimate damage from fires and other disasters. Today, they
use IBM ThinkPad computers to review building data and calculate and print estimates
right at the site of the damage. Using modern information technology has reduced
processing time for claims from weeks to hours.
Location-based competition : Competition based on providing place utility by delivering a
product where the consumer wants it.
Location-based competition is the effort to provide more place utility than competitors
do. Location is extremely important for retail businesses. The soft-drink shop
conveniently located at a high-traffic intersection will sell more soft drinks than a general
store located on a little-travelled road. A small store inside a shopping mall has many
drop-in customers who came to the mall to shop at the large department stores.
Today, the Internet allows marketers, even small businesses, to connect instantly with
customers all over the globe. In traditional business situations, bridging the physical
separation between buyers and sellers meant having a better geographical location, but
today barriers caused by distance are easier to overcome than they once were.
Competitive Advantage
A company strives to obtain an edge, or competitive advantage, over industry
competitors. To establish and maintain a competitive advantage means to be superior
to or different from competitors in some way. More specifically, it means to be superior
in terms of price, quality, time, or location. A company may achieve superiority by
operating a more efficient factory, by selling its products at a lower price, by designing
better-quality products, by being the first on the market with an innovation, or by satisfying
customers in other ways. In other words, market-oriented organizations can use many
alternative strategies to outperform competitors in terms of price, quality, time, or location.
Collaborators
Collaborator : A person or company that works with a marketing company. Collaborators help
the company run its business but are not actually part of the company.
For an organization, buying materials and supplies, hiring an advertising agency, or
getting a loan from a bank requires that one company work with another company.
These companies are collaborators. A collaborator is a person or a company that
works with your company. Collaborators help a company run its business but they are
not part of the company. They are often specialists who provide particular services or
supply raw materials, component parts, or production equipment.
Supplier : An organization that provides raw materials, component parts, equipment, services, or
other resources to a marketing organization; also called a vendor.
Collaborators that provide materials, equipment, and the like are called suppliers. Hyatt
Hotel Corporation believes that establishing long-term relationships with a supplier benefits
both companies. Whether its sheets and linens, emergency fire exit signs, or wine,
Hyatt buyers circle the globe looking for the highest-quality products. After Hyatt
settles on a supplier, the company works hard at maintaining that relationship.
The terms alliances, networks and informal partnerships, as well as others, have
been used to describe the kinds of relationships just mentioned. However, the term
collaborators works well because it implies that two companies are engaged in an
ongoing relationship. In todays business climate, companies must be flexible and able
to change quickly. Working with collaborators helps companies enhance their flexibility,
especially in global marketing activities and e-commerce activities.
The number of collaborative relationships has grown significantly in recent years, and
organizational collaborations are expected to be increasingly important during the 21st
century. Contemporary organization no longer perform all business activities internally.
Managers recognize that collaborators may have special competencies that allow them
to excel at certain tasks. Managers in todays companies believe that there is value in
making joint commitments and sharing resources.
Some companies marketing strategies are highly dependent on collaborations. In fact,
business thinkers have created a name for organizations that use collaboration extensively
: virtual corporations. The word virtual is derived from terminology used in the early
days of the computer industry. The term virtual memory described a way of making a
computer act as if it had more storage capacity than it really possessed. Thus, the so-
called virtual corporation, which appears to be a single enterprise with vast capabilities,
is the result of numerous collaborations with companies whose resources are called on
only when they are needed.
The Value Chain
Value chain : Chain of activities by which a company brings in materials, creates a good or service,
markets it, and provides service after a sale is made. Each step creates more value of the consumer.
Operating a business involves a system of activities and relationships with collaborators.
Each part of the systemeach link in the chainadds value to the product customers
ultimately buy. Figure 3.3. shows what is known as a value chain. The exhibit
illustrates the relationships between a company and its customers
Figure 3.3
and some of its collaborators by dividing activities into primary, upstream, and
downstream activities. Notice that before the company engages in its primary operations,
such as production, accounting and pricing, it engages in upstream activities, such as
purchasing equipment and materials from suppliers, Downstream activities, performed
after the product has been produced, require dealing with other collaborators, such as
transportation companies and retailers. These upstream and downstream activities are
called supportive activities. They provide the support necessary for carrying out
primary activities or for concluding the sale of goods or services to the final buyer.
Value chains may be more complex than the one illustrated here. Collaborators in the
value chain create new value together. These companies link themselves together to
achieve a common purpose. Each company values the skills that its partners bring to
the collaboration. By linking their companies capabilities, the collaborators can increase
the value that the ultimate customer obtains.
Core Competencies
Core competency : Expertise in a critical functional area or aspect of a particular business that
helps provide a company unique competitive advantage; what a company does best.
Before establishing the role of each collaborator in the value chain, marketers should
ascertain the companys core competencies. A core competency is a proficiency in
a critical functional activitysuch as technical know-how or a particular business
specializationthat helps provide a companys unique competitive advantage. The
company may be able to do something that its competitors cannot do at all or that they
find difficult to do even poorly. Simply put, core competencies are what the organization
does best.
A company enhances its effectiveness by concentrating its resources on a set of core
competencies that will allow it to achieve competitive superiority and provide unique or
Upstream Activities
Primary Activities
Downstream Activities
Company
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u
s
t
o
m
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r
Raw materials
supplier
Component
parts supplier
Service supplier
Wholesaler
Retailer
Transportation
company
differentiated value for customers. For example, research and development for product
design and marketing are Nikes core competencies, not production. Nike manufactures
only key technical components of its Nike Air
system. All of its shoe production is performed
by Asian collaborators. Nike works with its
advertising agency Wieden & Kennedy, and golf
star Tiger Woods to create exciting television
commercials. It uses Roadway Express and
Federal Express to transport its shoes to
Atheletes Foot stores, where shoppers receive
personalized customer service. Nike also
collaborates with top-ranked college football and basketball teams and provides them
with everything from pants and jerseys to warm-up jackets. These apparel lines are
also for sale in retail stores. Nike thus works with many collaborators who provide
special services or contribute unique talents that strengthen and support Nike as a
business. Nike understands its core competencies.
Outsourcing : Buying or hiring from outside suppliers.
An undetstanding of core competencies helps managers determine what value creating
activities can be outsourced. Outsourcing means having certain activities performed
by collaboratorsoutside sources. Outsourced activities, such as the production of
major parts or subassemblies by suppliers or the operation of an Internet Web site, may
be integral to a companys operations.
The major reason for outsourcing is that few companies possess adequate resources
and capabilities to perform all primary activities, upstream activities, and downstream
activities themselves. In todays era of intense global competition, it would be almost
impossible for any organization to have all the necessary competencies to excel at
every activity in its value chain. Companies that recognize the fact carefully plan their
collaborations with other companies so that they can combine complementary strengths
to increase customer value.
Companies often have problems when they stray too far from their core
competencies.
Chart 3.8: Examples of Core Competence
Firm Core Competence
Sony Capability for miniaturisation; it can make any product tiny.
Philips Optical media expertise.
3M Capability for making substrates, coatings and adhesives and combining them in
multiple ways.
Honda Capability for making engines, which gives it an advantage in diverse products like
cars, motorcycles, lawnmowers and generators.
DuPont Unique strength in chemical technology.
ITT Unique strength in electronics.
NEC Unique strength in telecom, semiconductors and computing.
Canon Unique strength in optics, imaging and microprocessor controls; together, they lend
Canon an advantage in diverse products as copiers, laser printers, cameras, and
image scanners.
JVC Unique strength in video recording/videotape technology which has given JVC many
unique and novel products.
A company enhances its
effectiveness by concentrating
its resources on a set of core
competencies that will allow ti
to achieve competitive
superiority and provide unique
or differentiated value for
customers.
Chart 3.9: Attributes of Core Competence
l Core competence is a fundamenetal, unique and inimitable strength of the firm that :
(i) Provides the firm, the access to a variety of products/markets.
(ii) Contributes significantly to customer benefits in the end products.
(iii) Is an exclusive preserve of the firm and cannot be imitated easily by competitors
l Core competence is largely a tehnological competence, a competence at the root technology
in particular.
This is so because, new businesses/new products are largely the result of technology.
This is especially true in todays technology-driven world, where technology is fast
altering existing boundaries of businesses.
The examples in Chart 3.8 show that the core competencies of these corporations are the
outcome of their command over several overarching technologies.
l Corporations who enjoy a core competence in the root technology/process/expertise
keep gaining lasting advantage, through new products and fresh value enhancement.
l In particular, for firms playing the business game through the product route, core
competence is very essential.
l Often, command over multiple streams of inter-related and overarching technologies,
(e.g., telecomputers-fibre optics) confers a core competence to a firm in the composite
area, giving rise to many unique products.
l Core competence is a knowledge base, which gives rise to a variety of products with
widely varying product missions.
Chart 3.10: Distinction Between Competitive Advantage and Core Competence
l A competitive advantage does not necessarily imply a core competence while a core
competence does imply a competitive advantage, often, a number of competitive
advantages.
l A competitive advantage does not constitute a sure success formula for a firm over a long
term; a core competence usually does.
l A core competence provides a lasting superiority to the company while a competitive
advantage provides a temporary competitive superiority. And behind any lasting
competitive superiority, one can always find a core competence.
l While a competitive advantage accrues from a functional strength in any of the manifold
functions performed by a firm, a core competence does not normally accrue from functional
strength. The strength has to be at the root of businesses and products; it has to be a core
strength like a unique capability in technology/process.
l A competitive advantage helps a firm in a specific and limited way; a core competence
helps it in a general, far-reaching and multifaceted manner.
l A competitive advantage provides competitive strength to the firm in a given business/
product. A core competence helps the firm to excel in a variety of businesses/products.
l A competitive advantage can be easily imitated and competitors catch up fast. A core
competence is an exclusive and inimitable preserve of a firm. It is long lasting; competitors
cannot easily catch up with the firm.
l A core competence is fundamental and unique to a firm; competitive advantages are not
unique to any firm over the long term.
Relationship Management
Relationship management : The building and maintaining of long term relationships with the
parties that contribute to an organizations success; the sales function of managing relationships
with customers and ensuring that they receive appropriate services.
Effective executives stress managing the relationships that make the value chain
productive. These managers work to build long-term relationships with suppliers,
resellers, and ultimately customers who buy their products for consumption. The term
relationship management refers to a major goal of business : building long-term
relationships with the parties that contribute to a companys success.
Companies strive to initiate collaborations and build loyalties. It is the managers job to
create, interpret, and maintain the relationships between the company and its
collaborators.
The Impact of Global Forces on the Four Cs
On a political map, the boundaries between countries are as clear as ever. But on a
competitive map, a map showing the real flows of financial and industrial activity, those
boundaries have largely disappeared. The world has become a global economy in
which corporations market their products in many areas outside their home countries.
In consumer electronics, for instance, Japanese marketers like Sony and Panasonic
have high market shares in the United States and compete effectively throughout the
world. Not only marketing but also manufacturing has taken on an international character
for some organizations.
International marketing : Marketing across international boundaries; also called multinational
marketing.
An organization that sells its products beyond the boundaries of its home nation engages
in international marketing. International marketing involves a marketing strategy
that views the world market rather than a domestic market as the forum for marketing
operations.
Import : A foreign product purchased domestically.
Export : A domestically produced product sold in a foreign market.
In thinking about marketing in the global economy, it is important to remember two key
economic terms. Imports are foreign products purchased domestically. Exports are
domestically produced products sold in foreign markets. Today, U.S. exports amount to
almost a trillion dollars. The United States top export products are (1) agricultural
products, (2) electrical machinery, such as circuit breakers, (3) data processing and
office equipment, (4) aircraft, and (5) general industrial machinery such as escalators.
Americas top export customers are (1) Canada, (2) Japan, (3) Mexico, (4) Britain, and
(5) Germany. In 1998 imports were approximately $1,110 billion. The goods accounting
for much of this trade were crude oil and refined petroleum products, automobiles,
industrial raw materials, and capital goods.
Many U.S. companies are thoroughly involved in multinational marketing. Gillette,
Coca-Cola, and Johnson & Johnson earn well over 50 per cent of their profits overseas.
The U.S. government encourages U.S. companies to expand their international marketing
efforts, and the United States is a major exporting country in terms of absolute dollar
volume.
The United States has passed through a transition period from a domestic orientation to
a global orientation. At one time, an American marketer could be content to ignore
world trade and compete with other domestic marketers for business in the growing
U.S. economy. Today, however, with multinational organizations employing global
marketing strategies, a domestic marketer must be aware of foreign competitors
influences not only in international markets but also in its own domestic market.
Competition is global, and the future of marketing is global. Companies must therefore
analyze microenvironments in various parts of the world. For that reason, it is useful to
consider the impact of global forces on the four Cs. We begin by looking at the global
consumer.
CustomersThe Era of the Global Consumer
International marketers, like marketers in their home countries, focus on satisfying
customer needs. Understanding why people in foreign countries behave and react as
they do requires knowing how their values and beliefs affect the success of marketing
efforts. Values and beliefs vary from culture to culture. What seems like a normal
idea, or even a great idea, to marketers in one country may be seen as unacceptable or
even laughable by citizens of other lands. Consider these examples about food
preferences :
l When Campbells offered its familiar (to Americans) red and whitelabelled
cans of soup in Brazil, it found cultural values there too strong for this product to
overcome. Brazilian housewives apparently felt guilty using the prepared soups
that Americans take for granted. They believed that they would not be fulfilling
their roles as homemakers if they served their families a soup they could not call
their own. Faced with this difficulty, Campbells withdrew the product. However,
the company discovered that Brazilian women felt comfortable using a dehydrated
soup starter to which they could add their own special ingredients and flair. To
market soup in Japan, on the other hand, the marketer must realize that soup is
regarded there as a breakfast drink rather than a dish served for lunch or dinner.
l Some 80 per cent of Indians are Hindu, adherents of a religion that prohibits the
eating of beef and considers cows to be a sacred symbol. Instead of the Big Mac,
the Indian menu features the Maharaja Mactwo all-mutton patties, special
sauce, lettuce, cheese, pickles, onions on a seasame-seed bun. For the strictest
Hindus, who eat no meat at all, there are rice-based patties flavoured with peas,
carrots, red pepper, beans coriander, and other spices. McDonald which has
restaurants in more than 100 countries, adapts its menu to local tastes around the
world.
Industrial buyers and government workers may also behave differently in different
cultures. In some countries, business dealings are carried on so slowly that U.S. business
people are frustrated by what they perceive as delays. Yet this customary slowness
may be seen by their hosts as contributing to a friendly atmosphere. Government
officials in some countries openly demand gifts or tips, without which nothing gets
done. Of course, this practice is illegal in the United States because it conflicts with
American social values.
Language
Language is an important part of culture, and the international marketer must be aware
of its subtleties. For example, although the French words tu and vous both mean
you, the former is used to address a social equal or an inferior and the latter to signify
formality and social respect. In Japan, yes may mean yes, I understand what you
said, not necessarily yes, I agree. Numerous marketing mistakes have resulted from
misinter pretations of languages by unwary translators. The Chevrolet brand name
Nova translates into Spanish as no go. Tomato paste becomes tomato glue in
Arabic. Translated into Spanish, Herculon carpet is the carpeting with the big derriere.
The straightforward slogan Come alive with Pepsi! has been translated as Come
out of the grave with Pepsi! and Pepsi brings your ancestors back from the grave.
English is spoken in many countries, but sometimes the language in English-speaking countries is
not quite the same. A pickup truck is called a bakkie in South Africa, a ute in Australia, and an utility
vehicle in New Zealand. What Americans call a bar is a pub in Great Britain, a hotel in Australia, and
a boozer in New Zealand. And if you are in Canada, a hoser is just another bubba.
Cultural Symbols
Another aspect of culture is cultural symbols. A cultural symbol stands for something
else and expresses a particular meaning shared by members of a society. Symbols
may be verbal or non-verbal. The colour white may represent purity, for example. A
bull may represent strength. Such symbols may act as powerful unconscious forces,
silently working to shape consumer attitudes and behaviour. The use of cultural symbols
can thus be of great importance in a marketing effort.
Ethnocentrism
Ethnocentrism : The tendency to consider ones own culture and way of life as the natural and
normal ones.
More often than not failure to understand the market leads to unpleasant results. One
reason that many managers fail to fully understand foreign cultures and marketing is
that people tend to be ethnocentric. Ethnocentrism is the tendency to consider ones
own culture and way of life as the natural and normal ones. We may mistakenly expect
others to share these feelings. This unconscious use of our own cultural values as a
reference points has been called the self-reference criterion. People doing business
in a foreign country may be using the self-reference criterion, or being ethnocentric,
when they think their domestic strategy or reputation is better than that of any competitor
in that country. But exporting ones own biases into foreign markets results in mistakes
such as when U.S. companies attempted to sell large U.S. built cars with steering
wheels on the left side for use in overcrowded Japanese streets, where cars are driven
on the left side of the road.
Many Americans expect foreign business people to conduct business the same way
people do in the United States. However, often this is not the case. For example,
assuming that it is appropriate to send a woman sales representative to Saudi Arabia,
Yemen, or some other country in the Middle East shows a lack of understanding of
cultural values. The womens movement has not had much impact in many Middle
Eastern countries. Marketers must avoid such cultural nearsightedness by consciously
recognizing its potentially biasing impact.
Although consumers will no doubt continue to differ from country to country, they are
developing some similar tastes and preferences as the business world becomes more
global. Global marketers should recognize both similarities and differences among
customers in different areas of the world and incorporate this knowledge into their
marketing strategies.
Multinational Economic Communities
Multinational economic community : A collaboration among countries to increase international
trade by reducing trade restrictions. Typically, a group of countries forms a unified market within
which there are minimal trade and tariff barriers, the European Union is an example.
Marketers often view global customers from a regional perspective, reflecting a trend
toward economic integration and the formation of multinational economic communities.
A multinational economic community is a collaboration among countries to increase
international trade by reducing trade restrictions. The formation of economic
communities not only makes it easier for member nations to trade with each other but
also makes it easier for outsiders to trade with member nations.
Perhaps the best-known economic community is the European Union, also known as
the European Community or the Common Market.
It consists of Portugal, France, Ireland, the United Kingdom, Spain, Denmark, Germany,
the Netherlands, Belgium, Luxembourg, Italy, Greece, Austria, Finland, and Sweden.
Although Europeans had been working on a borderless economy for more than 30
years, 1992 finally marked the elimination of national trade barriers, differences in tax
laws, conflicting product standards, and other restrictions that had kept the member
nations from being a single market. Trade within this union is very similar to trade
among U.S. statesborders are in minimal significance, and there are no customs
controls. In 1999 the Euro became the common currency in the European Union.
Market Segmentation, Targeting and Positioning 101
What is Market Segmentation ?
We have already defined what a market is but let us look again at that definition. A
market is a group of actual or potential customers for a particular product. More precisely,
a market is a group of individuals or organizations that may want the good or service
being offered for sale and that meet these three additional criteria :
1. They have the ability or purchasing power to buy the product being offered.
2. They have the willingness to spend money or exchange other resources to obtain
the product.
3. They have the authority to make such expenditures.
Economics text books often give the impression that all consumers are alike. Economists
frequently, draw no distinctions among different types of buyers, as long as they have a
willingness and an abilty to buy. Young and old buyers, men and women, people who
drink 12 beers a day and those who drink one beer on New Year's Eve are all lumped
together. Experience tells marketers, however, that in many cases buyers differ from
one another even though they may be buying the same products. Marketers try to
identify groups and subgroups within total marketsthat is, they try to segment markets.
Recall that market segmentation consists of dividing a heterogeneous market into a
number of smaller, more homogeneous submarkets. Almost any variable age, sex, product
usage, life style, expected benefitmay be used as a segmenting variable, but the logic
behind the strategy is always the same.
l Not all buyers are alike.
l Sub groups of people with similar behaviour, values, and/or backgrounds may be
identified.
l The sub groups will be smaller and more homogeneous than the market as a
whole.
l It should be easier to satisfy smaller groups of similar customers than a large
group of dissimilar customers.
Usually, marketers are able to cluster similar customers into specific market segments
with different, and sometimes unique, demands. For example, the computer software
market can be divided into two segments: the domestic market and the foreign market.
The domestic market can be segmented further into business users and home users.
And the home user segment can be further divided into sophisticated personal computer
user, people who hate personal computers but have to buy so their children use it for
Chapter 4
Market Segmentation, Targeting and
Positioning
school work, people who use computers only for e-mail, and so on. The number of
market segments within the total market depends largely on the strategist's ingenuity
and creativity in identifying those segments.
Neeedless to say, a single company is unlikely to pursue all possible market segments.
In fact, the idea behind market segmentation is for an organization to choose one or a
few meaningful segments and concentrate its efforts on satisfying those selected parts
of the market. Focusing its efforts on these targeted market segmentsthat is,
targeting-enables the organization to allocate its marketing resources effectively.
Concentrating efforts on a given market segment should result in a more precise
marketing program satisfying specific market needs.
The market segment, or group of buyers, toward which an organization decides to
direct its marketing plan is called the target market. The target market for Shower
shaver, for example, is that sub group of women who shave their legs in the shower.
Because it is possible to segment markets in so many ways, target marketing opportunities
abound. For example, there are left-handershops specializing in products for left-
handed people, tobacco shops catering to wealthy pipe smokers, and dress shops that
target women who wear certain clothing sizes. In addition, numerous products bear the
names or symbols of sports teams, such as the San Francisco 49ers or the Chicago
Bulls, and are marketed to team fans. As you can see, the process of segmentation
provides hints on how to market to the targeted segments identified.
Selection of a target market (or marketsin some cases, more than one may be selected
for a product) is a three-step process, as shown in Figure 4.1. First, the total market,
consisting of many different customers, is studied and broken down (or disaggregated)
into its component partsthat is, individual customers, families, organizations, or other
units. The customers are then regrouped by the marketing strategist into market segments
on the basis of one or several characteristics that segment members have in common.
Then the strategist must target segments to which the organization will appeal. When
that is done, the strategist has answered the question What are our target markets?
Figure 4.1 The major Steps in Market Segmentation and Selection of Target
Markets
To sum up the market for any product is normally made up of several segments. A
market after all is the aggregate of consumers of a given product. And, consumers,
who make a market, are seldom one homogeneous lot; they vary in their characteristics
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The market is broken down
STEP 1 STEP 2 STEP3
and grouped into meaningful
market segments
so that a target market can be chosen
and buying behaviour. It is thus natural that many differing segments occur within a
market.
Marketers usually divide the heterogeneous market for any product into segments, with
relatively more homogeneous characteristics, since this helps in tapping it. And, this
process of disaggregating a market into a number of sub-markets segments is known
as market segmentation.
To put it in a nutshell, market segmentation rests on the recognition that:
(a) any market is made up of several sub-markets, or sub-groups of consumers,
distinguished from one another by their varying needs and buying behaviour, and
(b) it is feasible to disaggregate the consumers into segments in such a manner that
in needs, characteristics and buying behaviour, the members would vary
significantly among/across segments, but would be homogeneous within each
segment.
Why Segment the Market?
Let us see how segmentation benefits the marketer.
1. Facilitates Proper Choice of Target Market
In the first place, segmentation helps the marketer to distinguish one customer
group from another within a given market and thereby enables him to decide
which segment should form his target market.
2. Facilitates Tapping of the Market, Adapting the Offer to the Target
Segmentation also enables the marketer to crystallise the needs of the target
buyers. It also helps him to generate an accurate perdiction of the likely responses
from each segment of the target buyers. Moreover, when buyers are handled
after careful segmentation, the responses from each segment will be homogeneous.
This, in turn, will help the marketer develop marketing offers/programmes that
are most suited to each group. He can achieve the specialisation that is required
in product, distribution, promotion and pricing for matching the particular customer
group, and develop marketing offers and appeals that match the requirements of
that particular group.
Exhibit 4.1: Adapting Offer to Suit Target Segment
Ford modifies its models for India
Ford modified its models for the Indian target segment as shown below:
l Higher ground clearance to make the car more compatible to the rougher road surface in India.
l Stiffer rear springs to enable negotiating the ubiquitous potholes on Indian roads.
l Changes in cooling requirement, with greater airflow to the rear.
l Higher resistance to dust.
l Compatibility of engine with the quality of fuel available in India.
l Location of horn buttons on the steering wheel.
As the Indian motorist uses the horn far more frquently, for cars sold in India, the horn buttons are
kept on the steering wheel and not on a lever on the side as in the models sold in Europe.
The Ford Strategy
Through segmentation, car manufacturers have gained useful insights on the product
features/benefits to be provided to different segments of car buyers. It will also be
clear that within a given segment, the Indian requirement is often unique, giving rise to
an India-specific sub-segment within any segment. Product offerings have to be tailored
to suit Indian conditions, especially Indian roads. From the details provided, it will be
clear that firms do appreciate this reality and they provide specific offers/models suiting
the Indian segment.
Exhibit explains how Ford has gained useful insights through segmentation and adapted
its offer to suit the Indian target segment.
In recent years, other carmakers have also identified distinct segments in the
Indian car market and offered distinct models for each of them. For example,
Daewoo offers eight variants of its Cielo, and Ford Mahindra four versions of the Ford
Escort.
3. Helps Divide the Markets and Conquer Them
Through segmentation, the marketer can look at the differences among the
customer groups and decide on appropriate strategic offers for each group. This
is precisely why some marketing experts have described segmentation as a
strategy of dividing the markets for conquering them.
4. Makes the Marketing Effort more Efficient and Economic
Segmentation also makes the marketing effort more efficient and economic. It
ensures that the marketing effort is concentrated on well defined and carefully
chosen segments. After all, the resources of any firm are limited and no firm can
normally afford to attack and tap the entire market without any delimitation
whatsoever. It would benefit the firm if the efforts were concentrated on segments
that are the most productive and profitable ones.
5. Helps Identify Less Satisfied Segments and Concentrate on Them
Segmentation also helps the marketer assess as to what extent existing offers
from competitors match the needs of different customer segments. The marketer
can thus identify the relatively less satisfied segments and succeed by satisfying
such segments.
6. Benefits the Customer as well
Segementation brings benefits not only to the marketer, but to the customer as
well. When segmentation attains higher levels of sophistication and perfection,
customers and compaines can conveniently settle down with each other, as at
such a stage, they can safely rely on each others discrimination. The firm can
anticipate the wants of the customers and the customers can anticipate the
capabilities of the firm.
Chart 4.1: Summarises the Advantages of Market Segmentation
l Helps distinguish one customer group from another within a given market.
l Facilitates proper choice of target market.
l Facilitates effective tapping of the market.
l Helps divide the markets and conquer them.
l Helps crystallise the needs of the target buyers and elicit more predictable responses from
them; helps develop marketing programmes on a more predictable base; helps develop
marketing offers that are most suited to each group.
l Helps achieve the specialisation required in product, distribution, promotion and pricing for
matching the customer group and develop marketing offers and appeals that match the needs
of such group.
l Makes the marketing effort more efficient and economic.
l Helps concentrate efforts on the most productive and profitable segments, instead of frittering
them over irrelevant, or unproductive, or unprofitable segments.
l Helps spot the less satisfied segments and succeed by satisfying such segment.
l Brings benefits not only to the marketer but to the customer as well.
l When segmentation attains high sophistication, customers and companies can choose each
other and stay together.
Levels and Patterns of Market Segmentation
We begin by examining the various levels and pattern of market segmentation.
Levels of Market Segmentation
Market segmentation is an effort to increase a companys precision marketing. The
starting point of any segmentation discussion is mass marketing. In mass marketing,
the seller engages in the mass production, mass distribution, and mass promotion of one
product for all buyers. Henry Ford epitomized this marketing strategy when he offered
the Model T-Ford in any color, as long as it is black. Coca-Cola also practised mass
marketing when it sold only one kind of Coke in a 6.5-ounce bottle.
The argument for mass marketing is that it creates the largest potential market, which
leads to the lowest costs, which in turn can lead to lower prices or higher margins.
However, many critics point to the increasing splintering of the market, which makes
mass marketing more difficult. According to Regis McKenna,
[Consumers] have more ways to shop : at giant malls, speciality shops, and super
stores; through mail-order catalogs, home shopping networks, and virtual stores
on the Internet. And they are bombarded with messages pitched through a growing
number of channels: broadcast and narrow-cast television, radio, on-line computer
networks, the Internet, telephone services such as fax and telemarketing at one
telemarketing, and niche magazines and other print media.
The proliferation of advertising media and distribution channels is making it difficult to
practiceone size fits allmarketing. Some claim that mass marketing is dying. Not
surprisingly, many companies are turning to micromarketing at one of four levels: segment,
niches, local areas, and individuals.
Segment Marketing
A market segment consists of a large identifiable group within a market with similar
wants, purchasing power, geographical location, buying attitudes, or buying habits. For
example, an auto company may identify four broad segments: car buyers who are
primarily seeking basic transportation or high performance or luxury or safety.
Segmentation is an approach midway between mass marketing and individual
marketing. Each segments buyers are assumed to be quite similar in wants and needs,
yet no two buyers are really alike. Anderson and Narus urge marketers to present
flexible market offerings instead of a standard offering to all members within a
segment. A flexible market offering consists of two parts: a naked solution consisting
of product and service elements that all segment members valueand options that
some segment members value. Each option carries an additional charge. For example,
Delta Airlines offers all economy passengers a seat, food, and soft drinks. It charges
extra for alcoholic beverages and earphones to those ecomomy passengers wanting
them.
Segment marketing offers several benefits over mass marketing. The company can
create a more fine-tuned product or service offering and price it appropriately for the
target audience. The choice of distribution channels and communication channels
becomes much easier. The company also may face fewer competitors in the particular
segment.
Niche Marketing
A niche is a more narrowly defined group, typically a small market whose needs are
not well served. Marketers usually identify niches by dividing a segment into sub
segments or by defining a group seeking a distinctive mix of benefits. For example, the
segment of heavy smokers includes those who are trying to stop smoking and those
who dont care.
Whereas segments are fairly large and normally attract several competitors, niches
are fairly small and normally attract only one or two. Larger companies, such as IBM,
lose pieces of their market to nichers: Dalgic labeled this confrontation guerrillas
against gorillas. Some larger companies have therefore turned to niche marketing,
which has required more decentralization and some changes in the way they do business.
Johnson & Johnson, for example, consists of 170 affiliates (business units), many of
which pursue niche markets.
The prevalence of nicheand even micronichemarketing can be seen in the media.
Witness the proliferation of new magazines targeting specific niches, divided and
subdivided along lines of ethnicity, gender, etc. For e.g., there is Outlook Traveller for
those who love travelling; there is Inside Outside which focus on design and interior;
there is Osho Times for those who believe in Osho etc.
Niche marketers presumably understand their customers needs so well that the
customers willingly pay a premium. Ferrari gets a high price for its cars because loyal
buyers feel no other automobile comes close to offering the product-service-membership
benefit bundle that Ferrari does.
An attractive niche is characterized as follows: The customers in the niche have a
distinct set of needs; they will pay a premium to the firm that best satisfies their needs;
the niche is not likely to attract other competitors; the nicher gains certain economies
through specialization; and the niche has size, profit, and growth potential.
Both small and large companies can practice niche marketing.
Linneman and Stanton claim that there are riches in niches and believe that companies
will have to niche or risk being niched. Blattberg and Deighton claim that niches too
small to be served profitably today will become viable as marketing efficiency improves.
The low cost of setting up shop on the Internet is a key factor making it more profitable
to serve even seemingly minuscule niches. Small businesses, in particular, are realizing
riches from serving small niches on the World Wide Web. Fifteen per cent of the
commercial Web sites with fewer than 10 employees take in more than $100,000, and
2 per cent even ring up more than $1 million. The recipe for Internet niching success:
Choose a hard-to-find product that customers dont need to see and touch.
Local Marketing
Target marketing is leading to marketing programs being tailored to the needs and
wants of local customer groups (trading areas, neighbourhoods, even individual stores).
McDonald offers different types of offerings in different states of India because the
food habits of the people are different.
Those favouring localizing a companys marketing see national advertising as wasteful
because it fails to address local needs. Those against local marketing argue that it
drives up manufacturing and marketing costs by reducing economies of scale. Logistical
problems become magnified when companies try to meet varying local requirements.
A brands overall image might be diluted if the product and message differ in different
localities.
Individual Marketing
The ultimate level of segmentation leads to segments of one, customized marketing,
or one-to-one marketing. For centuries,. consumers were served as individuals: The
tailor made the suit and the cobbler designed shoes for the individual. Much business-
to-business marketing today is customized, in that a manufacturer will customize the
offer, logistics, communications, and financial terms for each major account. New
technologiescomputers, databases, robotic production, e-mail, and faxpermit
companies to return to customized marketing, or what is called mass customization.
Mass customization is the ability to prepare on a mass basis individually designed
products and communications to meet each customers requirements.
According to Arnold Ostle, chief designer for Mazda,Customers will want to express
their individuality with the products they buy. The opportunities offered by these
technologies promise to turn marketing from a broadcast medium to a dialogue medium,
where the customer participates actively in the design of the product and offer.
Today customers are taking more individual initiative in determinig what and how to
buy. They log onto the Internet; look up information and evaluations of product or
sevice offers; dialogue with suppliers, users, and product critics; and make up their own
minds about the best offer.
Marketers will still influence the process but in new ways. They will need to set up toll-
free phone numbers and e-mail addresses to enable buyers to reach them with questions,
suggestions, and complaints. They will involve customers more in the product-specification
process. They will sponsor an Internet home page that provides full information about
the companys products, guarantees, and locations.
Just as mass production was the organizing principle of the last century, mass
customization is becoming the organizing principle for the twenty-first century. Two
trends are converging to make this so. One is the predominance of the customer and
the importance of true customer service. Consumers are demanding not only quality
products but also products that meet their individual needs. Marketing expert Regis
McKenna says, Choice has become a higher value than brand in America. Yet, it
would be prohibitively expensive, if not downright impossible, to offers customers so
many choices if it werent for another trend : the emergence of new technologies.
Computer-controlled factory equipment and industrial robots can now quickly read just
assembly lines. Bar-code scanners make it possible to track parts and products. Data
warehouses can store trillions of bytes of customer information. Most important of all,
the internet ties it all together and makes it easy for a company to interact with customers,
learn about their preferences, and respond. Joseph Pine, author of Mass Customization,
says,Anything you can digitize, you can customize.
Consumer-goods marketers arent the only ones riding these trends. Business-to-business
marketers are also finding that they can provide customers with tailor-made goods and
services as cheaply, and in the same amount of time, as it used to take to make
standardized ones. Particularly for small companies, mass customization provides a
way to stand out against larger competitors:
For both consumer marketers and business marketers, relationship marketing is an
important ingredient of mass-customization programs. Unlike mass production, which
eliminates the need for human interaction, mass customization has made relationships
with customers more important than ever.
Patterns of Market Segmentation
Market segments can be built up in many ways. One way is to identify preference
segments. Suppose ice cream buyers are asked how much they value sweetness and
creaminess as two product attributes. Three different patterns can emerge :
l Homogeneous preferences: Figure 4.2 (a) shows a market where all the
consumers have roughly the same preference. The market shows no natural
segments. We would predict that existing brands would be similar and cluster
around the middle of the scale in both sweetness and creaminess.
l Diffused preferences: At the other extreme, consumer preferences may be
scattered throughout the space (Figure 4.2[b]), indicating that consumers vary
greatly in their preferences. The first brand to enter the market is likely to position
in the center to appeal to the most people. A brand in the center minimizes the
sum of total consumer dissatisfaction. A second competitor could locate next to
the first brand and fight for market share. Or it could locate in a corner to attract
a customer group that was not satisfied with the center brand. if several brands
are in the market, they are likely to position throughout the space and show real
differences to match consumer-preference differences.
l Clustered preferences: The market might reveal distinct preference clusters,
called natural market segments (Figure 4.2[c]). The first firm in this market
has three options. It might position in the center, hoping to appeal to all groups. It
might position in the largest market segment (concentrated marketing). It might
develop several brands, each positioned in a different segment. If the first firm
developed only one brand, competitors would enter and introduce brands in the
other segments.
MARKET SEGMENTATION, TARGETING AND POSITIONING 97
Buyer Behavior and Consumer Decision Making Process 167
A Model of Consumer Behavior
The starting point for understanding buyer behaviour is the stimulus-response model
shown in Figure 5.1. Marketing and environmental stimuli enter the buyers
consciousness. The buyers characteristics and decision process lead to certain
purchasing decisions. The marketers task is to understand what happens in the buyers
consciousness between the arrival of outside stimuli and the buyers purchase decision.
Figure 5.1: Stimulus Response Model
The Major Factors Influencing Buying Behaviour
Consumers buying behaviour is influenced by cultural, social, personal, and psychological
factors. Cultural factors exert the broadest and deepest influence.
Cultural Factors
Culture, subculture, and social class are particularly important in buying behaviour.
Culture
Culture is the most fundamental determinant of a persons wants and behaviour. The
growing child acquires a set of values, perceptions, preferences, and behaviours through
his or her family and other key institutions. A child growing up in the United States is
exposed to the following values: achievement and success, activity, efficiency and
practicality, progress, material comfort, individualism, freedom, external comfort,
humanitarianism, and youthfulness.
Subculture
Each culture consists of smaller subcultures that provide more specific identification
and socialization for their members. Subcultures include nationalities, religions, racial
groups, and geographic regions. Many subcultures make up important market segments,
and marketers often design products and marketing programs tailored to their needs.
Marketing
Stimuli
Product
Price
Place
Promotion
Other
stimuli
Economic
Technology
Political
Cultural
Buyer's
characteristic
Cultural
Social
Personal
Psychlogical
Buyer's
decision process
Problem recognition
Information search
Evaluation of
alteratives
Purchase decision
Postpurchase behavior
Buyer's
decisions
Prodcut choice
Brand choice
Dealer choice
Purchase timing
Purchase amount
Chapter 5
Buyer Behavior and Consumer Decision
Making Process
Social Class
Virtually all human societies exhibit social stratification. Stratification sometimes takes
the form of a caste system where the members of different castes are reared for
certain roles and cannot change their caste membership. More frequently, stratification
takes the form of social classes.
l Social classes are relatively homogeneous and enduring divisions in a society,
which are hierarchically ordered and whose members share similar values, interests,
and behaviour.
Social classes do not reflect income alone, but also other indicators such as occupation,
education, and area of residence. Social classes differ in dress, speech patterns,
recreational preferences, and many other characteristics. Table 5.1. describes the seven
U.S. social classes identified by social scientists.
Social classes have several characteristics. First, those within each social class tend to
behave more alike than persons from two different social classes. Second, persons are
perceived as occupying inferior or superior positions according to social class. Third,
social class is indicated by a cluster of variablesrather than by any single variable.
Fourth, individuals can move from one social class to anotherup or downduring
their lifetime. The extent of this mobility varies according to the rigidity of social
stratification in a given society.
Social classes show distinct product and brand preferences in many areas, including
clothing, home furnishings, leisure activities, and automobiles. Some marketers focus
their efforts on one social class.
Table 5.1: Characteristics of Major U.S. Social Classes
1. Upper Uppers (less than 1 percent) The social elite who live on inherited wealth. They give large
sums to charity, run the debutante balls, maintain more han
one home, send their children to the finest schools. They
often buy and dress conservatively. Although small as a group,
they serve as a reference group to the extent that
their consumption decisions are imitated by the other social
classes.
2. Lower Uppers (about 2 percent) Persons who have earned high income or wealth through
exceptional ability in the professions or business. They usually
come form the middle class. They tend to be active in social
and civic affairs and seek to buy the symbols of status for
themselves and their children. They include the nouveau riche,
whose pattern of conspicuous consumption is designed to
impress those below them. The ambition of lower uppers is
to be accepted in the upper-upper stratum.
3. Upper Middles (12 percent) Possess neither family status nor unusual wealth. They are
primarily concerned with career. They have attained position
as professionals, independent businesspersons, and corporate
managers. They believe in education and want their children
to develop professional or administra-tive skills. Members
of this class like to deal in ideas and are highly civic minded.
They are home-oriented and are the quality market for good
homes, clothes, furniture, and appliances.
4. Middle Class (32 percent) Average-pay white-and blue-collar workers who live on the
right side of town. Often, they buy products that are popular
to keep up with trends. Twenty-five percent own imported
cars, and most are concerned with fashion. The middle class
Contd...
believes in spending more money on worthwhile experiences
for their children and aiming them toward a college education.
5. Working Class (38 percent) Average-pay blue-collar workers and those who lead a working-
class lifestyle, whatever their income, school background, or
job. The working class depends heavily on relatives for
economic and emotional support, for tips on job opportunities,
for advice, and for assistance. A working-class vacation means
staying in town, and going away means to a lake or resort
no more than two hours away. The working class tends to
maintain sharp sex-role divisions and stereotyping.
6. Upper Lowers (9 percent) Upper lowers are working, although their living standard is
just above poverty. They perform unskilled work and are
very poorly paid. Often, upper lowers are educationally
deficient.
7. Lower Lowers (7 percent) Lower lowers are on welfare, visibly poverty stricken, and
usually out of work. Some are not interested in finding a
permanent job, and most are dependent on public aid or charity
for income.
Social Factors
In addition to cultural factors, a consumers behaviour is influenced by such social
factors as reference group, family, and social roles and statuses.
Reference Groups
l A persons reference groups consist of all the group that have a direct (face-to-
face) or indirect influence on the persons attitudes or behaviour. Groups having a
direct influence on a person are called membership groups.
Some membership groups are primary groups, such as family, friends, neighbors, and
co-workers, with whom the person interact continuously and informally.
People also belong to secondary groups, such religious, professional, and tradeunion
groups, which tend to be more formal and require less continuous interaction.
People are significantly influenced by their reference groups in at least three
ways.Reference groups expose an individual to new behaviours and lifestyles. They
influence attitudes and self-concept. And they create pressures for conformity that
may affect actual product and brand choices.
People are also influenced by groups to which they do not belong. Aspirational groups
are those the person hopes to join; dissociative groups are those whose values or
behaviour an individual rejects.
Marketers try to identify target customers reference groups. However, the level of
reference group influence varies among products and brands. Reference groups appear
to influence both product and brand choice strongly only in the case of automobiles and
colour televisions. mainly brand choice in such items as furniture and clothing; and
mainly product choice in such items as beer and cigarettes.
Manufacturers of products and brand where group influence is strong must determine
how to reach and influence the opinion leaders in these reference groups. An opinion
leader is the person in informal product-related communications who offers advice or
information about a specific product or product category, such as which of several
brand is best or how a particular product or product category, such as which of several
brands is best or how a particular product may be used. Opinion leaders are found in all
strata of society, and person can be an opinion leader in certain product areas and an
opinion follower in other areas. Marketers try to reach opinion leaders by identifying
demographic and psychographic characteristics associated with opinion leadership,
identifying the media read by opinion leaders, and directing messages at the opinion
leaders. The hottest trends in teenage music, language, and fashion start in Americas
inner cities, then quickly spread to more mainstream youth in the suburbs. Clothing
companies that hope to appeal to the fickle and fashion-conscious youth market are
making a concerted effort to monitor urban opinion leaders style and behaviour:
Family
The family is the most important consumer-buying organization in society, and it has
been researched extensively. Family members constitute the most influential primary
reference group. We can distinguish between two families in the buyers life. The
family of orientation consists of ones parents and siblings. From parents a person
acquires an orientation toward religion, politics, and economics and sense of personal
ambition, self-worth, and love. Even if the buyer no longer interacts very much with his
or her parents, their influence on the buyers behaviour can be significant. In countries
where parents live with their grown children, their influence can be substantial. A more
direct influence on everyday buying behaviour is ones family of procreation namely,
ones spouse and children.
Marketers are interested in the roles and relative influence of the husband, wife, and
children in the purchase of a large variety of products and services. These roles vary
widely in different countries and social classes. Vietnamese Americans, for example,
are more likely to adhere to the traditionall model in which the man makes the decisions
for any large purchase. Similarly, successful ads for Korean Americans usually will
feature a man in his thirties or forties unless the ad is for a specifically female product,
such as jewellery.
In the United States, husband-wife involvement has traditionally varied widely by product
category. The wife has traditionally acted as the familys main purchasing agent, especially
for food, sundries, and staple-clothing items. In the case of expensive products and
services like vacations or housing, husbands and wives have engaged in more joint
decision making. Marketers need to determine which member normally has the greater
influence in choosing various products. Often it is a matter of who has more power or
expertise.
Women are rapidly gaining power in the householdpurchasing power, to be exact.
Business guru Tom Peters cites women as the number one business marketing opportunity,
and says :
The market research is clear; Women make or greatly influence most
purchasing decisions. Homes. . . . Medical care. Cars. Vacations. And
hammers and nails in the huge DIY ( do-it-yourself) industry: One (rare)
female DIY-chain exec remarked to me about her male collegues amazement
that 60% of their customers were women. . . . . Women are where the real
bucks are. Now close to 8 million women own enterprises in America, up
from about 400,000 in 1970. They employ about 18.5 million of us . . . 40%
more than old Forbes 500 industrials. About 22% of working wives outearn
their hubbies, and women constitute about half the population of those with
$ 500,000 or more in net worth.
Given womens great strides in the workplace, especially in nontraditional jobs, traditional
household purchasing patterns are gradually changing. Shifts in social values regarding
the division of domestic labor have also weakened such standard conceptions as women
buy all the household goods. Recent research has shown that although traditional
buying patterns still hold, baby boomer husbands and wives are more willing to shop
jointly for products traditionally thought to be under the separate control of one sposeor
the other. Hence, convenience-goods marketers are making mistake if they think of
women as the main or only purchasers or their products. Similarly, marketers of products
traditionally purchased by men may need to start thinking of women as possible
purchasers.
This is already happining in the car business :
l Cadillac. Women now make up 34 percent of the luxury car market, and
automakers are paying attention. Male car designers at Cadillac are going about
their work with paper clips on their fingers to simulate what it feels like to operate
buttons, konbs, and other interior features with longer fingernails. The Cadillac
Catera features an air-conditioned glove box to preserve such items as lipstick
and film. Under the hood, yellow marking highlight where fluid fills go.
Roles and Statuses
A person participates in many groupsfamily, clubs, organizations. The persons position
in each group can be defined in terms of role and status. A role consists of the activities
that a person is expected to perform. Each role carries a status. A Supreme Court
justice has more status than a sales manager, and a sales manager has more status than
an office clerk. People choose products that communicate their role and status in society.
Thus company presidents often drive Mercedes, wear expensive suits, and drink Chivas
Ragal scotch. Marketers are aware of the status symbol potential of products and
brands.
Personal Factors
A buyers decisions are also influenced by personal characteristics. These include the
buyers age and stage in the life cycle, occupation, economic circumstances, lifestyle,
and personality and self-concept.
Age and Stage in the Life Cycle
People buy different goods and service over a lifetime. They eat baby food in the early
years, most foods in the growing and mature years, and special diets in the later years.
Taste in clothes, furniture, and recreation is also age related.
Consumption is shaped by the family life cycle. Nine stages of the family life cycle are
listed in Table 5.2. along with the financial situation and typical product interests of
each group. Marketers often choose life-cycle groups as their target market. Yet target
households are not always family based: There are also single households, gay households,
and cohabitor households.
Some recent work has identified psychological life-cycle stages. Adults experience
certain passages or transformations as they go through life. Marketers pay close
attention to changing life circumstancesdivorce, widowhood, remarriageand their
effect on consumption behavior.
Table 5.2: Stage in Family Life Cycle Buying or Behavioral Pattern
1. Bachelor stage; young, single, Few financial burdens. Fashion leaders. Recreation
not living at home. oriented. Buy : basic home equipment, furniture,
cars, equipment for the mating game; vacations.
2. Newly married couples: young, Highest purchase rate and highest average purchase
no children. of durables : cars, appliances, furniture, vacations.
3. Full nest I: youngest child under six Home purchasing at peak. Liquid assest low.
Interested in new products, advertised products.
Buy: washers, dryers, TV, baby food, chest rubs and
cough medicines, vitamins, dolls, wagons, sleds,
skates.
4. Full nest II: youngest child six or over. Financial position better. Less influenced by
advertising. Buy larger-size packages, multiple-unit
deals. Buy : many foods, cleaning materials, bicycles,
music lessons, pianos.
5. Full nest III: older married couples Financial position still better. Some children get jobs.
with dependent children Hard to influence with advertising. High average
purchase of durables: new, more tasteful
furniture, auto travel, unnecessary appliances, boats,
dental services, magazines.
6. Empty nest I: older married couples, Home ownership at peak. Most satisfied with
no children living with them, head financial position and money saved. Interested in
of house-hold in labour force. travel, recreation, self-education. Make gifts
and contributions. Not interested in new products.
Buy : vacations, luxuries, home improvements.
7. Empty nest II: older married No Drastic cut in income. Keep home. Buy: medical
children living at home, head of appliances medical-care products.
household retired
8. Solitary survivor, in labour force. Income still good but likely to sell home.
9. Solitary survivor, retired. Same medical and product needs as other retired
group; drastic cut in income. Special need for
attention, affection, and security.
Occupation and Economic Circumstances
Occupation also influences a persons consumption pattern. A blue-collar worker will
buy work clothes, work shoes, and lunchboxes. A company president will buy expensive
suits, air travel, country club membership, and a large sailboat. Marketers try to identify
the occupational groups that have above-average interest in their product and services.
A company can even specialize its products for certain occupational groups: Computer
software companies design different products for brand managers, engineers, lawyers,
and physicians.
Product choice is greatly affected by economic circumstances: spendable income (level,
stability, and time pattern), savings and assets (including the percentage that is liquid),
debts, borrowing power, and attitude toward spending versus saving. Marketers of
income-sensitive goods pay constant attention to trends in personal income savings,
and interest rates. If economic indicators point to a recession, marketers can take
steps to redesign, reposition, and reprice their products so they continue to offer value
to target customers.
Lifestyle
People from the same subculture, social class, and occupation may lead quite different
lifestyles.
l A lifestyle is the persons pattern of living in the world as expressed in activities,
interests, and opinions. Lifestyle portrays the whole person interacting with his
or her environment.
Marketers search for relationships between their products and lifestyle groups. For
example, a computer manufacturer might find that most computer buyers are
achievement-oriented. The marketer may then aim the brand more clearly at the achiever
lifestyle.
Psychographics is the science of measuring and categorizing consumer lifestyles.
One of the most popular classifications based on psychographic measurements is the
VALS 2 framework. SRI Internationals Values and Lifestyles (VALS) framework has
been the only commercially available psychographic segmentation system to gain
widespread acceptance. The VALS2 system is continually updated to serve the business
world better. VALS 2 classifies all U.S. adults into 8 group based on psychological
attributes. The segmentation system is based on responses to a questionnaire featuring
5 demographics and 42 attitudinal questions as well as questions about use of on-line
services and Web sites.
The VALS 2 questionnaire asks respondents to agree or disagree with statements such
as I like my life to be pretty much the same from week to week, I often crave
excitement, and I would rather make something than buy it.
The major tendencies of the four groups with greater resources are:
l Actualizers : Successful, sophisticated, active, take-charge people. Purchases
often reflect cultivated tastes for relatively upscale, niche-oriented products.
l Fulfilleds : Mature, satisfied, comfortable, reflective. Favor durability, functionality,
and value in products.
l Achievers : Successful, career-and work-oriented. Favor established, prestige
products that demonstrate success to their peers.
l Experiencers : Young vital, enthusiastic, impulsive and rebellious. Spend a
comparatively high proportion of their income on clothing, fast food, music, movies,
and video.
The major tendencies of the four groups with fewer resources are :
l Believers : Conservative, conventional, and traditional. Favor familiar products
and established brands.
l Strivers : Uncertain, insecure, approval-seeking, resource constrained. Favor stylish
products that emulate the purchases of those with greater material wealth.
l Makers : Practical, self-sufficient, traditional, family-oriented. Favor only products
with a practical or functional purpose such as tools, utility vehicles, fishing equipment.
l Strugglers : Elderly, resigned, passive, concerned, resource constrained. Cautious
consumers who are loyal to favourite brands.
Although psychographics continues to be a valid and valued methodology for many
marketers, it may become less valid in the information economy. Social scientists are
realizing that old tools for predicting consumer behavior dont always work when it
comes to use of the Internet or on-line services and purchases of technology products.
Lifestyle segmentation schemes are by no means universal. McCann-Erickson London,
for example, identified the following British lifestyle: Avant-Gardians (interested in
Change); Pontificators (traditionalists, very British); Chameleons (follow the crowd);
and Sleepwalkers (contented underachievers). In 1992 the advertising agency D Arcy,
Masius, Benton & Bowles published The Russian Consumer: A New Perspective and
a Marketing Approach, which revealed five categories of Russian consumers: Kuptsi
(merchants), Cossacks, Students, Business Executives, and Russian Souls.
Cossacks are characterized as ambitious, independent, and status seeking, whereas
Russian Souls are passive, fearful of choices, and hopeful. Cossacks would drive a
BMW, smoke Dunhill cigarettes, and drink Remy Martin: Russian Souls would drive a
Lada, smoke Marlboros, and drink Smirnoff.
Table 5.3: Selected Marketing Opportunities of Consumer Lifestyles
Lifestyle Category Marketing Opportunities in Appealing to the Lifestyle
Family values Family-oriented goods and services
Educational devices and toys
Traditional family events
Wholesome entertainment
Voluntary Goods and services with quality, durability,
simplicity and simplicity
Environmentally safe products
Energy-efficient products
Discount-oriented retailing
Getting by Well-known brands and good buys (value)
Video rentals and other inexpensive entertainment
Do-it-yourself projects such as knock-down furniture
Inexpensive child care
Me generation Individuality in purchases
Luxury goods and services
Nutritional themes
Exercise-and education-related goods and services.
Blurring of gender Unisex goods, services, and stores
roles Couples-oriented advertising
Child-care services
Less male and female stereotyping
Poverty of time Internet and phone sales
Service firms with accurate customer appointments
Labor-saving devices
One-stop shopping
Component Situational purchases
lifestyle Less social class stereotyping
Multiple advertising themes
Market niching
Lifestyles of Computer Specialists.
How Tech Customers Stack UP
CAREER FAMILY ENTERTAINMENT
FAST FORWARDS NEW AGE NURTURERS MOUSE POTATOES
These consumers are the Also big spenders, but focused They like the on-line biggest
spenders, and theyre early on technology for home uses, for entertainment and are
adopters of new technology such as a family PC. willing to spend for the
for home, office, and latest in technotainment.
personal use.
TECHNO-STRIVERS DIGITAL HOPEFULS GADGET-GRABBERS
Use technology from cell Families with a limited budget They also favor on-line
phoned and pagers to on-line but still interested in new entertainment but have
services primarily to gain a technology. Good candidates less cash to spend on it.
career edge. for under-$1,000 PC.
HAND-SHAKERS TRADITIONALISTS MEDIA JUNKIES
Older consumerstypically Willing to use technology Seek entertainment and
managerswho dont touch but slow to upgrade. Not cant find much of it
their computers at work. convinced that upgrades on-line. Prefer TV and
They leave that to younger and other add-ons are other older media.
assistants. worth paying for.
SIDELINED CITIZENS (not interested in technology)
Personality and Self-Concept
Each person has a distinct personality that influences behavior.
By personality, we mean distinguishing psychological characteristics that lead to
relatively consistent and enduring responses to environment.
Personality is usually described in terms of such traits as self-confidence, dominance,
autonomy, defensiveness, and adaptability. Personality can be a useful variable in
analyzing consumer behavior, provided that personality types can be classified accurately
and that strong correlations exist between certain personality types and product or
brand choices. For example, a computer company might discover that many prospects
show high, self confidence, dominance and autonomy. This suggest designing computer
advertisements to appeal to these traits.
Related to personality is self-concept (or self-image). Marketers try to develop brand
images that match the target markets self-image. It is possible that a persons actual
self-concept (how she views herself) differs from her ideal self-concept (how she
would like to view herself) differs from her other-self-concept (how she thinks others
see her).
Which self will she try to satisfy in making a purchase? Because it is difficult to answer
this question, self-concept theory has had a mixed record of success in predicting
consumer responses to brand images.
Psychological Factors
A persons buying choices are influenced by four major psychlogical factorsmotivation,
perception, learning, and beliefs and attitudes.
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Motivation
A person has many needs at any given time. Some needs are biogenic; they arise
from physiological states of tension such as hunger, thirst, discomfort. Other needs are
psychogenic, they arise from psychological states of tension such as the need for
recognition, esteem, or belonging. A need becomes a motive when it is aroused to a
sufficient level of intensity. A motive is a need that is sufficiently pressing to drive the
person to act.
Motives Marketing Actions That Motivate
Hunger reduction Television and radio ads for fast-food restaurants
Safety Smoke detector demonstrations in stores
Sociability Perfume ads showing social success due to products
Achievement Use of consumer endorsements in ads specifying how much
knowledge can be gained from an encyclopedia
Economy Newspaper coupons advertising sales
Social responsibility Package labels that emphasize how easy it is to recycle
products
Each person has distinct motives for purchases, and these change by situation and over
time. Consumers often combine economic (price, durability) and emotional (social
acceptance, self-esteem) motives when making purchases.
Psychologists have developed theories of human motivation. Three of the best known
the theories of Sigmund Freud, Abraham Maslow, and Frederik Herzberg carry quite
different implications for consumer analysis and marketing strategy.
Freuds Theory. Sigmund Freud assumed that the psychological forces shaping peoples
behavior are largely unconscious, and that a person cannot fully understand his or her
own motivations. A technique called laddering can be used to trace a persons
motivations from the stated instrumental ones to the more terminal ones. Then the
marketer can decide at what level to develop the message and appeal.
When a person examines specific brands, he or she will react not only to their stated
capabilities but also to other, less conscious cues. Shape, size, weight, material, colour,
and brand name can all trigger certain associations and emotions.
Motivation researchers often collect in-depth interviews with a few dozen consumers
to uncover deeper motives triggered by a product. They use various projective
techniques such as word association, sentence completion, picture interpretation,
and role playing.
More recent research holds that each product is capable of arousing a unique set of
motives in consumers. For example, whisky can attract someone who seeks social
relaxation, status, or fun. Therefore, different whisky brands have specialized in one of
these three different appeals. Jan Callebaut calls this approach motivational positioning.
Maslows Theory. Abraham Maslow sought to explain why people are driven by
particular needs at particular times. Why does one person spend considerable time and
energy on personal safety and another on pursuing the high opinion of others? Maslows
answer is that human needs are arranged in a hierarchy, from the most pressing to the
least pressing . In their order of importance, they are physiological needs, safety needs,
social needs, esteem needs, and self-actualization needs (Figure5.2). People will try to
satisfy their most important needs first. When a person succeeds in satisfying an
important need, that need will cease being a current motivator, and the person will try to
satisfy the next-most-important need. For example, a starving man (need 1) will not
take an interest in the latest happenings in the art world (need 5), nor in how he is
viewed by others (need 3 or 4), not even in whether he is breathing clean air (need 2)
But when he has enough food and water, the next-most-important need will become
salient.
Figure 5.2: Maslows Hierarchy of Needs
Maslows theory helps marketers understand how various products fit into the plans,
goals, and lives of consumers.
Herzbergs Theory. Frederick Herzberg developed a two-factor theory that
distinguishes dissatisfiers (factors that cause dissatisfaction) and satisfiers (factors that
cause satisfaction). The absence of dissatisfiers is not enough; satisfiers must be actively
present to motivate a purchase. For example, a computer that does not come with a
warranty would be a dissatisfier. Yet the presence of a product warranty would not act
as a satisfier or motivator of a purchase, because it is not a source of intrinsic satisfaction
with the computer. Ease of use would be a satisfier.
Herzbergs theory has two implications. First, sellers should do their best to avoid
dissatisfiers (for example, a poor training manual or a poor service policy). Although
these things will not sell a product, they might easily unsell it. Second, the manufacturer
should identify the major satisfiers or motivators of purchase in the market and then
supply them. These satisfiers will make the major difference as to which brand the
customer buys.
Perception
A motivated person is ready to act. How the motivated person actually acts is influenced
by his or her perception of the situation.
l Perception is the process by which an individual selects, organizes and interprets
information inputs to create a meaningful picture of the world.
Self-
actualization
needs
(self-development
and realization)
Esteem needs
(self-esteem, recognition, status)
Social needs
(sense of belonging, love)
Safety needs
(security, protection)
Physiological needs
(food, water, shelter)

Perception depends not only on the physical stimuli but also on the stimulis relation to
the surrounding field and on conditions within the individual.
The key word in the definition of perception is individual. One person might perceive a
fast-talking salesperson as aggressive and insincere; another, as intelligent and helpful.
People can emerge with different perceptions of the same object because of three
perceptual processes: selective attention, selective distortion, and selective retention.
Selective Attention. People are exposed to a tremendous amount of daily stimuli:
The average person may be exposed to over 1,500 ads a day. Because a person cannot
possibly attend to all of these most stimuli will be screened outa process called selective
attention. Selective attention means that marketers have to work hard to attract
consumers notice. The real challenge is to explain which stimuli people will notice.
Here are some findings :
n People are more likely to notice stimuli that relate to a current need. A person
who is motivated to buy a computer will notice computer ads; he or she will
probably not notice stereo-equipment ads.
n
People are more likely to notice stimuli that they anticipate. You are more
likely to notice computers than radios in a computer store because you do not
expect the store to carry radios.
n People are more likely to notice stimuli whose deviations are large in relation
to the normal size of the stimuli. You are more likely to notice an ad offering Rs.
100/- off the list price of a shirt than one offering Rs. 5/- off.
Selective Distortion. Even noticed stimuli do not always come across in the way the
senders intended. Selective distortion is the tendency to twist information into personal
meanings and interpret information in a way that will fit our preconceptions.
Unfortunately, there is not much that marketers can do about selective distortion.
Selective Retention. People will forget much that they learn but will tend to retain
information that supports their attitudes and beliefs. Because of selective retention,
we are likely to remember good points mentioned about a product we like and forget
good points mentioned about competing products. Selective retention explains why
marketers use drama and repetition in sending messages to their target market.
Learning
When people act, they learn.
l Learning involves changes in an individuals behavior arising from experience.
Most human behavior is learned. Learning theorists believe that learning is produced
through the interplay of drives, stimuli, cues, responses, and reinforcement.
A drive is a strong internal stimulus impelling action. Cues are minor stimuli that determine
when, where, and how a person responds.
Suppose you buy an IBM computer. If your experience is rewarding, your response to
computers and IBM will be positively reinforced. Later on, when you want to buy a
printer, you may assume that because IBM makes good computers, IBM also makes
good printers. In other words you generalize your response to similar stimuli. A
countertendency to generalization is discrimination. Discrimination means that the person
has learned to recognize differences in sets of similar stimuli and can adjust responses
accordingly.
Learning theory teaches marketers that they can build up demand for a product by
associating it with strong drives, using motivating cues, and providing positive
reinforcement. A new company can enter the market by appealing to the same drives
that competitors use and providing similar cue configurations because buyers are more
likely to transfer loyalty to similar brands (generalization). Or the company might design
its brand to appeal to a different set of drives and offer strong cue inducements to
switch (discrimination).
Beliefs and Attitudes
Through doing and learning, people acquire beliefs and attitudes. These in turn influence
buying behavior.
l A belief is descriptive thought that a person holds about something.
Beliefs may be based on knowledge, opinion, or faith. They may or may not carry an
emotional charge. Of course, manufacturers are very interested in the beliefs people
carry in their heads about their products and services. These beliefs make up product
and brand images, and people act on their images. If some beliefs are wrong and inhibit
purchase, the manufacturer will want to launch a campaign to correct these beliefs.
Particularly important to global marketers is the fact that buyers often hold distinct
belief about brands or products based on their country of origin. Several country-of-
origin studies have found the following:
l The impact of country of origin varies with the type of product. Consumers would
want to know where a car was made but not where the lubricating oil came from.
l Certain countries enjoy a reputation for certain goods: Japan for automobiles and
consumer electronics; the United States for high-tech innovations, soft drinks,
toys, cigarettes, and jeans; and France for wine, perfume, and luxury goods.
l Sometimes the country-of-origin perception can extend beyond certain products
and encompass an entire countrys products. In a recent study, Chinese consumers
in Hong Kong perceived American products as prestigious, Japanese products as
innovative, and Chinese products as cheap.
l The more favorable a countrys image, the more prominently the Made in. . . .
label should be displayed in promoting the brand.
l Attitudes toward country of origin can change over time. Japan had a poor
quality image before World War II.
A company has several options when its products are competitively priced but their
place of origin turns off consumers. The company can consider co-production with a
foreign company that has a better name: South Korea could make a fine leather jacket
that it sends to Italy for finishing. Or the company can adopt a strategy to achieve
world-class quality in the local industry, as is the case with Belgian chocolates, Polish
ham, and Colombian coffee.
Finally, the company can hire a well-known celebrity to endorse the product. Nike has
had a great deal of success using basketball star Michael Jordan to promote its footwear
in Europe.
Just as important as beliefs are attitudes.
n An attitude is a persons enduring favorable or unfavorable evaluations, emotional
feelings, and action tendencies toward some object or idea.
People have attitudes toward almost everything: religion, politics, clothes, music, food.
Attitudes put them into a frame of mind of liking or disliking an object, moving toward or
away from it. Attitudes lead people to behave in a fairly consistent way toward similar
object. People do not have to interpret and react to every object in a fresh way. Because
attitudes economize on energy and thought, they are very difficult to change. A persons
attitudes settle into a consistent pattern : To change a single attitude may require major
adjustments in other attitudes.
Thus a company would be well advised to fit its product into existing attitudes rather
than to try to change peoples attitudes. Of course, there are exceptions where the cost
of trying to change attitudes might pay off.
Factors Affecting the Final Consumers Decision Process
Demographic, social , and psychological factors affect the way final consumers make
choices and can help a firm understand how people use the decision process. For
example, an affluent consumer would move through the process more quickly than a
middle income one due to less financial risk. An insecure consumer would spend more
time making a decision than a secure one.
By knowing how these factors influence decisions, a firm can fine-tune its marketing
strategies to cater to the target market and its purchase behavior, and answer these
questions: Why do two or more people use the decision process in the same way? Why
do two or more people use it differently?
Types of Decision Processes
Each time a person buys good or service, donates to a charity, and so on, he or she uses
the decision process. This may be done subconsciously, with the person not aware of
using it. Some situations let a person move through the process quickly and de-emphasize
or skip steps; others require a thorough use of each step. A consumer may use extended,
limited, or routine decision makingbased on the search, level of experience, frequency
of purchase, amount of perceived risk, and time pressure. (See Figure 5.3)
Figure 5.3: The Three Types of Final Consumer Decision Processes
Fig : 5.1
Degree of
Search
Level of
Prior
Experience
Frequency
of Purchase
Amount of
Perceived
Risk
Time
Pressure
Extended Consumer
Decision Making
Limited Consumer
Decision Making
Routine Consumer
Decision Making
Very High Moderate Very Low
Extended consumer decision making occurs when a person fully uses the decision
process. Much effort is spent on information search and evaluation of alternatives for
expensive, complex items with which a person has little or no experience. Purchases
are made infrequently. Perceived risk is high, and the purchase is important. A person
has time available to make a choice. Purchase delays often occur. Demographic, social,
and psychological factors have their greatest impact. Extended decision making is often
involved in picking a college, a house, a first car, or a location for a wedding.
Limited consumer decision making occurs when a person uses every step in the
purchase process but does not spend a great deal of time on some of them. The person
has previously bought a given good or service, but makes fresh decisions when it comes
under current purchase considerationdue to the relative infrequency of purchase, the
introduction of new models, or an interest in variety. Preceived risk is moderate and a
person is willing to spend some time shopping. The thoroughness with which the process
is used depends on the amount of prior experience, the importance of the purchase, and
the time pressure facing the consumer. Emphasis is on evaluating a list of known choice,
although an information search may be done. Factors affecting the decision process
have some impact. A second car, clothing, gift, home furnishings, and an annual vacation
typically need limited decision making.
Routine consumer decision making occurs when a person buys out of habit and
skips steps in the process. He or she spends little time shopping and often rebuys the
same brands (or those bought before). In this category are items with which a person
has much experience. They are bought regularly, have little or no perceived risk, and
are rather low in price. Once a person realizes a good or service is depleted, a repurchase
is made. Time pressure is high. Information search, evaluation, and post-purchase
behavior are normally omitted, as long as a person is satisfied. Impulse purchases,
where consumers have not thought of particular items until seeing displays for them,
are common. Factors affecting the process have little impact because problem awareness
usually leads to a purchase. Examples of items routinely purchased are the daily paper,
a haircut by a regular stylist, and weekly grocery items.
There are several differences between consumers in industrialized nations and those in
less-developed and developing ones. In general, consumers in less-developed and
developing countries.
Are exposed to fewer commercial and noncommercial cues.
Have access to less information.
Have fewer goods and services from which to choose.
Are more apt to buy a second choice if the first one is not available.
Have fewer places of purchase and may have to wait on long lines.
Are more apt to find that stores are out of stock.
Have less purchase experience for many kinds of good and services.
Are less educated and have lower incomes.
Are more apt to rebuy items with which they are only moderately satisfied (due to a
lack of choices).
Table 5.4: High-Involvement View of Active Consumers Versus Low-Involvement
View of Passive Consumers
Traditional High-Involvement Newer Low-Involvement
View of Active Consumers View of Passive Consumers
1. Consumers are information processors. 1. Consumers learn information at random.
2. Consumers are information seekers. 2. Consumers are information gatherers.
3. Consumers are an active audience for ads 3. Consumers are a passive audience for
and the effect of ads on them is weak. ads and the effect of ads on them is strong.
4. Consumers evaluate brands before buying. 4. Consumers buy first. If they do evaluate
brands, it is done after the purchase.
5. Consumers seek to maximize satisfaction. 5. Consumers seek an acceptable level of
They compare brands to see which provide satisfaction. They choose the brand least
the most benefits and buy based on apt to have problems and buy based
detailed comparisons. on few factors. Familiarity is key.
6. Lifestyle characteristics are related to consumer 6. Lifestyle characteristics are not related to
behavior because the product is closely tied to consumer behavior because the product is
a consumers identity and belief system. not closely tied to a consumers identity
and belief system.
7. Reference groups influence behavior 7. Reference groups have little effect on
because of the products importance to behavior because the product is unlikely
group norms. to be related to group norms.
Because many consumersin both industrialized nations and less-developed nations
want to reduce shopping time, the use of complex decision making, and risk, most
purchases are made by routine or limited decision making. Consumers often employ
low-involvement purchasing and/or brand loyalty.
Low-involvement purchasing occurs with unimportant products.
With low-involvement purchasing, a consumer minimizes the time and effort expended
in both making decisions about and shopping for those goods and services he or she
views as unimportant. Included are those situations where the consumer simply does
not care and is not concerned about brands or choices and makes the decision in the
most cognitively miserly manner possible. Most likely, low involvement is situation-
based, and the degree of importance and involvement may vary with the individual and
with the situation. In these situations, consumers feel little perceived risk, are passive
about getting information, act fast, and may assess products after (rather than before)
buying.
Firms can adapt to low-involvement purchasing by using repetitive ads to create
awareness and familiarity, stressing the practical nature of goods and services, having
informed salespeople, setting low prices, using attractive in-store displays, selling in all
types of outlets, and offering coupons and free samples. Table 5.4. compares the
traditional high-involvement view of consumer behavior with the newer low-involvement
view.
Brand loyalty involves consistent repurchases and preferences for specific brands.
After a consumer tries one or more brands of a good or service, brand loyaltythe
consistent repurchase of and preference toward a particular brandmay take place.
With it, a person can reduce time, thought, and risk whenever buying a given good or
service. Brand loyalty can occur for simple items such as gasoline (due to low-
involvement purchasing) and for complex items such as autos (to minimize the perceived
risk of switching brands).
According to Americas Research Group, at least 40 percent of U.S. adults say they
are very loyal or loyal to brands in these categories: autos, bath soap, coffee,
gasoline, hair products, insurance, major appliances, mayonnaise, soft drinks, and TVs.
On the other hand, 30 percent or less are very loyal or loyal to jewellery, phone
equipment, and sports equipment.
The Buying Decision Process
Marketers have to go beyond the various influences on buyers and develop an
understanding of how consumers actually make their buying decisions. Specifically,
marketers must identify who makes the buying decision, the types of buying decisions,
and the steps in the buying process.
Buying Roles
It is easy to identify the buyer for many products. In the United States, men normally
choose their shaving equipment, and women choose their personal products. But even
here marketers must be careful in making their targeting decisions, because buying
roles change. ICI, the giant British chemical company, discovered to its surprise that
women made 60 percent of the decisions on the brand of household paint; ICI therefore
decided to advertise its DeLux brand to women.
We can distinguish five roles people might play in a buying decision :
l Initiator: A person who first suggests the idea of buying the product or service
l Influencer: A person whose view or advice influences the decision
l Decider: A person who decides on any component of a buying decision: whether
to buy, what to buy, how to buy, or where to buy
l Buyer: The person who makes the actual purchase
l User: A person who consumes or uses the product or service
Buying Behavior
Consumer decision making varies with the type of buying decision. The decisions to
buy toothpaste, a tennis racket, a personal computer, and a new car are all very different.
Complex and expensive purchases are likely to involve more buyer deliberation and
more participants. Assael distinguished four types of consumer buying behavior based
on the degree of buyer involvement and the degree of differences among brands
(Table 5.5.)
Complex Buying Behavior
Complex buying behavior involves a three-step process. First, the buyer develops beliefs
about the product. Second, he or she develops attitudes about the product. Third, he or
she makes a thoughtful choice. Consumers engage in complex buying behavior when
they are highly involved in a purchase and aware of significant differences among
brands. This is usually the case when the product is expensive, bought infrequently,
risky, and highly self-expressive. Typically the consumer does not know much about
the product category. For example, a person buying a personal computer may not know
what attributes to look for. Many product features carry no meaning unless the buyer
has done some research.
The marketer of a high-involvement product must understand consumers information-
gathering and evaluation behavior. The marketer needs to develop strategies that assist
the buyer in learning about the products attributes and their relative importance, and
that call attention to the high standing of the companys brand on the more important
attributes. The marketer needs to differentiate store sales personnel and the buyers
acquaintances to influence the final brand choice.
Dissonance-Reducing Buyer Behavior
Sometimes the consumer is highly involved in a purchase but sees little difference in
brands. The high involvement is based on the fact that the purchase is expensive, in
frequent, and risky. In this case, the buyer will shop around to learn what is available
but will buy fairly quickly, perhaps responding primarily to a good price or to purchase
convenience. For example, carpet buying is a high-involvement decision because
carpeting is expensive and self-expressive, yet the buyer may consider most carpet
brands in a given price range to be the same.
After the purchase, the consumer might experience dissonance that stems from noticing
certain disquieting features or hearing favorable things about other brands. The consumer
will be alert to information that supports his or her decision. In this example, the consumer
first acted, then acquired new beliefs, then ended up with a set of attitudes. Marketing
communications should supply beliefs and evaluations that help the consumer feel good
about his or her brand choice.
Habitual Buying Behavior
Many products are bought under conditions of low involvement and the absence of
significant brand differences. Consider salt. Consumers have little involvement in this
product category. They go to the store and reach for the brand. If they keep reaching
for the same brand, it is out of habit, not strong brand loyalty. There is good evidence
that consumers have low involvement with most low-cost, frequently purchased products.
Table 5.5: Four Types of Buying Behavior
High Involvement Low Involvement
Significant Differences Complex buying Variety-seeking
between Brands behavior buying behavior
Few Differences Dissonance-reducing Habitual buying
between Brands buying behavior behavior
With these products, consumer behavior does not pass through the normal sequence of
belief, attitude, and behavior. Consumers do not search extensively for information,
evaluate characteristics, and make a decision on which brand to buy. Instead, they are
passive recipients of information in television or print ads. Ad repetition creates brand
familiarity rather than brand conviction. After purchase, they may not even evaluate
the choice because they are not highly involved with the product. For low-involvement
products, the buying process begins with brand beliefs formed by passive learning and
is followed by purchase behavior, which may be followed by evaluation.
Marketers of such products find it effective to use price sales promotion to stimulate
product trial. Television advertising is more effective than print because it is a low-
involvement medium that is suitable for passive learning.
Marketers use four techniques to try to convert a low-involvement product into one of
higher involvement. First, they can link the product to some involving issues as when
Crest toothpaste is linked to avoiding cavities. Second, they can link the product to
some involving personal situationfor instance, by advertising a coffee brand early in
the morning when the consumer wants to shake off sleepiness. Third, they might design
advertising to trigger strong emotions related to personal values or ego defense Fourth,
they might add an important feature (for example, fortifying a plain drink with vitamins).
These strategies at best raise consumer involvement from a low to a moderate level;
they do not propel the consumer into highly involved buying behavior.
Variety-Seeking Buying Behavior
Some buying situations are characterized by low involvement but significant brand
differences. Here consumers often do a lot of brand switching. Think about cookies.
The consumer has some beliefs about cookies, chooses a brand of cookies without
much evaluation, and evaluates the product during consumption. Next time, the consumer
may reach for another brand out of a wish for a different taste. Brand switching occurs
for the sake of variety rather than dissatisfaction.
The market leader and the minor brands in this product category have different marketing
strategies. The market leader will try to encourage habitual buying behavior by dominating
the shelf space, avoiding out-of-stock conditions, and sponsoring frequent reminder
advertising. Challenger firms will encourage variety seeking by offering lower prices,
deals, coupons, free samples, and advertising that presents reason for trying something
new.
The Stages of the Buying Decision Process
Smart companies research the buying decision process involved in their product category.
They ask consumers when they first became acquainted with the product category and
brands, what their brand beliefs are, how involved they are with the product, how they
make their brand choices, and how satisfied they are after purchase.
How can marketers learn about the stages in the buying process for their product.
They can think about how they themselves would act (introspective method). They
can interview a small number of recent purchasers, asking them to recall the events
leading to their purchase (retrospective method). They can locate consumers who
plan to buy the product and ask them to think out loud about going through the buying
process (prospective method). Or they can ask consumers to describe the ideal way
to buy the product (prescriptive method). Each method yields a picture of the steps in
the consumer buying process.
Figure 5.4 shows a stage model of the typical buying process. The consumer passes
through five stages: problem recognition, information search, evaluation of alternatives,
purchase decision, and postpurchase behavior. Clearly the buying process starts long
before the actual purchase and has consequences long afterward.
The model in Figure 5.4 implies that consumers pass sequentially through all five stages
in buying a product. But this is not the case: Consumers may skip or reverse some
stages. A woman buying her regular brand of toothpaste goes directly from the
need for toothpaste to the purchase decision, skipping information search and evaluation.
However, we will use the model in Figure 5.4 because it captures the full range of
considerations that arise when a consumer faces a highly involving new purchase.
Figure 5.4: Five-Stage Model of the Consumer buying Process
Problem Recognition
The buying process starts when the buyer recognizes a problem or need. The need can
be triggered by internal or external stimuli. In the former case, one of the personss
normal needshunger, thirst, sexrises to a threshold level and becomes a drive. In
the latter case, a need is aroused by an external stimulus. A person passes a bakery
and sees freshly baked bread that stimulates her hunger; she admires a neighbours
new car; or she watches a television ad for a Malaysian vacation.
Marketers need to identify the circumstances that trigger a particular need. By gathering
information from a number of consumers, marketers can identify the most frequent
stimuli that spark an interest in a product category. They can then develop marketing
strategies that trigger consumer interest.
Information Search
An aroused consumer will be inclined to search for more information. We can distinguish
between two levels of arousal. The milder search state is called heightened attention.
At this level a person simply becomes more receptive to information about a product.
At the next level, the person may enter active information search: looking for reading
material, phoning friends, and visiting stores to learn about the product. Of key interest
to the marketer are the major information sources to which the consumer will turn and
the relative influence each will have on the subsequent purchase decision. Consumer
information sources fall into four groups :
l Personal sources: Family, friends, neighbors, acquaintances
l Commercial sources: Advertising, salespersons, dealers, packaging, displays
l Public sources: Mass media, consumer-rating organizations
l Experiential sources: Handling, examining, using the product
The relative amount and influence of these information sources vary with the product
category and the buyers characteristics. Generally speaking, the consumer receives
the most information about a product from commercial sourcesthat is, marketer-
dominated sources. But the most effective information comes from personal sources.
Each information source performs a different function in influencing the buying decision.
Commercial information normally performs an informing function, and personal sources
perform a legitimizing or evaluation function. For example, physicians often learn
of new drugs from commercial sources but turn to other doctors for evaluative
information.
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Product is a key element in the market offering. Marketing-mix planning begins with
formulating an offering to meet target customers needs or wants. The customer will
judge the offering by three basic elements : product features and quality, services mix
and quality, and price appropriateness (Figure 6.1.) All three elements must be meshed
into a competitively attractive offering.
The Product And the Product Mix
l A product is anything that can be offered to a market to satisfy a want or need.
Products that are marketed include physical goods, services, experiences, events,
persons, places, properties, organizations, informations and ideas.
Product Levels
In planning its market offering, the marketer needs to think through five levels of the
product (Figure 6.2.). Each level adds more customer value, and the five constitute a
customer value hierarchy. The most fundamental level is the core benefit : the
fundamental service or benefit that the customer is really buying. A hotel guest is
buying rest and sleep. The purchaser of a drill is buying holes. Marketers must
see themselves as benefit providers.
At the second level, the marketer has to turn the core benefit into a basic product.
Thus a hotel room includes a bed, bathroom, towels, desk, dresser, and closet.
Figure 6.1: Components of the Figure 6.2: Five Product Levels
Market Offering
At the third level, the marketer prepares an expected product, a set of attributes and
conditions buyers normally expect when they purchase this product. Hotel guests
expect a clean bed, fresh towels, working lamps, and a relative degree of quiet. Because
most hotels can meet this minimum expectation, the traveler normally will settle for
Chapter 6
Product Concept and Decisions
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Core
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Product Concept and Decisions 207
whichever hotel is most convenient or least expensive.
At the fourth level, the marketer prepares an augmented product that exceeds customer
expectations. A hotel can include a remote-control television set, fresh flowers, rapid
check-in, express checkout and fine dining and room service. Elmer Wheeler once
observed, Dont sell the steaksell the sizzle.
Todays competition essentially takes place at the product-augmentation level. (In less
developed countries, competition takes place mostly at the expected product level.)
Product augmentation leads the marketer to look at the users total consumption system
: the way the user performs the tasks of getting, using, fixing and disposing of the
product. According to Levitt :
The new competition is not between what companies produce in their factories,
but between what they add to their factory output in the form of packaging,
services, advertising, customer advice, financing, delivery arrangements,
warehousing and other things that people value.
Some things should be noted about product-augmentation strategy. First, each
augmentation adds cost. The marketer has to ask whether customers will pay enough
to cover the extra cost. Second, augmented benefits soon become expected benefits.
Todays hotel guests expect a remote-control television set and other amenities. This
means that competitors will have to search for still other features and benefits. Third,
as companies raise the price of their augmented product, some competitors can offer a
stripped-down version at a much lower price. Thus alongside the growth of fine
hotels like Four Seasons and Ritz Carlton we see the emergence of lower-cost hotels
and motels (Motel Six, Comfort Inn) catering to clients who simply want the basic
product.
At the fifth levels stands the potential product, which encompasses all the possible
agmentations and transformations the product might undergo in the future. Here is
where companies search for new ways to satisfy customers and distinguish their offer.
All-suite hotels where the guest occupies a set of rooms represent an innovative
transformation of the traditional hotel product.
Successful companies add benefits to their offering that not only satisfy customers but
also surprise and delight them. Delighting is a matter of exceeding expectations. Thus
the hotel guest finds candy on the pillow or a bowl of fruit or a video recorder with
optional videotapes. Ritz-Carlton hotels, for example, remember individual guests
preferences and prepare rooms with these preferences in mind.
Product Offer Can Range from the Generic to the Potential
At the beginning of this chapter, we made a simple definition of product as a need
satisfying entity. Now, after analysing the various components that actually build up
the product, we have a better idea of what a product means. A product has a personality
consisting of several componentsthe basic material, its associated features, the brand
name, the package and the labelling, the price range, the positioning, speciality of the
sale outlets, the quality of promotion and the corporate image and prestige. A product
that is finally offered in the market is a combination of all these elements.
In fact, the crucial task in product management lies in working out the best possible
alignment among the myriad factors mentioned above. The marketing man is constantly
at it, always engaged in enriching his product offer. In his attempt to satisfy the customer
and score over competition, he brings out refinement upon refinement on his basic
product offer, and takes the product to higher levels of evolution. Theodore Levitt
explains this idea beautifully in his HBR article : Marketing Success Through
Differentiation of Anything. According to Levitt, a product offer can be conceived at
four levels : the generic product, the expected product, the augmented product and the
potential product. To make this evolution easier to understand, we go by a six-level
approach, as shown in Chart 6.1
Chart 6.1: Product Offer can Range from the Generic to the Potential
l The generic product
l The branded product
l The differentiated product
l The customised product
l The augmented product
l The potential product
The Generic Product
The generic product is the unbranded and undifferentiated commodity like rice, bread,
flour, or cloth. Here, the product does not have an identity through a name and is not
linked to any one maker or owner.
The Branded Product
The branded product gets an identity through a name, Lalkila basmati rice, Modern
bread, and Annapurna atta are branded products.
The Differentiated Product
The differentiated product enjoys further distinction from other similar products/brands
in the market. The marketer endows his brand with some special attributes/qualities
and claims uniqueness for his offer. The differentiation claimed may be tangible, with
a distinction on ingredient, quality, utility or service. It may also be intangible or
psychological, highlighted by subtle sales appeals.
Maggi noodles, and Dettol soap are examples of differentiated products with tangible
differentiation. Maggi claims a tangible distinction over other brands of noodles. It is
ready in two minutes and involves very little cooking. It is available with different
taste makers for the vegetarian and the non-vegetarian users. The differentiation is
tangible and rests on the planks of convenience and variety. Among bath soaps, Dettol
is differentiated on the basis of its ability to provide total protection from germs.
The scope for differentiation is immense; and to win over cutomers, firms seek higher
levels of differentiation through customising and augmenting of the product.
The Customised Product
A product that is adapted to the requirements of the individual customer is a customised
product. Today, many products coming from the IT and telecom industries have large
degree of customisation built into them. For example, the telephone knows which
language a given user would like to use while calling a long-distance operator. It will
Product Concept and Decisions 209
also allow him to create a distinctive ring so that his best friend knows that he is calling.
And, it can also recognise his most frequently called numbers, not just by number, but
by name as well.
The Augmented Product
The augmented product is the result of voluntary improvements brought about by the
manufacturer in order to enhance the value of the product. The firm goes beyond all
expectations of the consumers. It finds out through market research how the value of
its product can be enhanced. Using the insights so gathered, the firm augments the
product by adding extra features and functions to it.
Examples of augmented products : Titan, added protective packing to its alarmclocks
and claimed, Here is a travel clock with a protective shutter. Available in 3 dial options
and 4 elegant colours. Aristocrat introduced suitcases with wheels. The wheel was an
extra facility, an augmentation to the luggage. Instead of lifting and carrying the suitcase,
the users could now pull it on its wheels. Hindustan Motors augmented its Ambassador
car and offered the Ambassador 1800 ISZ, incorporating into the car, the 1817 cc, 74
HP, Isuzu engine, 5 synchromeshed gears with an overdrive, power-assisted brakes,
progressive suspension, diaphragm clutch, a new dashboard and bucket seats. The
augmentations translated into faster pick-up, greater speed, sure stopping and greater
comfort.
Companies resorting to the product development route in their marketing strategy are
basically in the game of continuous augmentation of products.
The Potential Product
The potential product is tomorrows product, carrying all the improvement and finesse
that is possible under the given technological, economic and competitive conditions.
For example, today, a robot available for domestic help can be considered a potential
product. In actual practice, development of potential products is the forte of big
companies, since heavy resources are required for this task.
PRODUCT HIERARCHY
Each product is related to certain other products. The product hierarchy stretches
from basic needs to particular items that satisfy those needs. We can identify seven
levels of the product hierarchy (here for life insurance) :
1. Need family : The core need that underlies the existence of a product family.
Example : security.
2. Product family : All the product classes that can satisfy a core need with reasonable
effectiveness. Example : savings and income.
3. Product class : A group of products within the product family recognized as
having a certain functional coherence. Example : financial instruments.
4. Product line : A group of products within a product class that are closely related
because they perform a similar function, are sold to the same customer groups,
are marketed through the same channels, or fall within given price ranges.
Example : life insurance.
Branding, Packaging and Labeling 223
BrandingWhats in a Name?
According to legend, the practice of branding products originated when an ancient ruler
decided that products should bear some sort of symbol so that, if something should go
wrong, buyers and the authorities would know who was
to blame. Forced to identify their products with
themselves, the story goes, producers began to take
greater pride in their products and to make them better
than those of their competitors, thus reversing the
negative intent of the kings order. Whether the story is
true or not, it makes the point that branding serves many
purposes, both for the buyer and for the seller.
Branding helps buyers to determine which manufacturers products are to be avoided
and which are to be sought. Without branding, a buyer would have difficulty recognizing
products that have proved satisfactory in the past. Many consumers are not able to
analyze competing items strictly on the basis of physical characteristics. They rely,
therefore, on a brands or firms reputation as an assurance that the product being
purchased meets certain standards. For example, the computer chip marketers Intel
Inside stickers on personal computers offer consumers reassurance when they feel
confusion and anxiety about making a computer purchase.
Branding helps sellers to develop loyal customers and to show that the firm stands
behind what it offers. A brand that has earned a reputation for high quality may pave
the way for the introduction of new products. Part of the attraction of Kelloggs Honey
Crunch Corn Flakes, for example, is its connection with the original Kelloggs Corn
Flakes, a branded product with a long record of public acceptance.
In large measure, the free enterprise system, with its accent on letting the market
decide which firms will succeed and which fail, depends on branding. Even societies
that have tried to do away with branding, such as China, have found that citizens somehow
determine which products are good and which are bad, even if they have to use product
serial numbers or other bits of information to differentiate among products.
BRANDS AND TRADEMARKS
Despite the common practice of speaking of brands, brand names, and trademarks as
if all these terms meant the same thing, there are some technical differences among
them.
Brand : An identifying feature that distinguishes one product from another; more specifically, any
name, term, symbol, sign, or design or a unifying combination of these.
Brand name : The verbal part of a brandthe part that can be spoken or written.
Brand mark : A unique symbol that is part of a brand.
Logo : A brand name or company name written in a distinctive way; short for logotype.
Chapter 7
Branding, Packaging and Labeling
A brand that has earned a
reputation for high
quality may pave the way
for the introduction of
new products.
Brands: A brand is any name, term, symbol, sign, design, or unifying combination of
these. A brand name is the verbal part of the brand. For example, Lux, Usha and
Rediff.com are brands. When these words are spoken or written, they are brand
names. Many branded goods and services rely heavily on some symbol for
indentification. Asian Paints, makes considerable use of a boy named Gattu and
Microsoft Windows is represented by a window that materializes out of an expanding
pattern of rectangles floating to its left. Such unique symbols are referred to as brand
marks: A brand name or company name written in a distinctive wayfor example,
Coca-Cola written in white script letters on a red backgroundis called a logo, short
for logotype.
Perhaps the most distinctive skill of professional marketers is their ability to create,
maintain, protect, and enhance brands. Marketers say that branding is the art and
cornerstone of marketing. The American Marketing Association defines a brand as
follows :
l A brand is a name, term, sign, symbol, or design, or a combination of them, intended
to identify the goods or services of one seller or group of sellers and to differentiate
them from those of competitors.
In essence, a brand identifies the seller or maker. It can be a name, trademark, logo, or
other symbol. Under trademark law, the seller is granted exclusive right to the use of
the brand name in perpetuity. Brands differ from other assets such as patents and
copyrights, which have expiration dates.
A brand is essentially a sellers promise to deliver a specific set of features, benefits,
and services consistently to the buyers. The best brands convey a warranty of quality.
But a brand is an even more complex symbol. It can convey up to six levels of meaning:
1. Attributes: A brand brings to mind certain attributes. Mercedes suggests expensive,
well-built, well-engineered, durable, high-prestige automobiles.
2. Benefits: Attributes must be translated into functional and emotional benefits.
The attribute durable could translate into the functional benefit I wont have to
buy another car for several years. The attribute expensive translates into the
emotional benefit The car makes me feel important and admired.
3. Values: The brand also says something about the producers values. Mercedes
stands for high performance, safety, and prestige.
4. Culture: The brand may represent a certain culture. The Mercedes represents
German culture; organized, efficient, high quality.
5. Personality: The brand can project a certain personality. Mercedes may suggest
a no-nonsense boss (person), a reigning lion (animal), or an austere palace (object).
6. User: The brand suggests the kind of consumer who buys or uses the product.
We would expect to see a 55 year-old top executive behind the wheel of a
Mercedes, not a 20-year-old secretary.
If a company treats a brand only as a name, it misses the point. The branding challenge
is to develop a deep set of positive associations for the brand. Marketers must decide
at which level(s) to anchor the brands identity. One mistake would be to promote only
attributes. First, the buyer is not as interested in attributes as in benefits. Second,
competitors can easily copy attributes. Third, the current attributes may become less
desirable later.
Promoting the brand only on one benefit can also be risky. Suppose Mercedes touts its
main benefit as high performance. Then several competitive brands emerge with
high or higher performance. Or suppose car buyers start placing less importance on
high performance as compared to other benefits. Mercedes needs the freedom to
maneuver into a new benefit positioning.
The most enduring meanings of a brand are its values, culture, and personality. They
define the brands essence. The Mercedes stands for high technology, performance,
and success. Mercedes must project this in its brand strategy. Mercedes must resist
marketing an inexpensive car bearing the name; doing so would dilute the value and
personality Mercedes has built up over the years.
Trademark: A legally protected brand name or brand mark. Its owner has exclusive rights to its
use. Trademarks are registered with the U.S. Patent and Trademark Office.
Trademarks: A brand or brand name can be almost anything a marketer wants to be,
but it does not have any legal status. A trademark, on the other hand, is a legally
protected brand name or brand mark. The owners of trademarks have exclusive rights
to their use. Thus, the word trademark is a legally defined term. Either a brand name
is a registered trademark or it is not.
The registered trademark gives a marketer proprietary rights to exclusive use of a
symbol or name. The NBC peacock is a registered trademark. So is the name Coca-
Cola, the script style in which it is written, and the products distinctive bottle design.
Since the holder of a trademark has exclusive rights to use the trademarked name or
symbol, a certain amount of protection is provided to the trademark holder.
Pizza Hut had not changed its brand mark for many years. When the pizza restaurant
decided to update its brand mark, it realized the importance of capitalizing on its
unique red roof symbol. The new brand mark symbolically communicates the
casual and enjoyable eating experience provided at Pizza Hut. The vibrant green
and yellow colors are intended to reflect freshness and fun.
Service mark: A symbol that identifies a service. It distinguishes a service in the way a trade-mark
identifies a good.
Service Marks: Sevice marks provide the same identifying function for services that
trademarks provide for goods. Like brands, they can be legally protected by registration.
The NBC chimes and GMs Mr. Goodwrench are thus legally protected. Service
marks may also include slogans like Lets make things better.
Generic Names
Generic name: A brand name so commonly used that it is part of everyday language and is used to
describe a product class rather than a particular manufacturers product.
Some words are so obviously part of everyday language that no one should be permitted
to use them exclusively. These generic names describes products or items in terms
that are part of our standard vocabularyfor example, flower and food. Other words
and terms, such as nylon, kerosene, escalator, cellophane and formica, were originally
invented to name particular products but have become legally generic through common
usage. Therefore, the 3M Company can call its tape Scotch Brand cellophane tape but
can no longer claim that it is the one and only cellophane tape. In many instances, a
brand name become a generic term when a judge determines that a word, such as
formica, is in such common usage that the original formulator of the word can no
longer hold the right to it.
Rollerblade advertisements call attention to the fact that Rollerblade is a brand name
and it is technically incorrect to use rollerblading as a verb. Coca-Cola exerts every
effort to make certain that you do not get a Pepsi when you ask a waiter for a Coke.
Vaseline, Dalda, Frisbee and other commonly used namesnames that are in fact
employed to mean a generic product classmay one day be legally declared generic.
One clever marketer of waterproof, all-purpose sealing tape turned the generic issue
around. An executive at Manco recognized that most customers pronounced the generic
duct tape as duck tape. So the company registered the trademark Duck brand tape
and used a friendly yellow duck as its brand symbol. Today, it is the market leader for
this product.
What Makes a Good Brand Name ?
What constitutes a good brand name? Instant Ocean, a synthetic sea salt for use in
aquariums, has a good brand name. It is easy to remember. It is easy to say. It is
pronounceable, at least in English, in only one way. It has a positive connotation. And
it suggests what the product is supposed to do. Denim deodorant soap, Orange Crush
soda, and Hotshot cameras are also excellent names in that they associate the product
with an image that is meaningful to consumers. Brand names also are often useful in
reinforcing an overall product concept. Brands like Land O Lakes butter, LEggs,
Duracell, Moist and Easy, and Nature Fresh may communicate product attributes far
better than any other variable in the marketing mix.
Notice that brand names and symbols say something about the product. Jiffy cake mix
is quick. Ocean Freeze fish are fresh-frozen. Toast Em Pop-Ups tells both what they
are and how to cook them. Spic and Span, Dustbuster, and Beautyrest tell what to
expect from these products. But brand names also say something about the buyers for
whom the products are intended. Right Guard Xtreme Sport is a deodorant for active
young guys who try to realize their personal best in sports. Eve and Virginia Slims are
cigarette brand names that appeal to certain types of women.
A good brand name has some quality that makes it distinctive and easy to remember. It
sticks in buyers minds. Most brand names are short, easy to pronounce, and unique.
Exxon and Citgo, words coined by petroleum companies, are good brand names. In
contrast, Exxons failed office systems division offered products called Qwip. Qyz,
and Vydecnames that were unique but also something of a problem to pronounce.
Toys R Us employs backward Rs to conjure an image of children, as well as to make
the name unique. When the sign appeared on the first store, which opened in 1954,
many customers informed the manager that the R on the sign was backward. That told
the founder of the firm he had hit on a name that people noticed and remembered. In
fact, the R had been used instead of the word Are simply to shorten the stores name so
that bigger letters could be used on the first outlets sign, since local ordinances prohibited
enlarging the sign itself.
Importance of Branding
l Product identification is eased. A customer can order a product by name instead
of description.
l Customers are assured that a good or service has a certain level of quality and
that they will obtained comparable quality if the same brand is reordered.
l The firm responsible for the product is known. Unbranded items cannot be as
directly identified.
l Price comparisons are reduced when customers perceive distinct brands. This is
most likely if special attributes are linked to different brands.
l A firm can advertise (position) its products and associate each brand and its
characteristics in the buyers mind. This aids the consumer in forming a brand
image, which is the perception a person has of a particular brand.
l Branding helps segment markets by creating tailored images. By using two or
more brands, multiple market segments can be attracted.
l For socially-visible goods and services, a products prestige is enhanced via a
strong brand name.
l People feel less risk when buying a brand with which they are familiar and for
which they have a favourable attitude. This is why brand loyalty occurs.
l Cooperation from resellers is greater for well-known brands. A strong brand also
may let its producer exert more control in the distribution channel.
l A brand may help sell an entire line of products, such as Britannia Biscuits.
l A brand may help enter a new product category, like Sansung Mobile.
Suggests a
positiveimage
Is easy to
remeber
Invokes positive
association
or connotation
Reinforces
product
concept
Says something
about the user
Is easy to prononounce;
has mnemonic
quality; is short and
distinctive
Communicates
Product
benefits
Avoids
linguistic
traps
Good
Brand
Name
Cover Girl
make up
Total
Exxon
Spic and Span
jiffy cake mix
Smarterkids.com
Palm
handheld
computers
Outward
Bound
Citgo
Figure 7.1: Characteristics of a Good Brand Name
l Ultimately, the power of a brand lies in the minds of consumers, in what, they
have experienced and learned about the brand over time. Consumer knowledge
is really at the heart of brand equity.
Brand Equity
Brands vary in the amount of power and value they have in the marketplace. At one
extreme are brands that are not known by most buyers. Then there are brands for
which buyers have a fairly high degree of brand awareness. Beyond this are brands
with a high degree of brand acceptability. Then there are brands that enjoy a high
degree of brand preference. Finally there are brands that command a high degree of
brand loyalty. Tony OReilly, former CEO of H.J. Heinz, proposed this test of brand
loyalty. My acid test..... is whether a housewife, intending to buy Heinz tomato ketchup
in a store, finding it to be out of stock, will walk out of the store to buy it elsewhere.
Few customers are as brand-loyal as OReilly hopes Heinzs customers will be. Aaker
distinguished five levels of customer attitude toward his or her brand, from lowest to
highest :
1. Customer will change brands, especially for price reasons. No brand loyalty.
2. Customer is satisfied. No reason to change the brand.
3. Customer is satisfied and would incur costs by changing brand.
4. Customer values the brand and sees it as a friend.
5. Customer is devoted to the brand.
Brand equity is highly related to how many customers are in classes 3, 4 or 5. It is also
related, according to Aaker, to the degree of brand-name recognition, perceived brand
quality, strong mental and emotional associations and other assets such as patents,
trademarks and channel relationships.
Companies do not normally list brand equity on their balance sheets because of the
arbitrariness of the estimate. But clearly brand equity relates to the price premium the
brand commands times the extra volume it moves over an average brand.
The worlds 10 most valuable brands in 1997 were (in rank order): Coca-Cola, Marlboro,
IBM, McDonalds Disney, Sony, Kodak, Intel, Gillette and Budweiser. Coca-Colas
brand equity was $48 billion, Marlboros $47 billion, and IBMs $24 billion.
High brand equity provides a number of competitive advantages :
l The company will enjoy reduced marketing costs because of consumer brand
awareness and loyalty.
l The company will have more trade leverage in bargaining with distributors and
retailers because customers expect them to carry the brand.
l The company can charge a higher price than its competitors because the brand
has higher perceived quality.
l The company can more easily launch extensions because the brand name carries
high credibility.
l The brand offers the company some defense against price competition.
A brand name needs to be carefully managed so that its equity doesnt depreciate.
This requires maintaining or improving brand awareness, perceived quality and
functionality, and positive associations. These tasks require continuous R&D investment,
skillful advertising, and excellent trade and consumer service. Canada Dry and Colgate-
Palmolive have appointed brand equity managers to guard the brands image,
associations, and quality and prevent short-term tactical actions by overzealous brand
managers from hurting the brand. Thats why some companies put their branding in
the hands of an entirely different company that can focus only on brand management
and nothing else.
P&G believes that well-managed brands are not subject to a brand life cycle. Many
brand leaders of 70 years ago are still todays brand leaders : Kodak, Wrigleys, Gillette,
Coca-Cola, Heinz, and Campbell Soup.
Some analysts see brands as outlasting a companys specific products and facilities.
They see brands as the companys major enduring asset. Yet every powerful brand
really represents a set of loyal customers. Therefore, the fundamental asset underlying
brand equity is customer equity. This suggests that the proper focus of marketing
planning is that of extending loyal customer lifetime value, with brand management
serving as a major marketing tool.
Unfortunately, many companies have mismanaged their greatest assettheir brands.
In the quest for ever increasing profits, its easy for a brand to lose its focus.
Figure 7.2: An Overview of Branding Decisions
Branding Challenges
Branding poses several challenges to the marketer. The key decisions are shown in
Fig. 7.2, and discussed in the following sections.
Branding Decision : To Brand or Not to Brand ?
The first decision is whether the company should develop a brand name for its product.
In the past, most products went unbranded. Producers and intermediaries sold their
goods out of barrels, bins, and cases, without any supplier identification. Buyers depended
on the sellers integrity. The earliest signs of branding were the medieval guilds efforts
to require craftspeople to put trademarks on their products to protect themselves and
consumers against inferior quality. In the fine arts, too, branding began with artists
signing their works.
Today, branding is such a strong force that hardly anything goes unbranded. Salt is
packaged in distinctive manufacturers containers, oranges are stamped with growers
names, nuts and bolts are packaged in cellophane with a distributors label, and automobile
Branding
Decision
Brand-Sponsor
Decision
Brand - Name
Brand-Strategy
Decision
Decision
Brand-Repositoining
Decision
Brand
No brand
Manufacturer
brand
Distributor
(private) brand
Licensed brand
Individual names
Blanket family
names
Separate family
names names
Company-idividual
names
Line extensions
Brand externsions
Multibrands
New brands
Cobrands
Repositioning
No repositioning
componentsspark plugs, tires, filtersbear separate brand names from the automakers.
Fresh food productssuch as chicken, turkey and salmonare increasingly being sold
under strongly advertised brand names.
In some cases, there has been a return to no branding of certain staple consumer
goods and pharmaceuticals. Carrefours, the originator of the French hypermarket,
introduced a line of no brands or generics in its stores in the early 1970s. Generics
are unbranded, plainly packaged, less expensive versions of common products such as
spaghetti, paper towels and canned peaches. They offer standard or lower quality at a
price that may be as much as 20 percent to 40 percent lower than nationally advertised
brands and 10 percent to 20 percent lower than retailer private-label brands. The
lower price is made possible by lower-quality ingredients, lower-cost labelling and
packaging and minimal advertising.
Why do sellers brand their products when doing so clearly involves costs ? Branding
gives the seller several advantages.
l The brand name makes it easier for the seller to process orders and track down
problems.
l The sellers brand name and trademark provide legal protection of unique product
features.
l Branding gives the seller the opportunity to attract a loyal and profitable set of
customers. Brand loyalty gives sellers some protection from competition.
l Branding helps the seller segment markets. Instead of P&Gs selling a simple
detergent, it can offer eight detergent brands, each formulated differently and
aimed at specific benefit-seeking segments.
l Strong brands help build the corporate image, making it easier to launch new
brands and gain acceptance by distributors and consumers.
Distributors and retailers want brand names because brands make the product easier
to handle, hold production to certain quality standards, strengthen buyer preferences,
and make it easier to identify suppliers. Consumers want brand names to help them
identify quality differences and shop more efficiently.
Brand-Spondor Decision
A manufacturer has several options with respect to brand sponsorship. The product
may be launched as a manufacturer brand (sometimes called a national brand), a
distributor brand (also called reseller, store, house, or private brand); or a licensed
brand name. Another alternative is for the manufacturer to produce some output
under its own name and some under reseller labels. Maruti, Eicher Tractor and Bajaj
sell virtually all of their output under their own brand names. Hart Schaffner & Marx
sells some of its manufactured clothes under licensed names such as Christian Dior,
Pierre Cardin, and Johnny Carson. Whirlpool produces both under its own name and
under distributors names (Sears Kenmore appliances).
Although manufacturers brands dominate, large retailers and wholesalers have been
developing their own brands by contracting production from willing manufacturers.
Sears has created several namesDiehard batteries, Craftsman tools, Kenmore
appliancesthat command brand preference and even brand loyalty. Retailers such
as The Limited, Benetton, Gap and Marks & Spencer carry mostly own-brand
merchandise. In Britain, two large supermarket chains have developed popular store-
brand colasSainsbury Cola (from Sainsbury) and Classic Cola (from Tesco) Sainsbury,
Britains largest food chain, sells 50 percent store-label goods; its operating margins are
six times that of U.S. retailer operating margins. U.S. supermarkets average 19.7
percent private-brand sales. Some experts believe that 50 percent is the natural limit
for carrying private brands because (1) consumers prefer certain national brands, and
(2) many product categories are not feasible or attractive on a private-brand basis.
Why middlemen bother to sponsor their own brands ? They have to hunt down qualified
suppliers who can deliver consistent quality, order large quantities and tie up their capital
in inventories, and spend money promoting a private label. Nevertheless, private brands
offer two advantages. First, they are more profitable. Intermediaries search for
manufacturers with excess capacity who will produce the private label at a low cost.
Other costs, such as research and development, advertising, sales promotion, and physical
distribution are also much lower. This means that the private brander can charge a
lower price and yet make a higher profit margin. Second, retailers develop exclusive
store brands to differentiate themselves from competitors. Many consumers dont
distinguish between national and store brands.
In the confrontation between manufacturers and private brands, retailers have many
advantages and increasing market power. Because shelf space is scarce, many
supermarkets now charge a slotting fee for accepting a new brand to cover the cost of
listing and stocking it. Retailers also charge for special display space and in-store
advertising space. They typically give more prominent display to their own brands and
make sure they are well stocked. Retailers are now building better quality in their store
brands.
Manufacturers of national brands are frustrated by the growing power of retailer brands.
Kevin Price put it well : A decade ago, the retailer was a chihuahua nipping at the
manufacturers heelsa nuisance, yes, but only a minor irritant; you fed it and it went
away. Today its a pit bull and it wants to rip your arms and legs off. Youd like to see
it roll over, but youre too busy defending yourself to even try. Some marketing
commentators predict that private brands will eventually knock out all but the strongest
manufacturers brands.
In years past, consumers viewed the brands in a category arranged in a brand ladder,
with their favourite brand at the top and remaining brands in descending order of
preference. There are now signs that this ladder is being replaced with a consumer
perception of brand paritythat many brands are equivalent. Instead of a strongly
preferred brand, consumers buy from a set of acceptable brands, choosing whichever
is on sale that day. People dont think the world will come to a screeching half if they
use Tide instead of Ariel.
The growing power of store brands is not the only factor weakening national brands.
Consumers are more price sensitive. They are noting more quality equivalence as
competing manufacturers and national retailers copy and duplicate the qualities of the
best brands. The continuous barrage of coupons and price specials has trained a
generation of shoppers to buy on price. The fact that companies have reduced advertising
to 30 percent of their total promotion budget has weakened their brand equity. The
endless stream of brand extensions and line extensions has blurred brand identity and
led to a confusing amount of product proliferation. Of course, one of the newest
factors that is not necessarily weakening national brands but changing the entire branding
landscape is the Internet.
Spencers : Spencers is a middlemans brand (store brand). Many products
ranging from bread and soda to consumer durables like storage water heaters
are sold by the Spencers distribution chain under the brand name Spencers.
Stop is another store brand; it is the brand of the retail chain Shoppers Stop.
Basic Blues is the store brand of Tatas Westside retail chain.
Foodworld is a store brand owned by the Foodworld chain store.
Manufacturers have reacted by spending substantial amounts of money on consumer-
directed advertising and promotion to maintain strong brand preference. Their price
has to be somewhat higher to cover the higher promotion cost. At the same time, mass
distributors pressure manufacturers to put more promotional money into trade allowances
and deals if they want adequate shelf space. Once manufacturers start giving in, they
have less to spend on advertising and consumer promotion, and their brand leadership
starts spiraling down. This is the national brand manufacturers dilemma.
To maintain their power vis-a-vis the trade, leading brand marketers need to invest in
heavy and continuous R&D to bring out new brands, line extensions, features, and
quality improvements. They must sustain a strong pull advertising program to maintain
high consumer brand recognition and preference. They must find ways to partner
with major mass distributors in a joint search for logistical economies and competitive
strategies that produce savings.
Table 7.1: Manufacturer, Private and Generic Brands
Characteristics Manufacturer Brand Private Brand Generic Brand
Target Risk avoider, quality cons- Price conscious, comparison Price conscious, careful
market cious, brand loyal, status shopper, quality conscious, shopper, willing to accept
conscious, quick shopper. moderate risk taker, dealer lower quality, large family
loyal or organization.
Product Well known, trusted, best Same overall quality as Usually less overall quality
quality control, clearly manufacturer, less emphasis than manufacturer, little
identifiable, deep product on packaging, less assort- emphasis on packaging, very
line ment, not known to non- limited assortment, not well
shoppers of the dealer. known.
Distribution Often sold at many compe- Usually only available from Varies
ting dealers a particular dealer in the area.
Promotion Manufacturer-sponsored ads, Dealer-sponsored ads Few ads, secondary shelf
cooperative ads space
Price Highest, usually suggested Moderate, usually controlled Lowest, usually controlled by
by manufacturer. by dealer dealer.
Marketing To generate brand loyalty To generate dealer loyalty To offer a low-priced, lesser-
focus and manufacturer control and control quality item to those desiring
it.
Brand-name Decision
Manufacturers and service companies who brand their products must choose which
brand names to use. Four strategies are available :
1. Individual names: The policy is followed by Hindustan Liver Limited (Dove,
Lux, Hamam, Lifebuoy). A major advantage of an individual-names strategy is
that the company does not tie its reputation to the products. If the product fails
or appears to have low quality, the companys name or image is not hurt. A
manufacturer of good-quality watches, such as Seiko, can introduce a lower-
quality line of watches (called Pulsar) without diluting the Seiko name. The
strategy permits the firm to search for the best name for each new product.
Rx for Brand Awareness : Nine Brand Strengtheners : As companies become
more aware of the importance of brand power, they wonder how they can strengthen
their brands. Most managers think the answer lies in increasing the advertising budget.
But advertising is expensive and it isnt always effective. Advertising is only one of
nine ways to build more brand awareness and brand preference :
1. Develop creative advertising : Absolute vodka, United Colors of Benetton, Fevicol.
2. Sponsor well-regarded events: IBM sponsoring art shows, ITC classic sponsoring
golf tournaments.
3. Invite your customers to join a club: Nestles Casa Buitoni Club, Harley-
Davidsons HOG Club.
4. Invite the public to visit your factory or offices: Cadburys theme park, Kelloggs
Cereal City.
5. Create your own retail units: Niketown, Sony, Raymonds.
6. Provide well-appreciated public services: Permier exercise trails, Nestle
Nestops.
7. Give visible support to some social causes: The Body Shops support for helping
the homeless, Ben & Jerrys giving 7 percent of profits to charity.
8. Be known as a value leader: IKEA, Home Depot.
9. Develop a strong spokesperson or symbol to represent the company : Richard
Branson (Virgin) Anita Roddick (The Body Shop), Colonel Sanders (KFC).
HLL-individual brands: In its bathing soaps line, HLL has several brands like Dove,
Lux, Pears, Lifebuoy, Liril and Hamam. In detergents, it has Surf, Rin and Wheel. The
washing soaps line carry brand names like Sunlight and 501. In toothpastes, it has
brands like Close-up and Pepsodent. Its coconut hair oil has the name Nihar. Its
cooking oil is Dalda. So HLL has built numerous brands in its different lines. They are
individual brands, each moving in its own right, independently.
Nestle: Nestle is another company going in for individual brand names. Nescafe is its
premium coffee brand, Maggi is its brand of noodles, Kitkat its chocolate brand and
Milo its chocolate beverage brand. It has Milkmaid as its brand in condensed milk and
Cerelac in baby food. Of late, Nestle is also going in for umbrella branding in select
categories. For instance, Maggi is now becoming an umbrella brand for several food
items like soups, sauces, pickles, ketchups and jams.
When an individual brand name is given for each product, there is no question of any
joint responsibility among the different products. Each brand gets promoted separately
and moves by itself. The promotional expenditure tends to be high with individual
brands. Still, many companies follow individual branding as they want to reap the
associated benefits.
2. Blanket family names: This policy is followed by Heinz and General Electric. A
blanket family name also has advantages. Development cost is less because
there is no need for name research or heavy advertising expenditures to create
brand-name recognition. Furthermore, sales of the new product are likely to be
strong if the manufacturers name is good. Campbells introduces new soups
under its brand name with extreme simplicity and achieves instant recognition.
Exhibit 7.1: Family/Umbrella Brand
Amul is an example of family/umbrella brand. Amul is the common brand name for the companys
milk powder, butter, ghee and milk chocolates.
Vijay is the family brand name for the products of Vijay Electricals. Mixer-grinders, electric irons,
electric kettles, water heaters and other products of the company go under the Vijay brand.
Videocon is a family brand name for a variety of products of Videocon Corporation. Its TVs,
VCRs, refrigerators, washing machines and air conditioners go under the Videocon brand name.
Godrej is another family brand. Several product lines of the company, and several products in each
of the lines go under the brand name Godrej. The products include locks, steel almirahs, office
furniture, electronic typewriter, desktop printers, refrigerators, air conditioners, etc. The company
also uses separate brand names for some other lines. In soaps, it has individual brands like Cinthol
and Ganga. In detergents, it has individuals brands like Key and Biz.
Johnsons is another family brand. The company, Johnson & Johnson sells many of its baby care
products under the Johnsons brand nameJohnsons Baby Powder, Johnsons Baby Soap,
Johnsons Baby Shampoo, etc.
BPL is another noteworthy family brand. About five dozen products of the company go under the
brand name BPL. It also happens to be the company name.
3. Separate family names for all products : This policy is followed by Sears
(Kenmore for appliances, Craftsman for tools and Homart for major home
installations). Where a company produces quite different products, it is not
desirable to use one blanket family name.
HLL has umbrella brands, too: However, it does not mean that HLL is totally
dependant on individual branding. HLL has also developed a couple of umbrella brands
for certain product categories. Brooke Bond is being developed as an umbrella brand
for its tea and coffee products. And, Kissan is becoming an umbrella brand for its
foods line. Under Kissan, Annapurna is being developed as another brand to cover a
variety of raw food items. In the make-up line, Lakme is being developed as an umbrella
brand to cover a variety of products, ranging from nail polish to perfumes.
4. Company trade name combined with individual product names : The policy
is followed by Kellogg (Kelloggs Rice Krispies, Kelloggs Raisin Bran, and
Kelloggs Corn Flakes). Some manufacturers tie their company name to an
individual brand name for each product. The company name legitimizes, and the
individual name individualizes, the new product.
Once a company decides on its brand-name strategy, it faces the task of choosing a
specific brand name. The company could choose the name of a person (Honda, Estee
Lauder), location (American Airlines, Kentucky Fried Chicken), quality (Safeway,
Duracell), lifestyle (Weight Watchers, Healthy Choice), or an artificial name (Exxon,
Kodak). Among the desirable qualities for a brand name are the following :
l It should suggest something about the products benefits : Examples : Beauty-
rest, Craftsman, Accutron.
l It should suggest product qualities such as action or colour: Examples; Sunkist,
Spic and Span, Firebird.
l It should be easy to pronounce, recognize and remember: Short names help.
Examples : Tide Crest, Puffs.
l It should be distinctive: Examples: Mustang, Kodak, Exxon.
l It should not carry poor meanings in other countries and languages :
Examples : Nova is a poor name for a car to be sold in Spanish-speaking countries:
it means doesnt go.
Normally, companies choose brand names by generating a list of possible names, debating
their merits, eliminating all but a few, testing them with target consumers, and making a
final choice. Today many companies hire a marketing research firm to develop and
test names. These companies use human brainstorming sessions and vast computer
databases, catalogued by association, sounds, and other qualities. Name-research
procedures include association tests (What images come to mind ?), learning test
(How easily is the name pronounced ?), memory tests (How well is the name remembered
?), and preference tests (Which names are preferred ?). Of course, the firm must also
conduct searches through other databases to make sure the chosen name hasnt already
been registered. The whole process, however, isnt cheap.
Many firms strive to build a unique brand name that eventually will become intimately
identified with the product category. Examples are Frigidaire, Kleenex, Kitty Litter,
Levis, Jell-O, Popsicle, Scotch Tape, Xerox, and Fiberglas. In 1994 Federal Express
officially shortened its marketing identity to FedEx, a term that has become a synonym
for to ship overnight. Yet identifying a brand name with a product category may
threaten the companys exclusive rights to that name. Cellophane and shredded wheat
are now in the public domain and available for any manufacturer to use.
Given the rapid growth of the global marketplace, companies should choose brand
names that work globally. These names should be meaningful and pronounceable in
other language. One thing Compaq liked about the name Presario for its line of home
computers is that it conjures up similar meanings in various Latin-influenced languages.
In French, Spanish, Latin, or Portuguese, Presario has the same, or similar, association
that it does in English. It makes one immediately think of an Impresario, the magical
master of the whirl and fantasy of a stage production. Companies also should not
change names owned by someone in another country. For example, Anheuser-Busch
cannot use the name Budweiser in Germany.
Choosing a Brand Name
There are several potential sources when a firm chooses brand names :
1. Under brand extension, an existing name is used with a new product (Business
Today)
2. For a private brand, the reseller specifies the name (St. Johns Bayan apparel
brand of J.C. Penney).
3. If a new name is sought, these alternatives are available :
(a) Initials (HBO).
(b) Invented name (Kleenex).
(c) Numbers (Century 21).
(d) Mythological character (Samsonite luggage).
(e) Personal name (Heineken)
(f) Geographical name (Air France)
(g) Dictionary word (Scope mouthwash)
(h) Foreign word (Nestle)
(i) Combination of words, initials, numbers, etc. (Head & Shoulders shampoo).
4. With a licensing agreement, a company pays a fee to use a name or logo whose
trademark rights are held by another firm. Due to the high consumer recognition
of many popular trademarks, sales for a product may be raised by paying a royalty
fee to use one. Examples of names used in licensing are Coca-Cola, Dallas
Cowboys, and George Foreman.
5. In co-branding, two or more brand names are used with the same product to
gain from the brand images of each. Typically, a company uses one of its own
brand names in conjunction with another firmsoften, via a licensing agreement.
Name Communicating the Functions/Attributes of the Product
Most companies select brand names, which communicate the functions/some key
attributes of the product. In the above cited examples, Goodknight, the mosquito repellant,
offers a good nights sleep; Boost is the energy booster drink; Aquaguard gives protected
water and Fair & Lovely promises fair and lovely skin. To cite a few more examples,
When Wipro Systems offered a software programme on astrology, the name chosen
was:
Jyothishi.
TVS named its tyre : Srichakra.
Shinex was the name chosen for an instant polish.
A paint for wooden furniture was named Touchwood.
The first portable stereo player was named Walkman.
Names, Which Communicate the Speciality of the Product
Some others try to communicate the speciality of the product through the chosen name.
GMs Opel, Fords Ikon, Mitsubishis Lancer, Suzukis Zen are names intended to
communicate the speciality of the respective brands. Shampoos with names Halo,
Sunsilk, and Velvette, are also trying to communicate certain special product effects/
claims. The name Taj given to the hotel chain of Indian Hotels is an attempt to recapture
and reflect the Moghul splendour.
Use of Acronyms
Sometimes brand names are acronyms. Amul originated from Anand Milk Union Ltd.
MRF originated from Madras Rubber Factory. FIAT too has similar origin.
Use of the Company Name
The temptation to use the company name as a brand name is also strong. Some of the
most famous brand names belong to this category : Bata, Cadburys, Samsung, Philips
and Sony are good examples.
Whatever is the approach in selecting a brand name, there is always a search for some
meaning/associations. It is natural because the name is the first tool for the owner of
the brand to communicate his brands properties/uniqueness. The name is important
because it really does some selling.
A good brand name has several attributes, depending on the situation : It suggests
something about a products use or attributes (Cleanwipes moist cleansing tissues). It
is easy to spell and remember and is pronounceable in only one way). It can be applied
to a whole line of products (Eicher tractors). It is capable of legal protection from use
by others Perrier (www.perrierusa.com). It has a pleasant or at least neutral meaning
internationally (Onviathe business-to-business marketplace). It conveys a differential
advantage (Pert Plus).
Figure 7.3: The Consumers Brand Decision Process
As firms expand globally, branding takes on special significance. Regardless of whether
brands are global or tailored to particular markets, their meanings must not have
negative connotations or violate cultural taboos. To make sure that this does not happen,
such specialized firms as Namestormers can devise names for clients that are acceptable
around the world. But outside of the leading power brands, which firms may want to
make into global brands, brands often must reflect the cultural and societal diversity in
the way products are positioned and used in different nations.
When branding, a firm should plan for the stage in the consumers brand decision
process, as shown in Fig. 7.3. For a new brand, a consumer begins with non-recognition
of the name; the seller must make the person aware of it. He or she then moves to
recognition, where the brand and its attributes are known; the seller stresses persuasion.
Next, the person develops a preference (or dislike) for a brand and buys it (or opts not
to buy); the sellers task is to gain brand loyalty. Last, some people show a brand
insistence (or aversion) and become loyal (or never buy); the sellers role is to maintain
loyalty. Often times, people form preferences toward several brands but do not buy or
insist upon one brand exclusively.
By using brand extension, a new product would begin at the recognition, preference, or
insistence stage of the brand decision process because of the carryover effect of the
Nonrecognition Recognition
Preference Insistence
Dislike Aversion
The marketer's goal is to gain consumer
preference and then insistence (brand
loyality). A company wants to avoid
customer dislike or aversion.
established name. However, consumers who dislike the existing product line would be
unlikely to try a new product under the same name, but they might try another company
product under a different brand.
Brand-strategy Decision
A company has five choices when it comes to brand strategy. The company can
introduce line extensions (existing brand name extended to new sizes or flavours in
the existing product category), brand extensions (brand names extended to new-product
categories), multibrands (new brand names introduced in the same product category),
new brands (new brand name for a new category product), and cobrands (brands
bearing two or more well-known brand names).
Line Extensions. Line extensions consist of introducing additional items in the same
product category under the same brand name, such as new flavour, forms, colours,
added ingredients, and package sizes. The vast majority of new-product introductions
consists of line extensions.
Many companies are now introducing branded variants, which are specific brand
lines supplied to specific retailers or distribution channels. They result from the pressure
retailers put on manufacturers to enable the retailers to provide distinctive offerings. A
camera company may supply its low-end cameras to mass merchandisers while limiting
its higher-priced items to specialty camera shops.
Line extension involves risks and has provoked heated debate among marketing
professionals. On the downside, extensions may lead to the brand name losing its
specific meaning; Ries and Trout call this the line-extension trap. When a person
asked for a Coke in the past, she received a 6.5-ounce bottle. Today the seller will
have to ask : New, Classic or Cherry Coke ? Regular or diet ? Caffeine or caffeine-
free ? Bottle or can ? Sometimes the original brand identity is so strong that its line
extensions serve only to confuse and dont sell enough to cover development and
promotion costs.
However, line extensions can and often do have a positive side. They have a much
higher chance of survival than brand-new products. Some marketing executives defend
line extensions as the best way to build a business.
Line extensions are also fueled by fierce competition in the marketplace, calling for
matching competitors new offerings. Nabisco has had such success with its Snack-
well Fat Free cookies that every competitor has had to extend its product line in defense.
One study, by Reddy, Holak, and Bhat, examined what makes a line extension succeed
or fail. Data on 75 line extensions of 34 cigarette brands over a 20-year period yielded
these findings : Line extensions of strong brands, symbolic brands, brands given strong
advertising and promotion support, and those entering earlier into a project subcategory
are more successful. The size of the company and its marketing competence also play
a role.
Surf: In detergents, HLL launched Surf Ultra, Surf Excel, Surf Excelmatic and
International Surf Excel as line extensions of Surf.
Colgate: Exhibit 7.2. shows the line extensions of Colgate. All of them exist under the
strength of the mother brand Colgate and simultaneously contribute to the spreading of
the Colgate tentacles to new market segments. What Colgate alone could not do
fighting competition, increasing corporate revenue and profitsis now being
accomplished by the new Colgate additions, especially Colgate Gel, Herbal and Cibaca
Top.
Exhibit 7.2: Line ExtensionColgate
Extending Colgate brand name to variants in the same toothpaste line
l Colgate Dental Cream : The mega-brand, the categorys volume driver.
l Colgate Gel : Positioned as giving long-lasting fresh breath
l Colgate Calciguard : With an anti-cavity therapeutic positioning.
l Colgate Total : With therapeutic, multi-benefits positioning.
l Colgate Sensitive : Positioned for special need and marketed through the dental profession
l Colgate Herbal : Positioned on the strength of herbal ingredients
l Colgate Cibaca Top : Positioned on economy.
Exhibit 7.3: Building Line ExtensionsExample of Lifebuoy
When HLL introduced Lifebuoy in the Indian market in 1895 (more than 100 years ago!), it was
positioned as the soap that would destroy germs and keep the body healthy.
The brand found the going tough, especially in rural markets where most people were accustomed
to bathing without any soap. HLL then decided to project Lifebuoy as a soap for hand wash.
The approach seemed to pay off. By 1900, Lifebuoy had established itself as a soap for hand wash.
At this stage, the brands inherent properties were expanded and Lifebuoy was repositioned as a
bath soap. Health remained the benefit proposition. Where there is Lifebuoy, there is health
became a very popular jingle in rural India. The brand was also projected on the plank of economy.
Much later, in 1964, the brand was relaunched with a slight change in its shape and wrapper design.
The relaunch was also backed by promotion campaigns highlighting the health benefit. Lifebuoy
started associating with sports events, seeking the image of a champions soap. Naturally, the
health and body fitness dimension got reinforced.
By the 1970s, competitors entered challenging Lifebuoys supremacy. The benefit-propositions in
soaps were also changing from healthcare to aspects such as freshness, beautify, nature-care and
deodorant-quality.
HLL now had many requirements to meet; it had to tap some of these emerging market needs, it had
to play down the image of Lifebuoy as a mere villagers soap and it had to enhance the earnings from
the Lifebuoy brand in the long term.
HLL decided to meet these needs by enlarging the scope of the Lifebuoy brand through line
extensions.
Lifebuoy Personal : HLL now launched Lifebuoy Personal, in pink colour, with a
new perfume. But the brand suffered because it did not carry the benefit proposition of
health and body care. HLL subsequently mended these drawbacks through an
appropriate promotion campaign.
Lifebuoy Plus : In the 1980s, HLL made special attempts to expand the reach of
Lifebuoy to urban consumers. To quote HLL, Lifebuoy was considered down market
especially in the urban areas. So, we had to instill a sense of pride in the user; he should
not be ashamed of using Lifebuoy. So Lifebuoy Plus came; it basically was the old
Lifebuoy with a different perfume. Backed by high budget advertising, HLL managed
to popularise Lifebuoy Plus. Says HLL, With Lifebuoy Plus, we could widen the
appeal to new, urban consumers.
Lifebuoy Gold : One more extension appeared for the urban consumer, Lifebuoy
Gold; it broke away from the traditional red colour of Lifebuoy; it was pure white, had
different fragrance and was higher priced.
Liquid Lifebuoy : By this time, Liquid Lifebuoy also staged its entry to strengthen the
brands presence in the urban market. It was a modern product form.
In the rural markets, Lifebuoy continued its dominance in spite of competition; there
was the stubborn Lifebuoy user in the rural areas, who continued to patronise the
brand. The line extensionsLifebuoy Personal, Lifebuoy Plus and Lifebuoy Gold
and the campaigns around them helped strengthen the brand name Lifebuoy to a great
extent.
Lifebuoy Active : But by the late 1990s, Lifebuoy was again under pressure. To
quote HLL : Lifebuoy has been facing pressure; Carbolic soaps are being challenged
by cheap fatty-matter based soaps. We are taking a series of measures to counter it.
HLL then came out with another extension, Lifebuoy Active, to take on the challenge
posed by non-carbolics.
While Lifebuoy continues its fight into the next century of its growth, HLL is endeavouring
to keep Lifebuoy young and novel. The parent brand and the extensions together
enhance the competitiveness of HLLs soaps line. Lifebuoy remains the largest selling
soap brand in India and a big revenue/profit earner for HLL.
Advantages of Line Extension :
l Line extensions help strengthen brand power and keep the brand live, modern and
contemporary. Surf Ultra and Surf Excel help Surf remain modern and also
strengthen its claim as a major player in detergents.
l Changing consumer tastes can be accommodated through line extensions. Every
change in consumer tastes may not warrant an altogether new brand.
l Usually, mounting advertising and promotion costs necessitate a reduction in the
brand portfolio of any firm. Line extensions help the firm to contain its brand
portfolio.
l Line extensions provide a convenient route for infusing new values into an ongoing
brand and gaining presence in new markets.
l Sometimes, companies add independent brands to a product line, but later they
find these brands cannot stand independently and then they bring it under an ongoing
strong brand, i.e., they revert to line extensions. Nestle, for example, first made
Sunrise an independent brand and later reverted it as a line extension of Nescafe
and called it Nescafe Sunrise.
Brand Extensions. A company may use its existing brand name to launch new
products in other categories. Honda uses its company name to cover such different
products as automobiles, motorcycle, snowblowers, lawn mowers, marine engines, and
snowmobiles. This allows Honda to advertise that it can fit six Hondas in a two-car
garage.
Brand-extension strategy offers many of the same advantages as line extensions. Sony
puts its name on most of its new electronic products and instantly establishes the new
products high quality. Like line extension, brand extension also involves risks. The
new product might disappoint buyers and damage their respect for the companys other
products. The brand name may be inappropriate to the new productconsider buying
Castrol Oil ketchup, Drano milk, or Boeing cologne. The brand name may lose its
special positioning in the consumers mind through overextension. Brand dilution
occurs when consumers no longer associate a brand with a specific product or highly
similar products. A brand is stronger the more narrow its focus.
Companies that are tempted to transfer their brand name must research how well the
brands associations fit the new product. The best result would occur when the brand
name builds the sales of both the new product and the existing product. An acceptable
result would be one in which the new product sells well without affecting the sales of
the existing product. The worst result would be one in which the new product fails and
hurts the sales of the existing product.
Maggi initially was a brand of noodles. Later, the brand name was extended to other
product lines in the related category foodMaggi Ketchup, Maggi Soup, etc. It is a
case of related brand extension. Maggis Instant culinary expertise was extended to
related food items. This is called related brand extension or category extension.
Dettol : For years, Dettol has been a well-known brand of antiseptic lotion. When the
company, Reckitt & Colman, decided to expand into new antiseptic products, they
decided to launch them under the Dettol brand name, i.e., as brand extensions in related
category. They felt that it would enable the new products to gain immediate identification
as sister products of Dettol and they would easily move under the Dettol name. The
Dettol brand name was extended to a number of related products as shown follow :
Dettol Soapantiseptic soap
Dettol Plasterantiseptic bandage
Dettol Handwashantiseptic wash
Exhibit 7.4: Line and Category Extensions by Ponds
l Ponds Dreamflower Talc
l Ponds Dreamflower Talc Magic
l Ponds Sandal Talc
l Ponds Dreamflower Soap
l Ponds Cold Soap
l Ponds Face Wash
l Ponds Cold Cream
l Ponds Complexion Defense Moisturiser
l Ponds Moisturising Lotion
l Ponds Dreamflower Moisturising Body Lotion
l Ponds Moisturising Cleansing Bar
Why Firms Opt for Brand Extension ?
l Helps the new item to acquire instant brand recognition.
l Saves costs; a brand extension costs much less than launching a new brand;
today, for sheer economic reasons, more and more firms are resorting to brand
extensions.
l Helps leverage the strength of the existing brand to new additions within the line,
within the category and outside the category.
l When a brand lends for premium pricing, benefit of brand extension is all the more
significant.
l If an existing brand name can be extended across totally new and unrelated
categories of products, the benefit is particularly large. Its a tremendously less
expensive way of introducing new products.
l Extensions also help built the brand into a superbrand in the minds of consumers.
It creates an extendable brand canopy with high scaope for profits.
Main Requirements for Success of Brand Extension
For brand extension to succeed, three basic requirements covering the mother brand
and the extensions must be met. These are :
(i) In customers perception, there must be consistency between the parent brand
and the extensions.
(ii) Extension should be in the brands area of expertise, so that there is scope for
leverage.
(iii) Benefit transfer.
Let us discuss them one by one.
(i) Consistency Factor
Consumers must perceive the extended item to be consistent with the mother brand.
This is difficult to achieve when the extension is to unrelated/outside the category
products.
In the case of Ponds, in consumers perception, there was no consistency between the
mother, Ponds talcum powder, and the extension, Ponds toothpaste. This extension
suffered in the market.
(ii) Brands Area of Expertise
As a rule, extension of brand name has a better chance of success when it is to a
product, which is within the brands area of expertise. Consumers then find the extension
credible. For example, Surfs extension to Surf Ultra and Lifebuoys extension to
Lifebuoy Plus were within the parent brands area of expertise. Similarly, Lipton had
great expertise in tea. But, in the consumers perception, biscuits needed a different
expertise altogether. On the contrary. Maggis extension of its instant culinary expertise
across food categoriesfrom noodles to ketchups, soups, and pickleslooked natural
to the consumer.
(iii) Benefit Transfer
Another tenet in brand extensions is that the mother brands benefit must be transferable
and be transferred to extensions, because consumers expect and desire the benefit
offered by the parent brand in the extensions. Thus, users of 5-Star ice cream will
expect the same kind of gratification as they have received from 5-Star chocolate.
In unrelated/outside category extensions, all the three conditions mentioned above are
under strain; it is difficult to fulfill these conditions. And that is why the risk of brand
extension is higher in such cases.
Multibrands. A company will often introduce additional brands in the same product
category. Sometimes the company is trying to establish different features or appeal to
different buying motives. Thus, P&G produces nine different brands of detergents. A
multibranding strategy also enables the company to lock up more distributor shelf space
and to protect its major brand by setting up flanker brands. Seiko establishes different
brand names for its higher-priced (Seiko Lasalle) and lower-priced watches (Pulsar) to
protect its flanks. Sometimes the company inherits different brand names in the process
of acquiring competitors.
A major pitfall in introducing multibrand entries is that each might obtain only a small
market share, and none may be particularly profitable. The company will have dissipated
its resources over several brands instead of building a few highly profitable brands.
Ideally, a companys brands within a category should cannibalize the competitors brands
and not each other. At the very least the net profits with multibrands should be larger
even if some cannibalism occurs.
New Brands. When a company launches products in a new category, it may find that
none of its current brand names are appropriate. If Timex decides to make toothbrushes,
it is not likely to call them Timex toothbrushes. Yet establishing a new brand name in
the U.S. marketplace for a mass-consumer packaged good can cost anywhere from
$50 million to $100 million.
Cobrands. A rising phenomenon is the emergence of cobranding (also called dual
branding), in which two or more well-known brands are combined in an offer. Each
brand sponsor expects that the other brand name will strengthen preference or purchase
intention. In the case of copackaged products, each brand hopes it might be reaching
a new audience by associating with the other brand.
Many manufacturers make componentsmotors, computer chips, carpet fibersthat
enter into final branded products, and whose individual identity normally gets lost. These
manufacturers hope their brand will be featured as part of the final product. Among
the few component branders that have succeeded in building a separate identity is
Intel. Intels consumer-directed brand compaign convinced many personal computer
buyers to buy only computer brands with Intel Inside. As a result, major PC
manufacturersIBM, Dell, Compaqpurchase their chips from Intel at a premium
price rather than buy equivalent chips from an unknown supplier. Despite these success
stories, most component manufactures find it hard to convince buyers to insist on a
certain component, material, or ingredient in the final product. A consumer is not likely
to choose a car because it features Champion spark plugs or Stainmaster upholstery.
Brand Repositioning
However well a brand is currently positioned, the company may have to reposition it
later when facing new competitors or changing customer preferences. Consider the
following repositioning story :
l 7-up. 7-up was one of several soft drinks bought primarily by older people who
wanted a bland, lemon-flavoured drink. Research indicated that although a majority
of soft drink consumers preferred a cola, they did not prefer it all the time, and
many other consumers were non-cola drinkers. 7-Up went for leadership in the
noncola market by calling itself the Uncola. The campaign featured the Uncola
as a youthful and refreshing drink, the one to reach for instead of a cola. 7-Up
established itself as the alternative to colas, not just another soft drink.
Logo
Selecting the Logo
Along with the brand name, companies also use a logo for visual identification. Logo
enhances recognition by the provision of a symbol of identity. A logo is a pictorial
symbol intended to communicate with the consumers. It is an accompaniment to the
brand name and the two together identify a companys product. Flags, mascots, pictures,
graphic designs or plain alphabets are all used as logos. The logo is a piece of creativity.
Marketers have understood that a logo/mascot, with a well-defined personality, can
greatly increase memorability, aid recall and help sales. The mascots special traits
tend to have a rub off on the brand and help sales. And over time, the symbol and the
brand become inseparable. Exhibit presents some well-known logos.
The logo can be made of anythingwords, alphabets, pictures, graphics or even a
splash of colours.
Exhibit 7.5: Some well-known Logos
HMVs Masters Voice
The dog was a very popular logo for HMV. All HMV gramophone records carried the picture of the
dog. And the punch line His Masters Voice lent more meaning to the logo and together they
enhanced the product appeal.
Air Indias Maharaja
Think of Air India, the Maharaja comes to mind. The Maharaja, with his myriad moods has
become one of the most endearing mascots. The logo has become inseparable to the brand.
Kelvinators Penguin
Kelvinators mascot, the Penguin, is also well known and has become almost inseparable to Kelvinator.
The friendly bird which weathers all storms and is identified with extreme cold climate goes well
with the product, refrigerator. The ad line, the coolest one is also apt.
Asian Paints Gattu
Asian Paints is another company that has created a winning logo. When you look for Asian Paints,
you catch sight of Gattuthe impish little boy with a paintbrush in one hand and a dripping can of
paint in the other. In many towns of North India, buyers ask for Asian Paints, by asking for the
bacha chaap paint (the kids paint).
Onidas Devil
Even a mascot with some negative association can work for a brands prospects, if handled
imaginatively. Thats what MIRC Electronics did when it launched its TV brand Onida in the
1980s. It used the devil, which represented envy, as the logo for Onida. Onidas marketing team
explained their approach : We thought, why not personify envy ? It would fuel interest, Onidas
strength lies in its pride and envy platform. The devil has remained a central part of Onidas
advertising theme, securing one of the highest recall levels in brand rating studies.
Dos and Donts in Logo Selection
The logo should fulfil the requirements of media suitability. It has to be reproduced on
various media like the print, television and other electronic vehicles. It should also lend
for attractive reproduction on different surfaces like glass and plastics. It should also
have the flexibility to accommodate national/global and business-to-business marketing
contexts.
The memory value of the logo is also very important. If one attempts to pack everything
into the logo, then people may not remember anything. So, one has to be very choosy
about the features to be incorporated in the logo. The design must aid memorability.
Uniqueness is another aspect. The more exclusive the symbol, the better the identification
and response.
Changing the Logo
Though a logo is a relatively permanent entity for a company, sometimes changes are
warranted. And, companies do change logos with the passage of time. They completely
alter the logo or modify it depending on the need.
Eicher : Eicher had the head of a horse as their logo for over three decades. The logo
served its purpose as long as Eicher remained a one-product company, making only
tractors; the logo stood for the power and sturdiness of the tractor. When Eicher
diversified into many unrelated fields, including financial services and consultancy, there
was a need to show the companys new face. The logo was modified subtly to show
the fast pace set by the company; the new logo showed the movement of a galloping
horse.
Singer : The 150-year-old American company Singer had the alphabet S and the
picture of a lady in bonnet using the sewing machine as its logo. Almost a century later,
this was dropped, instead the name Singer was adopted. The earlier logo was more
appropriate when the company was manufacturing only sewing machines. After
diversifying into a variety of house-hold appliances, the company had to adopt a new
logo, relevant to the companys altered range of products.
Goodlass Nerolac : When the paint company Goodlass Nerolac chose a tiger as its
mascot, it fitted its requirements : it stood for bright lasting colours. Goody, as the
mascot was called, figured in all communications of the company. But today, it is
played down. We have deliberately underplayed him to avoid tedium. Moreover,
Nerolac has built up a name for itself and today our priority is the omnibus brand name
Nerolac itself.
Brand Name, Logo and Slogan
The three go together; they must be compatible, one reinforcing the other. Let us see
a few examples.
Brand Name Logo Slogan
Onida The green-eyed devil Neighbours envy, owners pride.
MRF radial The man with steel muscles Indias answer to world-class car.
AT&T The globe Connecting people, anytime, anywhere.
PACKAGING
Packaging
Packaging is the part of product planning where a firm researches, designs, and produces
package(s). A package is a container used to protect, promote, transport, and/or
identify a product. It may consist of a products physical container, an outer label, and/
or inserts. The physical container may be a cardboard, metal, plastic, or wooden box;
a cellophane, waxpaper, or cloth wrapper; a glass, aluminium, or plastic jar or can; a
paper bag; styrofoam; some other material; or a combination of these. Products may
have more than one container : Cereal is individually packaged in small boxes, with
inner waxpaper wrapping, and shipped in large corrugated boxes; watches are usually
covered with cloth linings and shipped in plastic boxes. The label indicates a products
brand name, the company logo, ingredients, promotional messages, inventory codes,
and/or instructions for use. Inserts are (1) instructions and safety information placed in
drug, toy, and other packages or (2) coupons, prizes, or recipe booklets. They are used
as appropriate.
About 10 percent of a typical products final selling price goes for its packaging. The
amount is higher for such products as cosmetics (as much as 40 percent or more). The
complete package redesign of a major product might cost millions of dollars for machiney
and production. Packaging decisions must serve both resellers and consumers. Plan
are often made in conjunction with production, logistics, and legal personnel. Errors in
packaging can be costly.
A package involves decisions as to a products physical container, label, and inserts.
Package redesign may occur when a firms current packaging receives a poor response
from channel members and customers or becomes too expensive; the firm seeks a new
market segment, reformulates a product, or changes or updates its product positioning,
or new technology is available.
We define packaging as follows :
l Packaging includes the activities of designing and producing the container for a
product.
The container is called the package, and it might include up to three levels of material.
Old Spice aftershave lotion is in a bottle (primary package) that is in a cardboard box
(secondary package) that is in a corrugated box (shipping package) containing six
dozen boxes of Old Spice.
Packaging has become a potent marketing tool. Well-designed packages can create
convenience and promotional value. Various factors have contributed to packagings
growing use as a marketing tool :
l Self-service : An increasing number of products are sold on a self-service basis.
In an average supermarket, which stocks 15,000 items, the typical shopper passes
by some 300 items per minute. Given that 53 percent of all purchases are made on
impulse, the effective package operates as a five-second commercial. The
package must perform many of the sales tasks : attract attention, describe the
products features, create consumer confidence, and make a favourable overall
impression.
l Consumer affluence : Rising consumer affluence means consumers are willing
to pay a little more for the convenience, appearance, dependability and prestige of
better packages.
l Company and brand image : Packages contribute to instant recognition of the
company or brand. The Campbell Soup Company estimates that the average
shopper sees its familiar red and white can 76 times a year, creating the equivalent
of $26 million worth of advertising.
l Innovation opportunity : Innovative packaging can bring large benefits to
consumers and profits to producers. Softsoap cornered the market on pumps for
dispersing soap. Toothpaste pump dispensers have captured 12 percent of the
toothpaste market because they are more convenient and less messy.
Chesebrough-Ponds increased its overall nail-polish sales by 22 percent after
introducing its novel Aziza Polishing Pen for fingernails.
Developing an effective package for a new product requires several decisions. The
first task is to establish the packaging concept : defining what the package should
basically be or do for the particular product. Decisions must now be made on additional
elementssize, shape, materials, colour, text, and brand mark. Decisions must be
made on the amount of text, on cellophane or other transparent films, on a plastic or a
laminate tray, and so on. Decisions must be made on tamperproof devices. The
various packaging elements must be harmonized. The packaging elements must also
be harmonized with decisions on pricing, advertising, and other marketing elements.
After the packaging is designed, it must be tested. Engineering tests are conducted to
ensure that the package stands up under normal conditions; visual tests, to ensure that
the script is legible and the colours harmonious; dealer tests, to ensure that dealers find
the packages attractive and easy to handle; and consumer tests, to ensure favourable
consumer response.
Developing effective packaging may cost several hundred thousand dollars and take
several months to complete. Companies must pay attention to growing environmental
and safety concerns about packaging. Shortages of paper, aluminium, and other materials
suggest that marketers should try to reduce packaging. Many packages end up as
broken bottles and crumpled cans littering the streets and countryside. All of this
packaging creates a major problem in solid waste disposal, requiring huge amounts of
labor and energy. Fortunately, many companies have gone green : S.C. Johnson
repackaged Agree Plus shampoo in a stand-up pouch using 80 percent less plastic.
P&G eliminated outer cartons from its Secret and Sure deodorants, saving 3.4 million
pounds of paper broad per year.
l Tetra Pak. Tetra Pak, a major Swedish multinational, provides an example of
the power of innovative packaging and customer thinking. Tetra Pak invented an
aseptic package that enables milk, fruit juice, and other perishable liquid foods
to be distributed without refrigeration. This allows dairies to distribute milk over a
wider area without investing in refrigerated trucks and facilities. Supermarkets
can carry Tetra Pak packaged products on ordinary shelves, allowing them to
save expensive refrigerator space. Tetras motto is the package should save
more than it cost. Tetra Pak advertises the benefits of its packaging to consumers
directly and even initiates recycling programs to save the environment.
Basic Packaging functions
The basic packaging functions are containment and protection, usage, communication,
segmentation, channel cooperation, and new-product planning :
Packaging functions range from containment and protection to product planning.
l Containment and protectionPackaging enables liquid, granular and other
divisible products to be contained in a given quantity and form. It protects a
product while it is shipped, stored, and handled.
l UsagePackaging lets a product be easily used and re-stored. It may even be
reusable after a product is depleted. Packaging must also be safe for all, from a
young child to a senior.
l CommunicationPackaging communicates a brand image, provides ingredients
and directions, and displays the product. It is a major promotion tool.
l SegmentationPackaging can be tailor-made for a specific market group. If a
firm offers two or more package shapes, sizes, colours, or designs, it may employ
differentiated marketing.
l Channel cooperationPackaging can address wholesaler and retailer needs
with regard to shipping, storing, promotion and so on.
l New-product planningNew packaging can be a key innovation for a firm and
stimulate sales.
Factors Considered in Packaging Decisions
Several factors must be weighed in making packaging decisions.
Because package design affects the image a firm seeks for its products, the colour,
shape and material all influence consumer perceptions. Thus, After 115 years, Listerine
Antiseptic changed from glass to plastic in its most popular bottle sizes, as well as
redesigned the classic barbell-shaped package that signified amber mouthwashand
medicine-y taste to generations of consumers. The product inside is the same. We
wanted to modernize it from the package in your grandmothers cabinet.
In family packaging, a firm uses a common element on each package in a product line.
It parallels family branding. Campbell has virtually identical packages for its traditional
soups, distinguished only by flavour or content identification. American Home Products,
maker of Advil and Anacin pain medicine, does not use family packaging with these
brands; they have distinct packages to lure different segments.
A global firm must decide if a standardized package can be used worldwide (with only
a language change on the label). Standardization boosts global recognition. Thus,
Coke and Pepsi have standard packages when possible. Yet, some colours, symbols,
and shapes have negative meanings in some nations. For example, white can mean
purity or mourning, two vastly different images. Tide detergent has different packaging
in Shanghai, China, than in the United States.
Package costs must be considered on both a total and per-unit basis. As noted earlier,
total costs can run into the millions of dollars, and per-unit costs can go as high as 40
percent or more of a products pricedepending on the purpose and extend of packaging.
A firm has many packaging materials from which to select, such as paperboard, plastic,
metal, glass, styrofoam, and cellophane. In the choice, trade-offs are probably needed:
Cellophane allows products to be attractively displayed, but it is highly susceptible to
tearing: paperboard is relatively inexpensive, but it is hard to open. A firm must also
decide how innovative it wants its packaging to be. Aseptic packaging (for milk and
juice boxes) allows beverages to be stored in special boxes without refrigeration. They
are more popular in Europe than in the United States.
There is a wide range of package features from which to choose, depending on the
product. These features include pour spouts, hinged lids, screw-on tops, pop-tops, see-
through bags, tuck or seal-end cartons, carry handles, product testers (for items like
batteries), and freshness dating. They may provide a firm with a differential advantage.
A firm has to select the specific sizes, colours, and shapes of its packages. In picking
a package size, shelf life (how long a product stays fresh), convenience, tradition, and
competition must be considered. In the food industry, new and larger sizes have captured
high sales. The choice of package colour depends on the image sought. Mello Yello, a
citrus soft drink by Coca-Cola, has a label with bright orange and green lettering on a
lemon-yellow background, Package shape also affects a products image. Hanes created
a mystique for Leggs pantyhose via the egg-shaped package. The number of packages
used with any one product depends on competition and the firms use of differentiated
marketing. By selling small, medium, and large sizes, a firm may ensure maximum
shelf space, appeal to different consumers, and make it difficult and expensive for a
new company to gain channel access.
The placement, content, size, and prominence of the label must be set. Both company
and brand names (if appropriate) need to appear on the label. The existence of package
inserts and others useful information (some required by law) should be noted on the
label. Sometimes, a redesigned label may be confusing to customers and hurt a products
sales.
Multiple packaging couples two or more product items in one container. It may involve
the same product (such as razor blades) or combine different ones (such as a first-aid
kit). The goal is to increase usage (hoarding may be a problem), get people to buy an
assortment of items, or have people try a new item (such as a new toothpaste packaged
with an established toothbrush brand). Many multiple packs, like cereal, are versatile
they can be sold as shipped or broken into single units.
Individually wrapping portions of a divisible product may offer a competitive advantage.
It may also be costly. Kraft has done well with its individually wrapped cheese slices.
Alka-Seltzer sells tablets in individually wrapped tin-foil containers, as well as in a
bottle without wrapping.
For certain items (such as shirts, magazines, watches and candy), some resellers may
want pre-printed prices. They then have the option of charging those prices or adhering
their own labels. Other resellers prefer only a space for the price on the package and
insert their own price label automatically. Because of the growing use of computer
technology by resellers in monitoring their inventory levels, more of them are insisting
on pre-marked inventory codes on packages. The National Retail Federation endorses
the Universal Product Code as the voluntary vendor marking standard in the United
States.
With the Universal Product Code (UPC), manufacturers pre-mark items with a series
of thick and thin vertical lines. Price and inventory data bar codes are represented by
these lines, which appear on outer package labels but are not readable by employees
and customers. Lines are read by computerized scanning equipment at the checkout
counter; the cashier does not have to ring up a transaction manually and inventory data
are instantly transmitted to the main computer of the retailer (or manufacturer). In the
UPC system, human-readable prices must still be marked, either by the manufacturer
or the reseller.
Last, a firm must be sure the package design fits in with the rest of its marketing mix.
A well-known perfume may be extravagantly packaged, distributed in select stores,
advertised in upscale magazines, and sold at a high price. In contrast, a firm making
perfumes that imitate leading brands has more basic packages, distributes in discount
stores, does not advertise, and uses low prices. The two brands may cost an identical
amount to make, but the imitator would spend only a fraction as much on packaging.
At its Web site, Chamber Biz (www.chamberbiz.com) has a very good discussion
about package design, including its relationship with brand positioning, the use of graphics,
and reflecting target market values. In the tool bar at the left of the screen, go to
Expand Your Business and click on Sales/Marketing, Then, scroll down to
Packaging and pricing your product.
Criticisms of Packaging
The packaging practices of some industries and firms have been heavily criticized and
regulated due to their impact (or potential impact) on the environment and scarce
resources, the high expenditures on packaging, questions about the honesty of labels
and the confusion caused by inconsistent designations of package sizes (such as large,
family, super), and critics perceptions of inadequate package safety.
Yet, consumersas well as businessmust bear part of the responsibility for the
negative results of packaging. Throwaway bottles (highly preferred by consumers)
use almost three times the energy of returnable ones. Shoplifting annually adds to
packaging costs because firms must add security tags and otherwise alter packages.
In planning their packaging programs, firms need to weigh the short-term and long-
term benefits and costs of providing environmentally safer (green), less confusing,
and more tamper-resistant packages. Generally, firms are responding quite positively
to the criticisms raised here.
Package Materials
Changing trendsfrom wood to paper and plastics : Over the years a great deal
of changes have taken place in the materials used for packaging. In the earlier days,
wood was the main material used. It has slowly given place to paper and paperboard,
especially on account of the shortage in wood supplies. Paperboard cartons, paper
bags and corrugated boards have become popular forms of packaging for a variety of
products, from groceries to garments.
Metal containers are also popular. Metal containers are an excellent packaging medium
for processed foods, fruit, vegetables, meat products, oil, paint, etc. However, the
acute shortage of tin in India makes metal packaging rather costly. In recent years,
aluminium-based packaging has become popular. It is used in the form of foil, foil-
based laminates, cans, pilfer-proof caps, etc. Products like tea, coffee, and spices have
adopted aluminium foil packaging.
Plastics, the new packing medium : With the growth of the petrochemical industry;
a new range of packaging materials have entered the marketing scene. Films of low-
density and high-density polyethylene (LDPE and HDPE), metalised polyester film,
metalised polyester laminates and polypropylene have become the preferred packaging
medium for several products. In fact, such packaging materials have to a large extent
replaced the traditional medium of paper, metal and jute.
This new family of synthetic packaging materials, generally known as plastics, have
several merits such as : (i) waterproof and moisture proof property, (ii) capacity to
provide effective barrier to vapour, (iii) greater resistance to sun exposure, (iv) thermal
stability, (v) light weight, (vi) alkali and acid proof property, and (vii) attractiveness and
transparency.
They also allow attractive printing/branding on them. Plastics as a group are now
dominating the packaging field in India. They are now used in a variety of packaging
applicationsfrom simple grocery bags to sophisticated stretch blown bottles. Popular
brands like Tata Tea, Nescafe, Dalda, Amul milk chocolates and even agricultural
inputs like chemical fertilisers have all gone in for plastic packaging materials.
More innovations in packaging : The continuous search for improved types of
packing has led to a stream of innovations. These innovations have embraced packaging
materials, package design, package a esthetics and package convenience. Also, the
innovations have been brought in with a view to reducing the costs of packaging and
enhancing the shelf life of the product.
Tetrapacks : Tetrapacks or aseptic packaging is the new development in food
packaging. Here, the package as well as the contents are sterilised and human handling
dispensed with. The package consists of several thin layers of polyethylene foil and
paper. Several manufacturers of fruit juices and fruit drinks are now using tetrapacks.
Tetrapacks have an edge over cans since their contents have a shelf life of three
months without the addition of preservatives.
Parles Frooti and Godrejs Jump in were the early ones to go in for aseptic tetrapacks.
Fruit juice brands like Onjus and Tropicana have joined them and now many other
brands are opting for tetrapacks.
Package Aesthetics
For enhancing the sales appeal of the package, more and more attention is now being
given to package aesthetics. Marketing men are always in search of packaging materials,
package designs and package sizes and shapes that will enhance the sales appeal of
their products. Marketing men, especially in consumer products, rely heavily on package
aesthetics as a powerful tool for sales appeal, brand identification and product
differentiation.
When the shape and looks of the product is integral to its appeal, innovative packaging
can greatly help in generating trials. Hindustan Levers LeSancy soap, with its unique
bean shape, was packaged in transparent polythene to exhibit the shape. For the first
time in soap category, the customer could see the unique shape, colour and appearance
of the product. The packaging strongly influence high trial purchases.
In some cases, packaging also facilitates merchandising. The package as a silent
salesman and in projecting the right image of the product is discussed in the chapter.
Suffice here to say that the size and shape of the package, the material used, the finish,
the colour, the labelling, etc., are all influential components of the total sales appeal of
the product.
Package Size and Convenience
Along with packaging aesthetics, package size and convenience also contribute to the
total product appeal.
Ponds cold cream and Brylcream in tubes : Earlier, Ponds cold cream was
coming in a bottle container. And, it was intended and used as a dressing table item.
Subsequently, Ponds introduced the cream in a handy plastic tube. The new package
changed the very concept of the product. From a dressing table item, it also became a
carry-along product. This change in package increased the sales of Ponds cold cream.
The same was the case with Brylcream. Earlier, this hair-cream used to come only in
bottle containers. Later, Brylcream appeared in a convenient tube, Brylcream in the
new package became a convenient, carry-along, dressing item.
Application convenience of Harpic : Harpic liquid toilet cleaner is another product
that has successfully exploited the concept of customer convenience in packaging.
The container, fitted with a nozzle for cleaning the toilet, gives Harpic an advantage
over other similar products, which pose application problems for consumers.
The beer can : The beer can serves as one of the best examples of packaging
convenience. Opening the can is so simple an action and requires no instructions
whatsoever. The design is based on an understanding of peoples basic pattern of
expectations. Confronted with the ring when given a beer can, what would you do but
pull it.
Fractional packaging : Providing fractional package or small unit package is also a
method of going with customer preference and convenience. Toothpastes are now
available in 200 gm packing as well as in 50 gms pcaking.
Economy pack : The economy or family package makes available the product in
larger size. Households with several members can buy the economy packs and avoid
the inconvenience of repeat purchases, making a saving in the bargain.
Sachets : More recently, the tiny pack, sachet, is becoming popular. Many consumer
products like soups, beverages, candy, cough syrup, toothpaste, digestive salts, hair oil
and shampoo are now being popularised through sachets. The use of sachets gained
popularity with the arrival of pan masala in the 1980s. Now, sachets have become a
key marketing tool for penetrating rural markets, for inducing product trials and even
enticing the casual user. Some estimates put the turnover of consumer goods marketed
in sachets at Rs. 500 crore per annum. In shampoo, brands like Sunsilk and Velvette,
were the pioneers; they gained a lot of penetration in the rural markets through sachets.
The low unit price of sachets (e.g., Sunsilk Rs. 1.50, Velvette Rs. 1) made them
affordable even to the lower end of the market and helped in speedy trial and adoption.
Today, almost all shampoo brands are available in sachets and more than half the total
shampoo sales is in sachets.
Reusable containers : Providing reusable containers is another way of enhancing
product appeal. Nescafe at a point of time came in a glass jar, which could be later
used as a glass. And the Nescafe campaigns persuaded the customers to collect a set
of such glasses. Plastic containers, (e.g., Rath and Dalda) lend themselves for reuse in
the kitchen store. Bournvita in the 200 gm handle-jar was much sought after by the
housewife. Bournvita was also sold in smaller drinking mugs and pet jars. Cadburys
cocoa was introduced in a special measuring glass cup.
Refill packs : Refill packaging is also related to customer convenience and economy.
Several product categories like health drinks, coffee and tea and cooking oils are now
coming in refill packs. Brands like Nescafe, Bru, Bournvita, Maltova, Suffola, etc., are
examples. The refill packs are sold at a slightly lesser price than the regular package
and that itself serves as a sales promotion support.
Quite often, marketers use packaging for product renovation too. They change the
package to give a new look to the product : no changes are brought about in the product;
only the package is changed in an attempt to set right a declining trend in sales. The
product is then advertised as new. In some other cases, the package is changed even
when the sales are going up. The intention is to retain the interest of the existing
customers and to attract new groups of customers.
Labelling
Labelling
Sellers must label products. The label may be a simple tag attached to the product or
an elaborately designed graphic that is part of the package. The label might carry only
the brand name or a great deal of information. Even if the seller prefers a simple label,
the law may require additional information.
Labels perform several functions. First, the label identifies the product or brandfor
instance, the name Sunkist stamped on oranges. The label might also grade the product;
canned peaches are grade labelled A, B and C. The label might describe the product
: who made it, where it was made, when it was made, what it contains, how it is to be
used, and how to use it safely. Finally, the label promote the product through its attractive
graphics.
Labels eventually become outmoded and need freshening up. The label on Ivory soap
has been redone 18 times since the 1890s, with gradual changes in the size and design
of the letters. The label on Orange Crush soft drink was substantially changed when
competitors labels began to picture fresh fruits, thereby pulling in more sales. In
response, Orange Crush developed a label with new symbols to suggest freshness and
with much stronger and deeper colours.
There is a long history of legal concerns surrounding labels, as well as packaging. In
1914, the Federal Trade Commission Act held that false, misleading, or deceptive labels
or packages constitute unfair competition. The Fair Packaging and Labeling Act, passed
by Congress in 1967, set mandatory labelling requirements, encouraged voluntary industry
packaging standards, and allowed federal agencies to set packaging regulations in specific
industries. The Food and Drug Adminstration (FDA) has rqeuired processed-food
producers to include nutritional labelling that clearly states the amounts of protein, fat,
carbohydrates, and calories contained in products, as well as their vitamin and mineral
content as a percentage of the recommended daily allowance. The FDA recently
launched a drive to control health claims in food labeling by taking action against the
potentially misleading use of such descriptions as light, high fiber and low fat.
Consumerists have lobbied for additional labelling laws to require open dating (to
describe product freshness), unit pricing (to state the product cost in standard
measurement units), grade labelling (to rate the quality level), and percentage labelling
(to show the percentage of each important ingredient).
LABELLINGTELLING ABOUT THE PRODUCT
Label : The paper or plastic sticker attached to a container to carry product information. As
packaging technology improves, labels become incorporated into the protective aspects of the
package rather than simply being affixed to the package.
The paper or plastic sticker attached to a can of peas or a mustard jar is technically
called a label. But as packaging technology improves and cans and bottles become
less prominent, labels become incorporated into the protective aspects of the package.
In the case of a box of frozen broccoli, for example, a good portion of the vegetables
protection comes from the label, which is more properly called, in this case, the wrapper.
Whether the label is a separate entity affixed to a package or is, in effect, the package
itself, it must perform certain tasks. It carries the brand name and information concerning
the contents of the package, such as cooking instructions and information relating to
safe and proper use of the product. A label may also carry instructions for the proper
disposal of the product and its package, or at least a plea to consumers to avoid littering.
The label must contain any specific nutritional information, warnings, or legal restrictions
required by law. Some labels, such as those of Procter & Gamble, also give an 800
telephone number that customers with ideas or complaints can use. Consumers calls
are a major source of Procter & Gambles product improvement ideas.
Universal Product Code (UPC). The array of black bars, readable by optical scanners, found on
many products. The UPC permits computerization of tasks such as checkout and compilation of
sales volume information.
Most consumer packaged goods are labeled with an appropriate Universal Product
Code (UPC), and array of black bars readable by optical scanners. The advantages
of the UPCwhich allow computerized checkout and compiling of computer-generated
sales volume informationhave become clear to distributors, retailers and consumers
in recent years.
Global Implications and Legal Guidelines for Packaging
Package designers are relatively free to develop package designs. However, when the
package will be used in several countries, marketers must determine whether to use a
single package with one language, a single package with two or more languages, or
multiple packages tailored to the separate countries. Decisions about use of colours
and symbols, protection in transit over long distances, etc. should also be made.
Product Life Cycle 255
Product Life-cycle Marketing Strategies
A companys differentiating and positioning strategy must change as the product, market,
and competitors change over time. Here we will describe the concept of the product
life cycle and the changes that are normally made as the product passes through each
stage of the life cycle.
The Concept of the Product Life Cycle
To say that a product has a life cycle is to assert four things :
1. Products have a limited life.
2. Product sales pass through distinct stages, each posing different challenges,
opportunities, and problems to the seller.
3. Profits rise and fall at different stages of the product life cycle.
4. Products require different marketing, financial, manufacturing, purchasing, and
human resource strategies in each stage of their life cycle.
Figure 8.1: Sales and Profit Life Cycles.
Most product life-cycle curves are portrayed as bell-shaped (Fig. 8.1). This curve is
typically divided into four stages : introduction, growth, maturity and decline.
1. Introduction: A period of slow sales growth as the product is introduced in the
market. Profits are nonexistent in this stage because of the heavy expenses incurred
with product introduction.
2. Growth: A period of rapid market acceptance and substantial profit improvement.
3. Maturity: A period of a slowdown in sales growth because the product has achieved
acceptance by most potential buyers. Profits stabilize or decline because of increased
competition.
Sales
Profit
Introduction
Growth
Time
Maturity
Decline
S
a
l
e
s

a
n
d

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r
o
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(
S
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Chapter 8
Product Life Cycle
New Product Development 265
Once a company has carefully segmented the market, chosen its target customers,
identified their needs, and determined its market positioning, it is better able to develop
new products. Marketers play a key role in the new-product process, by identifying and
evaluating new-product and working with R & D and others in every stage of
development.
Every company must develop new products. New-product development shapes the
companys future. Replacement products must be created to maintain or build sales.
Customers want new products, and competitors will do their best to supply them. Each
year over 16,000 new products (including line extensions and new brands) are introduced
into groceries and drugstores.
A company can add new products through acquisition or development. The acquisition
route can take three forms. The company can buy other companies, it can acquire
patents from other companies, or it can but a licence or franchise from another company.
The development route can take two forms. The company can develop new products
in its own laboratories. Or it can contract with independent researchers or new-product-
development firms to develop specific new products.
Booz, Allen and Hamilton had identified six categories of new products :
1. New-to-the-world products : New products that create an entirely new market.
2. New product lines : New products that allow a company to enter an established
market for the first time.
3. Additions to existing product lines : New products that supplement a companys
established product lines (package sizes, flavours, and so on).
4. Improvements and revisions of existing products : New products that provide
improved performance or greater perceived value and replace existing products.
5. Repositionings: Existing products that are targeted to new markets or market
segments.
6. Cost reductions: New products that provide similar performance at lower cost.
Less than 10 per cent of all new products are truly innovative and new to the world.
These products involve the greatest cost and risk because they are new to both the
company and the marketplace. Most new-product activity is devoted to improving
existing products. At Sony, over 80 per cent of new-product activity is undertaken to
modify and improve existing Sony products.
What is a New Product?
New product : The meaning of this relative term is influenced by the perceptions of marketers and
consumers. In general, it refers to a product new to a company or any recently introduced product
that offers some benefit that other product do not.
Chapter 9
New Product Development
Before reading further, however, pause for a second to decide in your own mind what
a new product is. Think of an example or two, and try to identify what makes them
new. Is the egg-shaped video camera that plugs into your desktop computers USB
port really a new product ? Is Logitechs Cordless MouseMan Wheel that uses radio
frequency truly different from the first mouse ? Does the ingenious, and highly practical,
voice-activated word-processing software qualify as really new ?
To some marketers, a new product may be a major technological innovation. The first
computers were introduced in the 1940s. Though primitive by todays standards, at
that time they were altogether new to the market. At one time or other, so were
microwave ovens, radial tyres, adjustable rate mortgages, and automatic teller machines.
To other marketers, new products might be simple additions to an otherwise unchanged
product line, such as new shades of lipstic or hair colouring introduced by Revlon or
Clairol.
Even a me, too item, developed in imitation of a competitors successful product, is a
new product to the imitating company. Furthermore, a product may be new because it
offers some benefit that similar products do not. For example, Velcro tabs on paper
diapers, which allow parents to check for wetness and reseal the diaper securely, make
these diapers different from those that reseal with ordinary adhesive tape. The marketing
concept, after all, tells marketers to consider a product as a bundle of tangible and
intangible benefits. If the bundle of benefits offered by a product differs from the
bundle already available, then the product can be said to be new.
From the buyers point of view, a product may be new if it is something never before
purchased, even if it has been on the market for years. In international marketing, old
products may become new again, especially when a manufacturers established
product is being offered to people in a less-developed country. There are, for example,
places in the world where VCRs and colour televisions are new to most people. It is
clear, then, that the term new and the related term novel are used in a relative sense.
They are influenced by perceptions, whether you are a marketing manager or a consumer.
Lets begin by taking the managers perspective.
Managements Perspective on New Products
Managers may consider a product new if it is new to the market or simply new to the
company. Products can be either new-to-the-world products, product category
extensions, product line extensions, or product modifications. Companies have
considerable experience marketing product modifications but far less experience with
products in the first three categories.
l New-to-the-world products are inventions that create an entirely new market.
These are the highest-risk products, because they are new to both the company
and the market. The technology for producing these innovative products, which is
itself new to the company, is often the result of a large investment in research and
development.
l Product category extensions are new products that, for the first time, allow a
company to diversify and enter an established market for an existing product
category. These products are not entirely new to the market, but the company
has had no previous technological or marketing experience with them. If these
products imitate competitive products with identical features, they can be described
as me, too products.
l Product line extensions are additions to an existing product line that supplement
the basic items in the established line. Line extensions include enhanced models,
low-price economy models, and variations in colour, flavour, design, and so on.
These new products may be family branded or marketed under a new brand
name, perhaps a private label that appeals to a different market segment.
l Product modifications include product improvements, cost reductions, and
repositionings. New and improved versions replace existing products and are
intended to provide improved performance, enhanced features, or greater perceived
value. Cost reductions replace existing products by providing similar performance
at a lower cost. Repositionings may modify existing products by targeting new
market segments, offering a new benefit, or assuming a different competitive
position. The marketing task for these products often is to communicate the
benefits of product modifications to consumers who do not see the product as
unique or strikingly different from past offerings.
The Consumers Perspective on Newness
From a consumer perspective, new products vary in degree of newness. There are
three types of innovations : discontinuous, dynamically continuous, and continuous, as
shown in Fig.9.1.
Discontinuous Innovation
Discontinuous innovation : A product so new that no previous product performed an equivalent
function. Such a product requires the development of new consumption or usage patterns.
Discontinuous innovations are pioneering products so new that no previous product
performed an equivalent function. As a result of this near-complete newness, new
consumption or usage patterns are required. The lithium battery pacemaker implanted
in heart patients was a discontinuous innovation. The fax machine was another. These
products, once new to the world, did things no products before them had done, and to
use them properly, people had to make extensive behaviour changes. Artificial hearts
and a drug to cure AIDS are still in their developmental stages, but once perfected and
made available, they, too, will be discontinuous innovations.
Figure 9.1
Discontinuous
innovatoin
New function not
performed by any
previous product
Need for behavior
changes
Dynamically
continuous innovation
Improvement of
performance
Similar consumption
pattern
Continuous
innovation
Variation of
existing product
Same consumption
pattern
Breakthrough Major change Ongoing alteration
Dynamically Continuous Innovation
Dynamically continuous innovation : A product that is different from previously available products
but that does not strikingly change buying or usage patterns.
In the newness continuum, somewhere between the breakthrough achieved with the
perfected artificial heart and the commonplace newness of the new and improved
consumer product, is the dynamically continuous innovation. New products in this
middle range represent changes and improvements that do not strikingly change buying
and usage patterns.
The hybrid gasoline engine/electric motor car is an example of a dynamically continuous
innovation. The buying habits of those purchasing cars and fuel may be altered by
successful and appealing hybrid gas/electric automobiles, but virtually all driving behaviour
will remain as it is. Compare this situation with the way the Model T Ford affected
society. Similarly, although TiVos personal video recorder system, is genuinely new, its
effect on buyers and users is nothing like the effect of the first video-tape recorder.
Continuous Innovation
Continuous innovation : A new product that is characterized by minor alterations or improvements
to existing products and that produces little change in consumption patterns.
A continuous innovation is a commonplace change that is part of an ongoing product
modification effort, such as a minor alteration of a product or the introduction of an
imitative product. The flat-panel computer monitor is an example of a continuous
innovation. This new product is an improvement over existing monitors because it
takes up less space. Although the product has a new form, it is used in the traditional
manner, so consumers do not have to change their consumption behaviour. This is a
key characteristic of a continuous innovation. Marketers constantly strive to improve
products, because even minor improvements, such as reducing calories or salt, can
provide a competitive advantage. Although this approach may be viewed as fine-
tuning the product, the new product is an innovation of a sort.
The Slim Chances of Success
Product success is both difficult to define and difficult to achieve. It is problematic to
determine the number of new product successes and failures because, like newness,
success is so hard to define. How much of a success must a new product be before it
is truly a success ? It is a widely accepted belief that relatively few new product
ideas become commercial successes. But because most organizations would rather
not talk about failures, this belief is based largely on estimates. Moreover, some product
ideas wither in their developmental stages and documentation of ideas that were
suggested but never made it to market is seldom available. For our purpose, failure
occurs when a product does not meet the organizations expectations.
Several estimates of new product failure rates are available. Some of these suggest
that 80 per cent of new product ideas do not become commercial successes. One
consulting organization, after considerable study, has suggested that only one successful
product is generated from 40 new product ideas. Once a new product has actually
appeared on the market, the success rate is much higher because of the research,
planning, and effort that have gone into its introduction. It is estimated that there is a
one-in-three failure rate among new product introductions.
Clearly, failure and success rates vary from organization to organization. In general,
the failure rate is higher for consumer products than for organizational goods. In the
consumer package-goods market, for instance, the failure rate is likely to be far higher
than in the organizational electrical components field. This difference is due to the
dynamic nature of the consumer marketplace and the fact that consumers often cannot
tell marketers exactly what new products will satisfy them. In contrast, the organizational
buyers of electrical components are able to give detailed information to component
manufacturers. No wonder, then, that new product failure and success rates vary
greatly.
The Characteristics of Success
Five characteristics influence a new products chances for success in the market place
: relative advantage, compatibility with existing consumption patterns, trialability,
observability, and simplicity of usage. When a product lacks one or more of these
characteristics, the others may be used effectively to make up for the deficiency. Non
product elements of the marketing mixprice, promotion, and distributionmust be
developed and adjusted with these same characteristics in mind.
Relative Advantage
Relative advantage : The ability of a product to offer clear-cut advantages over competing offerings.
Products that offer buyers clear-cut advantages over competing offerings are said to
have relative advantage. In organizational markets, relative advantage often arises
when new products perform exactly the same functions less expensively or faster than
existing products. Experience and improved technology, for example may make it
possible to replace metal parts with cheaper and lighter plastic ones. In other cases,
relative advantage arises from totally new technology. Computer systems that use
spoken words as input obviously have a relative advantage over earlier generations that
require typed input. In contrast, some new products prove to have no relative advantage
over their competitors. When the Miller Brewing company test-marketed its Clear
Miller Beer, the company quickly learned that its colourless beer didnt look or taste like
beer. This new product has no relative advantage.
Compatibility with Existing Consumption Patterns
Everything else being equal, a new product that is compatible with existing patterns of
consumption stands a better change of market acceptance than one that incompatible.
This is true even when the newer item has some relative advantage.
Consider, for example, the LifeSaver Companys Ice Breakers gum, with freshener
capsule technology that allows a bigger hit of mint to be released when you chew the
gum. It is completely compatible with the existing behaviour of people who buy breath
mints or chewing gum; and because it has a relative advantage, it should achieve rapid
market acceptance. On the other hand, it will take time for the market to accept the
Handwriter for Windows, a digital pad on which a computer user writes or draws with
a pen. The pad converts handwritten characters into computerized text and gives the
pen mouselike pointing capabilities with Windows programs. However, the thin pad is
quite different from a keyboard or mouse and requires a departure from existing usage
patterns.
Trialability The Opportunity for Buyer Testing
Trialability : The ability of a product to be tested by possible future users with little risk or effort.
Trial sampling : The distribution of newly marketed products to enhance trialability and familiarity;
giving away free samples.
Divisibility : The ability of a product to be sampled in small amounts by consumers.
A new product has trialability when possible future users can test it with little risk or
effort. Dior Mascara Flash, an instant makeup for hair highlighting, has trialability.
Clorox Disinfecting Wipes, premoistened and treated towels that kill 99.9% of bacteria;
they are not expensive, and the buyer need not invest in special equipment to use them.
A products trialability may be enhanced by coupon in newspapers, magazines, and the
mail. New shampoos and laundry products are made available in small, inexpensive
packages to encourage consumers to try them with little monetary risk. When companies
give away free samples to possible buyers, bringing trialability to perhaps its highest
level, the process is termed trial sampling. Sending computer discs and offering 10 or
50 hours of unlimited Internet and online service is America Onlines major means of
generating new customers.
Effective marketing management demands careful consideration of steps that
may encourage buyer sampling of a new product. Items intended to be sold in cases or
six-packs, like juices, sodas, and other drinks, might first be offered in single digit
packages or be given away by the cupful in shopping malls. Customers who are reluctant
to buy 12 of a given product may be willing to try just one. Trialability is more
appropriately referred to as divisibility when it refers to the opportunity to try a small
amount.
Observability The Chance to See the Newness
Observability : The ability of a product to display to consumers its advantages over existing
products.
Some new products enter the marketplace with attributes or characteristics that are
visible to the customer. Kyoceras Visual Phone is a mobile phone that can send and
receive images of callers. The new product has a video screen and a small camera
embedded in its upper right-hand corner. The gadget has a relative advantage over
regular mobile phones, and that advantage is easy to see.
Kyoceras Visual Phone is a product with observability.
Other products possess definite relative advantages that are not observable or so easily
grasped. A new brand of allergy tablets with an advanced formula that relieves allergy
symptoms without causing drowsiness has an advantage that is not observable by
most buyers. Advertisements for products with hidden qualities frequently feature
experts or credible users who attest to the products worth, making hidden qualities
observable.
Simplicity of Usage
A complex product or one that requires complex procedures for storage or use
starts out with a disadvantage. Digital cameras, at their introduction, were viewed by
consumers as phenomenal. However, because it was difficult for the average person
to understand the technical mechanism inside the cameras, the cameras themselves
were designed for easy operation. The simplicity of usage offsets the complexity of
the product itself. Compact disc digital recordings were similarly surprising to consumers,
who found it difficult to grasp the system by which these recordings were played.
Makers of early CD players carefully trained sales people to explain the new system
and arranged for newspaper and magazine columnists to try it so that they could explain
it to their readers.
Simplicity of usage : Ease of operation. This product benefit can offset any complexity in the
product itself.
The Importance of New Products
A firms product policy should be future-oriented and recognize that products, no matter
how successful, tend to be mortal they usually cannot sustain peak sales and profits
indefinitely : Who survives in todays highly competitive environment ? The innovators.
They dont just have new designs. They passionately pursue new ways to serve their
customers. So, product line additions and replacements should be constantly planned
and a balanced product portfolio pursued by both small and large firms.
New products offer differential advantages.
Introducing new products is important for several reasons. Desirable differential
advantages can be attained. The Venus shaver from Gillette is a product especially
designed for women, unlike Sensor for women and other mens shaving products adapted
for women. Gillette spent three years and $300 million to develop Venus, and introduced
it simultaneously in 29 nations during early 2001. The product has three blades, a
pivoting head, and aloe strips for comfort.
New products lead to sales growth or stability.
New products may be needed for continued growth. That is why ESPN has a new and
growing restaurant chain, known as ESPN Zone, that is capitalizing on the cable networks
strong brand loyalty among viewers. ESPN Zone was named as one of 2001s Hot
Concepts by Nations Restaurant News. For firms with cyclical or seasonal sales,
new products can stabilize revenues and costs. Dow Chemical manufactures medical-
testing equipment, and other rather stable product categories, to reduce its dependence
on cyclical chemicals. Black & Decker has cut back on lawn-care items and looks for
new opportunities in less seasonal products, such as power tools for the home.
New products can take time
Planning for growth must take into account the total time it takes to move from the idea
stage to commercialization. For instance, in 2001, Boeing announced that it would
develop a new long-range plane, tentatively named the Sonic Cruiser, with the goal of
introducing it in 2007 or 2008. The 200 to 300-seat plane will fly at up to Mach 0.95 or
faster, saving one hour per 3,000 miles flown. As Boeings executive vice-president of
sales and marketing says, nothing in the plane besides its efficiency will be very different:
There is no other plane around at the moment that can travel 9,000 miles nonstop
except for this one. However, it is still under development. The Sonic Cruiser is a
result of Boeings analysis on the need for a plane to fly from point to point. You cant
fly often if you have a bigger aircraft. The demand now is for smaller airplanes and not
the bigger ones.
New products can increase profit and control.
New products can lead to larger profits and give a company better control over a
marketing strategy. For example, new models of luxury cars such as Lincoln and
Lexus are often quite popular. When they are, the cars sell at or close to the sticker
price, with dealers earning gross profits of up to $10,000 or more on each car sold.
Because there are fewer luxury dealers relative to ones selling lower-priced cars, they
do not use much price discounting and have firm command over their marketing efforts.
Risk may be lessened through diversity.
To limit risk, many firms seek to reduce dependence on one product or product line.
That is why many movie theatres converted to multiplexes, so their revenues are not
tied to any one films performance. Hewlett-Packard makes electronic components
and test equipment, medical electronic equipment, and analytical instrumentationbesides
its core computing and printing products; and it regularly adds new products. Turtle
Wax, the worlds leader in car-care products, now makes glass cleaners, leather cleaners,
carpet cleaners, and upholstery cleaners.
New products may improve distribution.
Firms may improve the efficiency of their established distribution systems by placing
new products in them. They can then spread advertising, sales, and distribution costs
among several products, gain dealer support, and discourage others from entering the
market, Manufacturers like AT & T, Unilever and Revlon can place new products in
many outlets quickly. Service firms such as the Royal Bank of Canada also can efficiently
add new products (financial services) into their distribution networks.
Technology can be exploited.
Firms often seek technological breakthroughs. Makers of computer storage devices,
such as Western Digital, are constantly introducing newer, faster, better versions of
their productsat lower prices. In 2000, a Western Digital 15-gigabyte hard drive sold
for $200. By 2001, the firms newer 30-gigabyte drives were selling for $115. Japans
Toshiba, one of the worlds largest office equipments firms, has a new high-speed
digital copier that prints up to 80 pages a minute and can store paper at 24 locations.
The machine has the ability to print 440,000 copies per month.
Waste materials can be used.
Sometimes, firms want to find uses for waste materials from existing productsto aid
productivity or be responsive to recycling : Electric utilities are spinning gold out of
gunk they once spewed in the air. To comply with the 1970 Clean Air Act, companies
have been scrubbing the smoke coming out of their stacks to remove sulphur and fly
ash, then dumping the wastes into landfills. Now, they are finding farmers and construction
companies will buy the stuff. Near Oak Ridge, Tennessee, a unit of Caraustar Industries
built a factory to make wallboard out of sulfur residue produced at the Tennessee
Valley Authority power plant next door. Farmers buy sulphur residuescrubber
sludgesince it improves soil and boost crop yields. Wherever you put that stuff, it
just greens up. By selling what it calls coal by products, the TVA makes from $6
million to $10 million a year.
New products respond to consumer needs.
Companies may bring out new products to respond to changing consumer demographics
and life-styles. Single-serving pre-packaged foods are aimed at smaller households.
Kodak and Fuji have introduced a full line of single-use disposable cameras that appeal
to people interested in convenience. Microsoft offers computer keyboard that are
easier on the wrist. The Hain Celestial Group markets foods that appear to consumers
interested in natural, speciallty, organic, and snack foods under brand names sold as
better-for-you products.
Government mandates are addressed.
New products may be devised in response to government mandates. To address growing
concerns about battery disposal (and the carcinogenic properties of nickel cadmium
batteries), battery makers (led by Rayovac) have introduced rechargeable batteries
that can be recharged up to 25 times or more. Rayovac even hired Michael Jordan as
a celebrity endorser of its Renewal batteries. Although sales of rechargeable batteries
are still rather low, they are expected to rise.
Good long-run new-product planning requires systematic research and development,
matching the requirements of new-product opportunities with company abilities,
emphasizing consumer desires, properly spending time and money, and defensiveas
well as offensiveplanning. A firm must accept that some new products may fail; a
progressive firm will take risks : Innovation is a risky business, and failure is
commonplace. Rewarding success is easy, but rewarding intelligent failure is more
important. Dont judge people strictly by results; try to judge them by the quality of
their efforts. People should take intelligent business risks without also risking their
compensation or their careers.
8
There has been some criticism about the negative
effects of many U.S. firms short-run, bottom-line orientation on their level of
innovativeness (and willingness to take risks).
Challenges in New-product Development
Companies that fail to develop new products are putting themselves at great risk. Their
existing products are vulnerable to changing customer needs and tastes, new technologies,
shortened product life cycles, and increased domestic and foreign competition.
At the same time, new-product development is risky. Texas Instruments lost $660
million before withdrawing from the home computer business, RCA lost $500 million on
its videodisc players, Federal Express lost $340 million on its Zap mail, Ford lost $250
million on its Edsel, DuPont lost an estimated $100 million on a synthetic leather called
Corfam, and the British-French Concorde aircraft will never recover its investment.
Why do new products fail ?
l A high-level executive pushes a favorite idea through in spite of negative market
research findings.
l The idea is good, but the market size is overestimated.
l The product is not well designed.
l The product is incorrectly positioned in the market, not advertised effectively, or
overpriced.
l Development costs are higher than expected.
l Competitors fight back harder than expected.
Several other factors hinder new-product development :
l Shortage of important ideas in certain areas : There may be few ways left to
improve some basic products (such as steel, detergents).
l Fragmented markets : Keen competition is leading to market fragmentation.
Companies have to aim their new products at smaller market segments, and this
can mean lower sales and profits for each product.
l Social and government constraints : New products have to satisfy consumer
safety and environmental concerns. Government requirements slow down innovation
in drugs, toys, and some other industries.
l Costliness of the development process: A company typically has to generate
many ideas to find just one worthy of development. Furthermore, the company
often faces high R & D, manufacturing, and marketing costs.
l Capital shortages: Some companies with good ideas cannot raise the funds needed
to research and launch them.
l Faster required development time: Companies that cannot develop new products
quickly will be at a disadvantage. Companies must learn how to compress
development time by using computer-aided design and manufacturing techniques
strategic partners, early concept tests, and advanced marketing planning. Alert
companies use concurrent new-product development, in which cross-functional
teams collaborate to push new products through development and to market
Concurrent product development resembles a rubgy match rather than a relay
race, with team members passing the new product back and forth as they head
toward the goal. The Allen-Bradley Corporation (a maker of industrial controls)
was able to develop a new electrical control device in just two years, as opposed
to six years under its old system.
l Shorter product life cycles : When a new product is successful, rivals are quick
to copy it. Sony used to enjoy a three-year lead on its new products. Now Matsushita
will copy the product within six months, leaving hardly enough time for Sony to
recoup its investment.
Given these challenges, what can a company do to develop successful new products ?
Cooper and Kleinschmidt found that the number-one success factor is a unique, superior
product. Products with a high product advantage succeed 98 per cent of the time,
compared to products with a moderate advantage (58 per cent success) or minimal
advantage (18 per cent success). Another key success factor is a well-defined product
concept prior to development. The company carefully defines and assesses the target
market, product requirements, and benefits before proceeding. Other success factors
are technological and marketing synergy, quality of execution in all stages, and market
attractiveness.
Madique and Zirger, in a study of successful product launches in the electronics industry,
found eight factors accounting for new-product success. New-product success is greater
the deeper the companys understanding of customer needs, the higher the performance-
to-cost ratio, the earlier the product is introduced ahead of competition, the greater the
expected contribution margin, the more spent on announcing and launching the product,
the greater the top management support, and the greater the cross-functional teamwork.
New-product development is most effective when there is teamwork among R & D,
engineering, manufacturing, purchasing, marketing, and finance. The product idea must
be researched from a marketing point of view, and a specific cross-functional team
must guide the project throughout its development. Studies of Japanese companies
show that their new-product successes are due in large part to cross-functional
teamwork.
Exhibit: New Product Failures to Faulty Product Idea
Cibaca Lime Toothpaste
In 1991, Hindustan Ciba-Geigy launched Cibaca-Lime toothpaste. But despite the 14 genuine
herbal ingredients, the product failed. While people like the lemon flavour in foods, when it came to
brushing, the citrus taste jarred the teeth.
Cool Catsdecorated ceiling fans
Polar Industries launched Cool Cats, ceiling fans decorated with carbon characters, meant primarily
for children. The company got noted singer Sharon Prabhakar to do the promotional video and
conducted a door-to-door promotion campaign. Polar spent substantial sums of money on advertising
and marketing.
Despite all this, Cool Cats sold barely a few thousand pieces. Polar investigated why the sales did
not take off. When the fan moved, all the colours in the fan dissolved into a blur. There was no
colour effect to be seen by the children ! There was no other extra-functional benefit either that
justified its premium pricing at Rs. 1,200.
The company later slashed prices of Cool Cats by around 25 per cent, and also made the non-metro
towns its target market, instead of the metros.
Paloma and Nestea iced tea
Another product that has not taken off is iced tea. Nestle tried it in the 1980s with Paloma and yet
again in the 1990s with Nestea. Both left the consumers cold. For the majority of the consumers, tea
was still a hot drink and furthermore the customers at both the times were not ready to try
something new like iced tea. But now the customers are more willing to try new things and it will
be appropriate for Nestle to conduct marketing research to know about customers preference
towards the iced tea.
Walls frozen desserts
BBLILs Walls range of frozen desserts is another example. It is yet to capture a big market. It could
not be promoted as ice cream for technical reasons. And, since it is based on vegetable fats, it has
gained the name Dalda ka Ice cream, doing considerable damage to its intended position of a
premium product.
Distribution Problems Causing New Product Failure
Nestle Chocolates
When Nestle launched its new chocolates, the product was ok; the promotion too was ok. In fact,
the promotion won several awards. But, the new product encountered difficulties on the distribution
side.
The company insisted that at the retail outlets, its chocolates should be stored inside refrigerators:
otherwise they would melt. The stipulation resulted in two difficulties at the retail level: First, it
meant excluding a majority of the available outlets, as they did not have refrigerators. Second,
Contd....
chocolates being an impulse buy, the products are not picked up, if they are not visible upfront in
the retail shops.
Nestle eventually had to reformulate its product in line with channel requirements.
Pepsis Ruffles
Pepsi had problems with its Ruffles chips. The company decided that the same distribution system
(Pepsi) could be used both for the soft drink and the chips; the rationale was that both products
were breakable and fragile.
But, in actual practice, the two differed in distribution characteristics; the chips got crushed while
being transported along with the sturdier bottles. Eventually, Pepsi had to drop the combination
arrangement and go in for an independent distribution system for Ruffles.
Effective Organizational Arrangements
Top management is ultimately accountable for the success of new products. New
product development requires senior management to define business domains, product
categories, and specific criteria. For example, the Gould Corporation established the
following acceptance criteria :
n The product can be introduced within five years.
n The product has a market potential of at least $50 million and a 15 per cent growth
rate.
n The product would provide at least 30 per cent return on sales and 40 per cent on
investment.
n The product would achieve technical or market leadership.
Budgeting for new Product Development
Senior management must decide how much to budget for new-product development.
R & D outcomes are so uncertain that it is difficult to use normal investment criteria.
Some companies solve this problem by financing as many projects as possible, hoping
to achieve a few winners. Other companies set their budget by applying a conventional
percentage of sales figures or by spending what the competition spends.
Still other companies decide how many successful new products they need and work
backward to estimate the required investment.
The U.S. company best known for its commitment to new-product research and
development is Minneapolis-based 3M Company :
3M Minnesota Mining and Manufacturing (3M) fosters a culture of innovation and
improvisation that was evident at its very beginnings: In 1906 the directors were faced
with a failed mining operation, but they ended up making sandpaper out of the grit and
wastage. Today 3M makes more than 60,000 products, including sandpaper, adhesives,
computer diskettes, contact lenses, and Post-it notes. Each year 3M launches scores of
new products. This $15 billion companys immodest goal is to have each of its
divisions generate at least 30 per cent of sales from products less than four years on the
market.
l 3M encourages everyone, not just engineers, to become product champions.
The companys 15 per cent rule allows all employees to spend up to 15 per cent of
their time working on projects of personal interest. Products such as Post-it notes,
masking tape, and 3Ms microreplication technology grew from 15 per cent-rule
activities.
l Each promising new idea is assigned to a multidisciplinary venture team headed
by an executive champion.
l 3M expects some failures and learns from them. Its slogan is You have to kiss a
lot of frogs to find a prince.
l 3M hands out its Golden Step awards each year to the venture teams whose new
product earned more than $2 million in U.S. sales or $4 million in worldwide sales
within three years of its commercial introduction.
Table shows how a company might calculate the cost of new-product development.
The new-products manager at a large consumer packaged-goods company reviewed
the results of 64 new-product ideas. Only one in four ideas, or 16, passed the screening
stage. It cost Rs. 20,000/- to review each idea at this stage. Half of these ideas or eight,
survived the concept-testing stage, at a cost of Rs. 60,000/- each. Half of these or four,
survived the product-development stage, at a cost of Rs. 5,00,000/- each. Half of
these, or two, did well in the test market, at a cost of Rs, 50,00,000 each. When these
two ideas were launched, at a cost of Rs. 2.5 crore each. Only one was highly successful.
Thus the one successful idea had cost the company Rs. 3,05,80,000 to develop. In the
process, 63 other ideas fell by the wayside. The total cost for developing one successful
new product was Rs. 7,62,40,000. Unless the company can improve the pass ratios and
reduce the costs at each stage, it will have to budget nearly Rs. 8 crore for each
successful new idea it hopes to find. If top management wants four successful new
products in the next few years, it will have to budget at least Rs. 32 crore (4 Rs. 8
crore) for new-product development.
Table 9.1: Estimated Cost of Finding One Successful New Product
(Starting with 64 New Ideas).
Cost per
Number Pass Product Total
Stage of Ideas Ratio Idea Cost
1. Idea screening 64 1:4 Rs. 20,000/- Rs. 12,80,000/-
2. Concept testing 16 1:2 Rs. 60,000/- 9,60,000/-
3. Product development 8 1:2 5,00,000/- 40,00,000/-
4. Test marketing 4 1:2 50,00,000/- 2,00,00,000/-
5. National launch 2 1:2 2,50,00,000/- 5,00,00,000/-
Rs. 3,05,80,000/- Rs. 7,62,40,000
Organizing New-product Development
Companies handle the organizational aspect of new-product development in several
ways. The most common are :
l Product managers : Many companies assign responsibility for new-product ideas
to product managers. In practice, this system has several faults. Product managers
are so busy managing existing lines that they give little thought to new products
other than line extensions. They also lack the specific skills and knowledge needed
to develop and critique new products.
n New-product managers : Johnson & Johnson have new-product managers who
report to category managers. This position professionalizes the new-product
function. However, like product managers, new-product managers tend to think in
terms of modifications and line extensions limited to their product market in which
they operate. For e.g., A new product manager in car manufacturing company
will focus more on modification in existing cars.
n New-product committees : Many companies have a high-level management
committee charged with reviewing and approving proposals. These proposals
must be complete and describe the steps from conceptualisation to economic,
commercial & technical analysis in brief.
n New-product departments : Large companies often establish a department headed
by a manager who has substantial authority and access to top management. The
departments major responsibilities include generating and screening new ideas,
working with the R & D department, and carrying out field testing and
commercialization.
n New-product venture teams : 3M, Dow, Westinghouse, and General Mills often
assign new-product development work to venture teams. A venture team is a
group brought together from various operating departments and charged with
developing a specific product or business. They are intrapreneurs relieved of
their other duties and given a budget, a time frame, and a skunkworks setting.
Skunkworks are informal workplaces, sometimes garages, where intrapreneurial
teams attempt to develop new products.
The most sophisticated tool for managing the innovation process is the stage-gate
system used by 3M and a number of other companies. The innovation process is
divided into several stages. At the end of each stage is a gate or checkpoint. The
project leader, working with a cross-functional team, must bring a set of known
deliverables to each gate before the project can pass to the next stage. To move from
the business plan stage into product development requires a convincing market research
study of consumer needs and interest, a competitive analysis, and a technical appraisal.
Senior managers review the criteria at each gate to judge whether the project deserves
to move to the next stage. The gatekeepers make one of four decisions: go, kill, hold, or
recycle.
Go : The Product development process is given a go-ahea.
Kill : The process is halted forever because the economics may not be making
the sense or the profitability may not be justified etc.
Hold : The process is halted for the time being may be because of inadequate
information or time may not be right.
Recycle : The process is sent back to the initial stage so that extra details about
customer preferences may be collected or proposed projections of cost & profits
be revised etc.
Stage-gate systems put strong discipline into the innovation process, making its steps
visible to all involved and clarifying the project leaders and teams responsibilities at
each point. Some of the companies that rely on the stage-gate process are Mobil, 3M,
Hewlett-Packard, and Seattle-based Fluke, a pioneer in handheld electronic instruments.
Lego, the Danish toy maker, replaces about one-third of its product line every year with
new products. Since the late 1980s, Lego has been relying on a stages gate new-
product process to ensure that everything comes together for rapid product launches.
New Product Development Process
Managing The Development Process : Ideas
Idea Generation
The new-product development process starts with the search for ideas. Top managers
should define the product and market scope and the new products objectives. They
should state how much effort should be devoted to developing breakthrough products,
modifying existing products, and copying competitors products. New-product ideas
can come from many sources: customers, scientists, competitors, employees, channel
members, and top management.
The marketing concept holds that customer needs and wants are the logical place to
start the search for ideas. Hippel has shown that the highest percentage of ideas for
new industrial products originate with customers Technical companies can learn a
great deal by studying their lead users, those customers who make the most advanced
use of the companys products and who recognize the need for improvements before
other customers do. Many of the best ideas come from asking customers to describe
their problems with current products.
Figure 9.2: The New-Product-Development Decision Process
Successful companies have established a company culture that encourages every
employee to seek new ways of improving production, products, and services. Toyota
claims its employees submit 2 million ideas annually (about 35 suggestions per employee),
over 85 per cent of which are implemented. Kodak and other firms give monetary,
holiday, or recognition awards to employees who submit the best ideas.
Companies can also find good ideas by researching their competitors products and
services. They can learn from distributors, suppliers, and sales representatives. They
1. Idea
generation
is the
idea wort h
considering ?
2. Idea screening
Is the product
idea compatible
wi th company
objectives,
strategies, and
resources ?
3. Concept
development
and testing
Can we find a good
concept for the
Product that
consumers say they
would try ?
4. Marketing
strategy
development
Can we find a
cost -effective,
of fordabl e
Marketing
st rategy ?
5. Business analyis
Will the product
meet our profit
god ?
6. Product
development
Have we
developed a
technically and
commerci ally
sound product ?
7. Market
testing
Have product
sal es met
expectati ons ?
Are prodcut sales
meeting
expectations ?
Should we send the
idea back for product
development ?
Would it help to
modify t he product or
marketing program ?
DROP
Yes
Yes
Lay Future
Plans
Yes Yes
Yes
Yes Yes Yes Yes
No
No
No
No
No
No
No No No No
can find out what customers like and dislike in their competitors products. They can
buy their competitors products, take them apart, and build better ones. Many automobile
companies do this. Company sales representatives and intermediaries are a particularly
good source of ideas. These groups have firsthand exposure to customers and their
problems and are often the first to learn about competitive developments. An increasing
number of companies train and reward sales representatives, distributors, and dealers
for finding new ideas.
Top management can be another major source of ideas.
Some company leaders, such as Edwin H. Land, former
CEO of Polaroid, took personal responsibility for
technological innovation in their companies. On the other
hand, Lewis Platt, CEO of Hewlett-Packard, believes
senior managements role is to create an environment
that encourages business managers to take risks and
create new growth opportunities. Under Platts leadership,
HP has been structured as a collection of highly
autonomous entrepreneurial businesses.
New-product ideas can come from other sources as well,
including inventors, patent attorneys, university and
commercial laboratories, industrial consultants, advertising
agencies, marketing research firms, and industrial
publications. But although ideas can flow from many
sources, their chances of receiving serious attention often
depend on someone in the organization taking the role of
product champion. The product idea is not likely to
receive serious consideration unless it has a strong
advocate.
Ten Ways to Great New Product Ideas
1. Run pizza-video parties, as Kodak does-informal
sessions where groups of customers meet with
company engineers and designers to discuss
problems and needs and brainstorm potential
solutions.
2. Allow time offscounting timefor technical
people to putter on their own pet projects 3M allows
15 per cent time off; Rohm & Haas allows 10 per
cent.
3. Make a customer brainstorming session a standard
feature of plant tours.
4. Survey your customers : Find out what they like
and dislike in your and competitors products.
5. Undertake fly-on-the-wall or camping out
research with customers, as do Fluke and Hewlett-
Packard.
Figure 9.3: Forces
Fighting New Ideas.
"i've got a great ideal"
"It won't work here."
"We've tried it before."
"This isn't the right time."
"It can't be done."
"It's not the way we do things."
"We've done all right without it."
"It will cost too much."
6. Use iterative rounds : a group of customers in one room, focusing on identifying
problems, and a group of your technical people in the next room, listening and
brainstorming solutions. The proposed solutions are then tested immediately on
the group of customers.
7. Set up a keyword search that routinely scans trade publications in multiple countries
for new-product announcements and so on.
8. Treat trade shows as intelligence missions, where you view all that is new in your
industry under one roof.
9. Have your technical and marketing people visit your suppliers labs and spend
time with their technical peoplefind out whats new.
10. Set up an idea vault, and make it open and easily accessed. Allow employees to
review the ideas and add constructively to them.
Idea Screening
Any company can attract good ideas by organizing itself properly. The company should
motivate its employees to submit their ideas to an idea manager whose name and
phone number are widely circulated. Ideas should be written down and reviewed each
week by an idea committee, which sorts them into three groups : promising ideas,
marginal ideas, and rejects. Each promising idea is
researched by a committee member, who reports back to the committee. The surviving
promising ideas then move into a full-scale screening process. The company should
reward employees submitting the best ideas.
In screening ideas, the company must avoid two types of errors. A DROP-error occurs
when the company dismisses an otherwise good idea. It is extremely easy to find fault
with other peoples ideas (Fig. 9.3). Some companies shudder when they look back at
ideas they dismissed: Xerox saw the novel promise of Chester Carlsons copying
machine, but IBM and Eastman Kodak did not. IBM thought the market for personal
computers was minuscule. RCA saw the opportunity of radio; the Victor Talking Machine
Company did not. Marshall Field understood the unique market-development possibilities
of instalment buying; Endicott Johnson did not. Sears dismissed the importance of
discounting; Wal-Mart and Kmart did not. If a company makes too many DROP-
errors, its standards are too conservative.
A GO-error occurs when the company permits a poor idea to move into development
and commercialization. We can distinguish three types of product failures. An absolute
product failure loses money; its sales do not cover variable costs. A partial product
failure loses money, but its sales cover all its variable costs and some of its fixed costs.
A relative product failure yields a profit that is less than the companys target rate of
return.
The purpose of screening is to drop poor ideas as early as possible. The rationale is that
product-development costs rise substantially with each successive development stage.
Most companies require new-product ideas to be described on a standard form that
can be reviewed by a new-product committee. The description states the product idea,
the target market, and the competition, and roughly estimates market size, product
price, development time and costs, manufacturing costs, and rate of return.
The executive committee then reviews each idea against a set of criteria. Does the
product meet a need ? Would it offer superior value ? Can it be distinctively advertised
? Does the company have the necessary know-how and capital? Will the new product
deliver the expected sales volume, sales growth, and profit ? The surviving ideas can
be rated using a weighted-index method like that in Table 9.2. The first column lists
factors required for successful product launches, and the second column assigns
importance weights. The third column scores the product idea on a scale from 0 to 1.0,
with 1.0 the highest score. The final step multiplies each factors importance by the
product score to obtain an overall rating. In this example, the product idea scores .69,
which places it in the good idea level. The purpose of this basic rating device is to
promote systematic product-idea evaluation and discussion. It is not supposed to make
the decision for management.
As the new-product idea moves through development, the company will constantly
need to revise its estimate of the products overall probability of success, using the
following formula :
Overall Probability Probability of Probability of
probability of = of technical commercialization economic
success completion given technical success given
completion commercialization
For example, if the three probabilities are estimated as .50, .65, and .74, respectively,
the company would conclude that the overall probability of success is .24. The company
then has to judge whether this probability is high enough to warrant continued
development.
Managing the Development Process : Concept To Strategy
Concept Development and Testing
Attractive ideas must be refined into testable product concepts. A product idea is a
possible product the company might offer to the market. A product concept is an
elaborated version of the idea expressed in meaningful consumer terms.
Concept Development
We shall illustrate concept development with the following situation: A large food
processing company gets the idea of producing a powder to add to milk to increase its
nutritional value and taste. This is a product idea. But consumers do not buy product
ideas; they buy product concepts.
A product idea can be turned into several concepts. The first question is: Who will use
this product? The powder can be aimed at infants, children, teenagers, young or middle-
aged adults, or older adults. Second, what primary benefit should this product provide ?
Taste, nutrition, refreshment, energy ? Third, when will people consume this drink ?
Breakfast, midmorning, lunch, midafternoon, dinner, late evening ? By answering these
questions, a company can form several concepts :
l Concept 1: An instant breakfast drink for adults who want a quick nutritious
breakfast without preparing a breakfast.
l Concept 2: A tasty snack drink for children to drink as a midday refreshment.
l Concept 3: A health supplement for older adults to drink in the late evening
before they go to bed.
Each concept represents a category concept that defines the products competition.
An instant breakfast drink would compete against bacon and eggs, breakfast cereals
coffee and pastry, and other breakfast alternatives. A tasty snack drink would compete
against soft drinks, fruit juices, and other thirst quenchers.
Table 9.2: Product-Idea Rating Device
Relative Product Product
Weight Score Rating
Product Success Requirements (a) (b) (c = a b)
Unique or superior product .40 .8 .32
High performance-to-cost ratio .30 .6 .18
High marketing dollar support .20 .7 .14
Lack of strong competition .10 .5 .05
Total 1.00 .69*
Figure 9.4. Product and Brand Positioning.
Suppose the instant-breakfast-drink concept looks best. The next task is to show where
this powdered product would stand in relation to other breakfast products. Fig. 9.4.(a),
uses the two dimensions of cost and preparation time to create a product-positioning
map for the breakfast drink. An instant breakfast drink offers low cost and quick
preparation. Its nearest competitor is cold cereal; its most distant competitor is bacon
and eggs. These contrasts can be utilized in communicating and promoting the concept
to the market.
Next, the product concept has to be turned into a brand concept. Fig. 9.4.(b), is a
brand-positioning map showing the current positions of three existing brands of instant
breakfast drinks. The company needs to decide how much to charge and how calorific
to make its drink. The new brand would be distinctive in the medium-price, medium-
calorie market or in the high-price, high-calorie market. The company would not want
to position it next to an existing brand, where it would have to fight for market share.
Concept Testing
Concept testing involves presenting the product concept to appropriate target consumers
and getting their reactions. The concepts can be presented symbolically or physically.
However, the more the tested concepts resemble the final product or experience, the
more dependable concept testing is. In the past, creating physical prototypes was costly
(a) Product-positioning map
(breakfast market)
Expensive
Slow Quick
Inexpensive
Bacon
and eggs
Cold
cereal
Pancakes
Hot
cereal
Instant
breakfast
(b) Brand-positioning map
(instant breakfast market)
High price per ounce
Brand C
Low
in
calories
High
in
calories Brand B
Brand A
Low price per ounce
and time-consuming, but computer-aided design and manufacturing programs have
changed that. Today firms can design alternative physical products (for example, small
appliances or toys) on a computer, and then produce plastic models of each. Potential
consumers can view the plastic models and give their reactions.
Companies are also using virtual reality to test product concepts. Virtual reality programs
use computers and sensory devices (such as gloves or goggles) to simulate reality.
Gadd International has developed a research tool called Simul-Shop, a CD-ROM virtual
reality approach that re-creates shopping situations in which researchers can test
consumer reactions to factors such as product positioning, store layouts, and package
designs. Suppose a cereal marketer wants to test reactions to a new package design
and store shelf positioning. Using Simul-Shop on a standard desktop PC, test shoppers
begin their shopping spree with a screen showing the outside of a grocery store. They
click to enter the virtual store and are guided to the appropriate store section. Once
there, they can scan the shelf, pick up various cereal packages, rotate them study the
labelseven look around to see what is on the shelf behind them. A Gadds research
director explains: Once users move toward the item we want to test, [they] can look at
different packaging, shelf layouts, and package colours. Depending on the activity, we
can even ask users why they did what they did.
Many companies today use customer-driven engineering to design new products.
Customer-driven engineering attaches high importance to incorporating customer
preferences in the final design.
Concept testing entails presenting consumers with an elaborated version of the concept.
Here is the elaboration of concept I in our milk example :
Our product is a powdered mixture that is added to milk to make an instant breakfast
that gives the person all the needed nutrition along with good taste and high convenience.
The product would be offered in three flavors (chocolate, vanilla, and strawberry) and
would come in individual packets six to a box at $ 2.49 a box.
After receiving this information, consumers respond to the following questions :
Question Product Dimension Measured
1. Are the benefits clear to you and Communicability and believability. If the scores
believable ? are low, the concept must be refined or revised.
2. Do you see this product solving a Need level. The stronger the need, the higher the
problem or filling a need for you ? expected consumer interest.
3. Do other products currently meet this Gap level. The greater the gap, the higher the
need and satisfy you ? expected consumer interest. The need level can be
multiplied by the gap level to produce a need-gap
score. A high need gap score means that the consumer
sees the product as filling a strong need that is not
satisfied by available alternatives. A high need gap
score implies greater chances of success of the new
product.
4. Is the price reasonable in relation to the Perceived value. The higher the perceived value,
value ? the higher the expected consumer interest.
5. Would you (definitely, probably, probably Purchase intention. This would be high for con-
not, definitely not) buy the product ? sumers who answered the previous three questions
positively.
6. Who would use this product, and when User targets, purchase occasions, purchasing
and how often will the product be used ? frequency, number of times product is consumed
and average consumption in the single time.
The respondents answers indicate whether the concept has a broad and strong consumer
appeal, what products this new product competes against, and which consumers are
the best targets. The need-gap levels and purchase-intention levels can be checked
against norms for the product category to see whether the concept appears to be a
winner, a long shot, or a loser. In case of the winner there will be definite go ahead;
incase of long shot cost will be the determining factor for e.g., if the cost is high then
the company may not go ahead and in case of a loser its no go.
Conjoint Analysis
Consumer preferences for alternative product concepts can be measured through
conjoint analysis, a method for deriving the utility values .that consumers attach to
varying levels of a products attributes. Respondents are shown different hypothetical
offers formed by combining varying levels of the attributes, then asked to rank the
various offers. Management can identify the most appealing offer and the estimated
market share and profit the company might realize.
Figure 9.5: Samples for Conjoint Analysis.
Green and Wind have illustrated this approach in connection with developing a new
spot-removing carpet-cleaning agent for home use. Suppose the new-product marketer
is considering five design elements :
l Three package designs (A, B, C see Fig. 9.5.)
l Three brand names (K2R, Glory, Bissell)
l Three prices ($1.19, $1.39, $1.59)
l A possible Good Housekeeping seal (yes, no)
l A possible money-back guarantee (yes, no)
Although the researcher can form 108 possible product concepts (3 3 3 2 2), it
would be too much to ask consumers to rank 108 concepts. A sample of, say, 18
contrasting product concepts can be chosen, and consumers would rank them from the
most preferred to the least preferred.
The marketer now uses a statistical program to derive the consumers utility functions
for each of the five attributes (Fig. 9.6). Utility ranges between zero and one; the
higher the utility, the stronger the consumers preference for that level of the attribute.
Looking at packaging, we see that package B is the most favoured, followed by C and
A B C
What Is a Channel of Distribution ?
A channel of distribution may be referred to by other names, and terms vary from
industry to industry. But whether channel, trade channel, or some other variant of
the term is used, the functions performed remain the same. The term channel of
distribution has its origins in the French word for canal, suggesting a path that goods
take as they flow from producers to consumers. In this sense, a channel of distribution
is defined by the organizations or individuals along the route from producer to consumer.
Because the beginning and ending points of the route must be included, both producer
and consumer are always members of a channel of distribution. However, there may
be intermediate stops along the way. Several marketing institutions have developed to
facilitate the flow of the physical product or the transfer of ownership (title) to the
product from the producer to the consumer. Organizations that serve as marketing
intermediaries (middlemen) specializing in distribution rather than production are external
to the producing organization. When these intermediaries join with a manufacturer in a
loose coalition aimed at exploiting joint opportunities, a channel of distribution is formed.
Channel of distribution : The complete sequence of marketing organizations involved in bringing
a product from the producer to the ultimate consumer or organizational user.
A channel of distribution, then, consists of producer, consumer and any intermediary
organizations that are aligned to provide a means of transferring ownership (title) or
possession of a product from producer to consumer. The channel of distribution can
also be seen as a system of interdependent relationships among a set of organizations
a system that facilitates the exchange process.
All discussions of distribution channels assume that the product in question has taken
on its final form. The channel of distribution for an automobile begins with a finished
automobile. It does not include the paths of raw materials (such as steel) or component
parts (such as tires) to the automobile manufacturer, which is an industrial user in these
other channels. It should be emphasized that the channels purpose in moving products
to people is more than a simple matter of transportation. The channel of distribution
must accomplish the task of transferring the title to the product as well as facilitating
the physical movement of the goods to their ultimate destination. Although title transfer
and the exchange of physical possession (transportation) generally follow the same
channel of distribution, they do not necessarily need to follow the same path.
Merchant intermediary : A channel intermediary, such as a wholesaler or a retailer, that takes title
to the product.
Agent intermediary : A channel intermediary that does not take title to the product. Agent
intermediaries bring buyers and sellers together or otherwise help complete a transaction.
All but the shortest of channels include one or more intermediariesindividuals or
organizations specializing in distribution rather than production. (In the past,
Chapter 10
Distribution Channel Management
Distribution Channel Management 305
intermediarires were called middlemen). A distinction may be made between merchant
intermediaries, which take title to the product, and agent intermediaries, which do
not take title to the product. Although agent intermediaries never own the goods, they
perform a number of marketing functions, such as selling, that facilitate further
transactions in the exchange process.
Most intermediaries are independent organizations tied to the producers they deal with
only by mutual agreement; they are not owned by the producers. Some intermediaries
are owned by producers, such as the company-owned sales branches and sales offices
that sell NCR point-of-sale systems. However, these company-owned sales branches
and offices are clearly separate from the production facilities operated by the company.
In service marketing, it sometimes appears that there is no channel of distribution.
When a beautician delivers a product, such as a haircut or make-up advice, he or she
deals directly with the customer. But even in these shortest of distribution channels,
involving no intermediaries, marketing functions are being performed. The required
activities are simply performed by the provider of the service (or, in a self-service
environment, by the ultimate consumer).
When identifiable intermediaries are present, the channel members form a coalition
intended to act on joint opportunities in the marketplace. Each channel member, from
producer to retailer, must be rewarded or see some opportunity for continued participation
in the channel. Ultimately, for the channel to work properly, the consumer, who is not
an institutional member of the channel but is the final link in the process, must also
perceive a likely reward. Thus, the large merchandise selection and low retail prices
offered by a Target store must be seen as compensation for driving an extra mile or
two to the store. The coalition between channel members may be a loose one resulting
from negotiation or a formal set of contractual arrangements identifying each partys
role in the distribution process. The conventional channel of distribution is characterized
by loosely aligned, relatively autonomous marketing organizations that have developed
a system to carry out a trade relationship. In contrast, formal vertical marketing systems
are more tightly organized system in which the channel members are either owned by
a manufacturer or a distributor, linked by contracts or other legal agreements such as
franchises, to informally managed and coordinated as an integrated system through
strategic alliances.
Not included in the channel of distribution are transporation companies, financial
institutions, and other functional specialists selling services that assist the flow of products.
They are collaborators, playing a specialized role by providing a limited facilitating
service to channel members.
Marketing Functions Performed by Intermediaries
Perhaps the most neglected, most misunderstood, and most maligned segment of the
economy is the distribution segment. Retailers are seen by some as the principal cause
of high consumer prices, simply because retailers
are the marketers with whom consumers most
frequently come into contact. Retailers collect
money from consumers, so even though much of
that money is passed to other distributors or
manufacturers, retailers often bear the burnt of customers complaints. Wholesalers
A company can eliminate
intermediaries, but it
cannot eliminate the
functions they perform.
are also seen as causing high prices, perhaps because much of what they do is done
outside the view of consumers. In either case, many suggest cutting out the middleman
as a means of lowering the prices of consumer goods. For thousands of years, the
activities of those who perform the distribution function have been misunderstood, and
this viewpoint persists today.
Students of marketing should understand that an efficient distribution system must
somehow be financed. Most of the time, eliminating the middleman will not reduce
prices, because the dollars that go to intermediaries to compensate them for the
performance of tasks that must be accomplished regardless of whether or not an
intermediary is present. In other words, a company can eliminate intermediaries, but it
cannot eliminate the functions they perform.
How Intermediaries Fit into Distribution Channels
In the previous section we outlined a conventional channel of distribution consisting of
a manufacturer, a wholesaler, a retailer, and the ultimate consumer. Not all channels
include all of these marketing institutions. In some cases, a unit of product may pass
directly from manufacturer to consumer. In others it may be handled by not just one
but two or more wholesalers. To show why these many variations exist, we will examine
the role of intermediaries in marketing channels.
Consider this conventional channel of distribution :
Manufacturer Retailer Ultimate consumer
It is possible, as shown here, to have a channel of distribution that does not include a
separate wholesaler. A manufacturer can choose to sell directly to retailers, in effect
eliminating the wholesaler. However, the marketing functions performed by the
wholesaler must then be shifted to one of the other parties in the channelthe retailer
or the manufacturer. For instance, with the wholesaler out of the picture, the
manufacturer may have to create a sales force to call on the numerous retailers. If the
manufacturer assumes some or all of the marketing functions, they are said to have
been shifted back ward in the channel. If the retailer assumes them, they are said to
have been shifted forward in the channel. For example, the manufacturer may decide
to perform the function of breaking bulk by sending comparatively small orders to
individual retail customers. On the other hand, the retailer may be willing to accept
truckload lots of a product, store large quantities of it, and perform the activity of
breaking down these larger quantities into smaller quantities.
In any case, the functions performed by the eliminated wholesaler do not disappear;
they are simply shifted to another channel member. The channel member that assumes
these functions expects to be compensated in some way. The retailer may expect
lower prices and higher margins for the extra work performed. The manufacturer may
expect larger purchase orders, more aggressive retail promotion, or more control over
the distribution process.
The key to setting the structure of a channel of distribution is to determine how the
necessary marketing functions can be carried out most efficiently and effectively. Certain
variables, such as price, the complexity of the product, and the number of customers to
be served, can serve as guides to the appropriate channel structure. However, the
functions to be performed should be the primary consideration in marketing managers
distribution plans. Let us consider some of the major functions performed by
intermediaries: physical distribution, communication, and facilitating functions.
Producer
Intemediary
Buyer
A
Buyer
B
Buyer
C
Buyer
D
Breaking bulk-
function of most
intermediaries
Creating bulk
function of most
assemblers
Producer
A
Producer
B
Producer
C
Producer
D
Intermediary
(assembler)
Buyer
Physical Distribution Functions
Physical distribution functions include breaking bulk, accumulating bulk, creating
assortments, reducing transactions, and transporting and storing.
Bulk-breaking function : An activity, performed by marketing intermediaries, consisting of buying
products in relatively large quantities and selling in smaller quantities.
Breaking Bulk. With few exceptions, intermediaries perform a bulk-breaking function.
The bulk-breaking function consists of buying in relatively large quantities, such as
truckloads, and then selling in smaller quantities, passing the lesser amounts of
merchandise on to retailers, organizational buyers, wholesalers, and other customers.
By accumulating large quantities of goods and then breaking them into smaller amounts
suitable for many buyers, intermediaries can reduce the cost of distribution for both
manufacturers and consumers. Consumers, do not buy and store great amounts of
merchandise, which would increase their storage costs and the risks of spoilage, fire
and theft. Manufacturers are spare the necessity of dividing their outputs into the small
order sizes retailers or consumers might prefer. Bulk breaking is sometimes termed
resolution of economic discrepancies, because manufacturers, as a rule, turn out
amounts of merchandise that are vast compared with the quantity that an individual
buyer might be able to purchase. Breaking bulk resolves this discrepancy.
Bulk-accumulating function : An activity, performed by marketing intermediaries, consisting of
buying small quantities of a particular product from many small producers and then selling the
assembled larger qantities.
Assembler : A marketing intermediary that performs a bulk-accumulating function.
Accumulating Bulk. In the majority of cases, it is the task of the intermediary to
break bulk. However, an intermediary may also create bulk, buying units of the same
product from many small producers and offering the larger amount to those who prefer
to purchase in large quantities. These intermediaries are performing bulk-accumulating
function. An intermediary performing this function is called surprisingly, an assembler.
The classic examples of assemblers are in agriculture and fishing businesses. A maker
of tamato sauce, such as Maggie, would probably not want to have to deal with many
small farms. Assemblers gather large quantities of apples or tuna or other products
attractive to large buyers Figure 10.1. contrast the operation of assemblers with that of
bulk-breaking intermediaries.
Figure 10.1: The Bulk-Breaking and Bulk-Accumulating Functions
Sorting function : An activity, performed by marketing intermediaries, consisting of classifying
accumulated products as to grade and size, and then grouping them accordingly.
After accumulating bulk, marketers of agricultural products and raw materials typically
perform a sorting function, which involves identifying differences in quality and breaking
down the product into grade or size categories. For example, eggs are sorted into
jumbo grade AA, large grade AA, and so on.
Assorting function : An activity, performed by marketing intermediaries, consisting of combining
products purchased from several manufacturers to create assortments.
Creating Assortments : Another function that intermediaries perform is the creation
of assortments of merchandise that would otherwise not be available. This assorting
function resolves the economic discrepancy resulting from the factory operators natural
inclination to produce a large quantity of a single product or a line of similar products
and the consumers desire to select from a wide variety of choices. Wholesalers that
purchase many different products from different manufacturers can offer retailers a
greater assortment of items than an individual manufacturer is able to provide.
Consider how magazine publishers and retailers use intermediaries to solve a very big
assorting problem. There are hundreds of magazine titles available from Indian
publishers. No newsstand operator or other retailer carries anything like that number;
a series of intermediaries is used to sort these many titles into appropriate groupings for
individual stores. National wholesalers, move the hundreds of titles to hundreds of local
wholesalers. Their reward for fulfilling this huge task is about 6 percent of the magazines
retail prices, out of which they must pay all expenses involved. The local distributors
continue the task of breaking bulk, moving the magazines to countless supermarkets,
new stands, and other retail spots. But there is more to the local wholesalers task than
simply breaking bulk and making delivery. The local wholesaler must select, from
among the hundreds of available titles the ones that are appropriate for the individual
retailers operations. Then, this assortment of titles must be assembled in the proper
numbers for each retailer. The local wholesaler is paid about 20 percent of the cover
prices. Complicated as this sounds, the system is so efficient that, less than 36 hours
after a new Business Today is printed, it has arrived at all the retail establishments that
carry the business magazine. Although the influence of wholesalers has declined in
certain industries, it is obvious why wholesalers remain very important in the magazine
distribution business.
Reducing Transactions. There is one underlying reason why intermediaries can
economically accumulate bulk and create assortments. The presence of intermediaries
in the distribution system actually reduces the number of transactions necessary to
accomplish the exchanges that keep the economy moving and consumers satisfied.
As Figure 10.2, indicates, even if only four suppliers of grocery items attempt to transact
business with just four retail buying headquarters, the number of interrelationships
necessary is far greater than the number needed once an intermediary, such as a
wholesaler, is added to the system. Channel intermediaries, in their dual roles as buying
agents for their customers and selling agents for the manufacturers with which they
deal, simplify the necessary transaction process considerably. (Of course, channels of
distribution can become too long. Such channels are common in Japan). Intermediaries
not only reduce the number of transactions but also reduce the geographic distances
that buyers and sellers must travel to complete exchanges and spare manufacturers the
trouble of locating and contacting individual potential customers. These are some of
the ways wholesalers and retailers can reduce costs. If manufacturers and consumers
had to perform all these activities themselves, they would have to bear the costs involved.
Figure 10.2: Reduction of Transactions by an Intermediary
Transporting and Storing. Intermediaries, in most cases, perform or manage two
other marketing functions : transporting and storing. Merchandise must be physically
moved from points of production to points of consumption. This process often involves
storing, or holding, the product at various spots along the way. Intermediaries of all
types, including retailers, frequently store goods until they are demanded by customers
further along in the channel of distribution.
Consider Haldiram namkeena very popular namkeen in the Rohtak market. If each
person who wanted to buy (Haldiram namkeen) had to travel from Rohtak to the
Haldiram namkeen manufacturing unit at New Delhi to make a purchase, those hundreds
of thousands of customersor Haldirams employees, if the company chose to make
home deliverieswould travel an incredible total distance. Wholesalers and retailers
provide storage in the Rohtak market and enable Haldiram to send relatively few
truckloads of namkeen to that city, greatly reducing the total distance traveled. It is
clear that transportation and storage functions are necessary to satisfy the Rohtak
areas demand for Haldiram namkeen. Although this example may seem far-fetched,
it illustrates that one of the most important functions of intermediaries is to provide
regional and local storage. The local Haldiram wholesaler, the neighborhood sweet
shop, and the corner retailer all carry an inventory, and thus each performs the storage
function.
We should mention that some types of intermediaries do not take possession of the
goods whose distribution they facilitate. In such cases, the intermediary does not actually
transport or store the merchandise. Instead, the intermediary coordinates transportation
and storage or contributes in some other way to the creation of time and place utility.
Wholesaler
Manufacturer
Manufacturer
Colgate
Palmolive
HLL
Wholesaler
Retailer
Retailer
Amul
Modern
bread
Retailer 1
Retailer 4
Retailer 3
Retailer 2
Retailer 1
Retailer 4
Retailer 3
Retailer 2
Colgate
Palmolive
HLL
Amul
Modern
bread
Thus, you should think of transportation and storage in a broad sense that includes the
contribution of wholesalers that, for example, arrange for shipment of goods from a
producer-owned place of storage to an organizational buyers place of business.
Communication and Transaction Functions
Intermediaries perform a communication function, which includes buying, selling, and
other activities involving gathering or disseminating information. The ultimate purpose
of the communication link between the manufacturer and the retailer or between the
wholesaler and the retailer is to transfer ownershipthat is, to complete a transaction
that results in an exchange of title.
Selling function : Activities, performed by intermediaries, that are associated with communicating
ideas and making a sale and thus effecting the transfer of ownership of a product.
Buying function : Activities, performed by intermediaries, that are associated with making a
purchase and thus effecting the transfer of ownership of a product.
Wholesalers and retailers may perform an important promotional function for
manufacturers when they provide product information and price quotes. Most frequently,
this communication is carried out by a sales force. However, intermediaries also use
advertising and such sales promotion tools as retail displays. In other words,
intermediaries perform a selling function for the manufacturer, often providing a sales
force or other promotional efforts that they can supply more efficiently than the
manufacturer can. The wholesaler provides a buying function for retailers,
organizational users, and other customers. A wholesalers contact with numerous
manufacturers allows it to evaluate the quality of a wide assortment of goods from
competing manufacturers. thus, retailers and other customers are freed of the burden
of evaluating every manufacturers product assortments. This allows them more time
to specialize in the retailing and merchandising of products.
Intermediaries further serve as channels of communication by informing buyers how
products are to be sold, used, repaired, or guaranteed. They can even explain new
product developments. (In fact, retailers should pass along more of this information to
their customers : unfortunately many retail salespeople are not trained to provide
information of this sort). Because intermediaries typically deal with a number of
manufacturers or other suppliers of goods, they are in a unique position to serve as
conduits of information.
Intermediaries, being in the middle, are well placed not only to pass information from
producers to other channel members but also to collect information from channel members
or retail shoppers and return it to producers. For example, suppose a retailer receives
serious consumer complaints about a product or some product-related matter such as
repair service. The retailer should pass this information backward in the channel to the
wholesaler, who can bring the matter to the attention of the producer. Should is the
key word here. Too often, whether because of apathy or the fear of somehow being
blamed for a problem, intermediaries fail to perform this potentially valuable
service. Marketers at all levels should encourage communication throughout channels
of distribution, because the satisfaction of all channel members and consumers is at
stake.
Facilitating Functions
The transportation and storage functions of channel intermediaries are their most obvious
contributions to the operation of the marketing system. However, intermediaries perform
additional, so-called facilitating functions, which are not quite so apparent to observers
of a channel in operation. Because the tasks of a channel intermediary can be so
varied, it is nearly impossible to list all the facilitating functions a channel member might
perform. However, three major categories of facilitating functions should be mentioned
specifically : providing extra services, offering credit, and taking risks.
Service function : Activities, performed by intermediaries, that increase the efficiency and effectiveness
of the exchange process. Repair services and management services provided by intermediaries are
examples.
Extra Services. Channel member, particularly intermediaries, can and do provide a
range of extra services that increase the efficiency and effectiveness of the channel;
intermediatires thus perform a service function. For many products, the availability
of a post-sale repair service is an absolute necessity. Office photocopiers, for examples,
always seem to need either routine maintenance or minor or major overhauls.
Wholesalers and retailers of such machines usually offer repair services on either a
contract or an emergency basis. They also carry necessary supplies like paper. Other
productssuch as personal computers and cellular phonesare not so prone to
breakdowns, yet buyers like to know that repair service is available should it ever be
needed. Technical support is critical for many Internet and software companies.
Honouring manufacturers guarantees can be another responsibility of intermediaries.
Channel intermediaries can also provide a variety of management services. In the food
industry, for example, wholesalers offer such services as computerized accounting
systems, inventory planning, store site selection, store layout planning and management
training programs. The extra services offered are good business for the wholesalers in
that (1) they attract customers and (2) they help their food retailer customers to stay in
business and to remain successful. The services, if not offered by every competing
wholesaler, can also provide a competitive advantage to the food wholesaler willing to
invest in them. Wholesalers may offer other services, too. They may provide help in
preparing advertisements, and they may offer a line of private brand goods or a
wholesaler-owned label that smaller retailers can use to create an image similar to
those of larger chains.
Credit function : Provision of credit to another member of a distribution channel.
Credit Services : Most intermediaries perform a credit function by offering credit
service of one kind or another. Although some wholesalers and retailers operate
exclusively on a cash-and-carry basis, promising to pass related savings on to the
customers, they make up a relatively small proportion of the millions of intermediaries
operating in India.
Some credit services provided by channel members may not be immediately obvious.
A retailer that accepts Master Card or Visa provides a credit service that in fact, costs
the retailer a percent of the sales fee, which it must pay to the credit card company.
Many small/medium retailers offer their own credit plans, which involve a more clear-
cut provision of service than accepting outside card.
Wholesalers and other nonretailer channel members may provide credit in a number of
ways. Although a supplier may have a credit system so unique that buyer pay particular
notice, supplier credit systems are generally so widespread throughout a trade that
buyers scarcely see the credit system as a true service Intermediaries in many fields
routinely offer 30, 60 or more days to pay for merchandise ordered. Often, the days do
not start counting until the goods are delivered to the buyers place of business. In
effect, such a service permits the buyer to make some money on a product before
having to pay for it.
Risk-taking function : Assumption of the responsibility for losses when the future is uncertain.
Risk Taking. In almost everything they do, channel intermediaries perform a risk-
taking function. When purchasing a product from a manufacturer or supplier of any
type, intermediaries run the risk of getting stuck with an item that has fallen out of
favour with the buying public because of a shift in fashion or the death of a fad. It is
also possible for a product to spoil while it is in storage or lost through fire or some other
disaster. Intermediaries bear these risks in addition to market risk.
PERFORMED PERFORMED
MARKETING FUNCTION FOR SUPPLIERS FOR CUSTOMERS
Physical distribution Breaking bulk Sorting products into desired
functions Accumulating bulk quantities
Creating assortments Assorting items into desired
Transporation variety
Storage Delivery (transportation), Storage
Comnunication functions Promotion, especially selling and Buying based on interpretations
communication of product information of customer needs
Gathering customer information Dissemination of information
Facilitating functions Financing customer purchases Credit financing Repair services
Providing management services Technical support
Taking risks
Figure 10.3: What a Channel Intermediary Does for Its Suppliers and
Its Customers
Intermediaries run obvious risks in offering credit to the individuals and organizations to
which they sell. They take legal risks in that intermediaries, not manufacturers, can be
held responsible for problems caused by faulty products or misleading claims.
When intermediaries, for whatever reason, seek to avoid the service of risk taking, the
distribution system becomes less effective. In hard economic times, for example,
retailers and wholesalers are tempted to engage in hand to mouth buying, ordering
small quantities of products and attempting to sell them before placing yet another small
order. Such behaviour defeats the whole purpose of the marketing channel by eliminating
the buy in large quantitiessell in smaller quantities premise on which most channels
are based. Figure 10.3. summarizes the basic functions that channel intermediaries
perform.
Typical Channels of Distribution
We have already suggested that not all channels of distribution are alike. In fact, the
variety of distribution channels is extensive indeed. That is because marketers are
constantly seeking new ways to perform the distribution function. Both manufacturers
and intermediaries have developed all sorts of variations on the basic theme of distribution.
Each variation was developed in an effort to perform the distribution function better
and thereby attract business.
Channels may be distinguished by the number of intermediaries they include; the more
intermediaries, the longer the channel. Some organizations choose to sell their products
directly to the consumer or organizational user; others use long channels that include
numbers of wholesalers, agents, and retailers to reach buyers.
This discussion focuses on the most common of the numerous channels of distribution
available. Figure 10.4 shows the primary channels for consumers and business-to-
business products.
Channels of Distribution for Consumer Goods and Services
Figure 10.4, gives examples of typical channels for the distribution of consumer goods
and services.
The Direct Channel for Consumer Goods and Services. A good example of the
direct channel is supplied by the neighbourhood bakery, which converts flour, water,
and other raw materials into baked goods and then retails these products, providing any
other functions that might be necessary to complete the transaction. The direct channel
is also familiar as the distribution method used by many marketers of services and not-
for-profit groups that solicit donations.
Figure 10.4: Typical Channels of Distribution
Manufacturer
or Producer
Manufacturer
or Producer
Manufacturer
or Producer
Manufacturer
or Producer
Manufacturer
or Producer
Consumer
or User
Consumer
or User
Consumer
or User
Consumer
or User
Consumer
or User
Retailer
Retailer
Retailer
Wholesaler
(agent)
Wholesaler
Wholesaler
ICICI Bank
MRF Tyres
HLL
Time
magazine
Maruti Showroom
HLL
distributor
India Today Group
Bookstore
Travel Agency
Local
wholesaler
Retail shop
Consumer
Consumer
Consumer
Consumer
Consumer
Agent
Your
university
Travel
Agency
Garage
Home
building
contractor
Local
Maruti dealer
Automobile
Service Station
(wholesaler)
Local Dealer
Exclusive
dealer
Sales agent
International
Travel Agency
IBM
Maruti Zen
Tyres
Asian Paints
The Primary Channel of Distribution
Business-to-Business Examples
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
Indian
Airlines
British
Airways
Company whose
executives are
frequent flyers
Marketers of consumer goods and services that promote their products through mail-
order catalogs, telemarketing (telephone sales), and toll-free numbers listed in
advertisements and that distribute directly to consumers through the mail or a delivery
service are also using direct channels. The strategies of these direct marketers, which
do not use retail outlets or contact customers in person, rely largely on data-based
management and certain direct-response promotional strategies.
The Manufactirer (Producer)RetailerConsumer Channel. The
manufacturerretailerconsumers channel is commonly employed when the retailer
involved is a sizable organization, such as a discount chain like Wal-Mart. This type of
retail marketing organization may prefer to deal directly with manufacturers to be able
to order specially made merchandise or obtain discounts or other benefits.
Generally, the benefits must be important enough to make the retailer willing to perform
many wholesaling functions. However, in an effort to please large retail customers, the
manufactuerer may agree to perform wholesaler functions. The efficiencies a
manufacturer gains from the large orders placed by Sears or Wal-Mart can more than
offset the wholesaling costs the manufacturer may have to absorb.
Most of the private mobile phone service provides like Air Tel, Hutch, IDEA use service
provider Retailer Consumer channel to provide various pre-paid and post paid
service facilities to the consumers. This type of intensive distribution helps in catering
the customer requirements anywhere, anytime.
The ManufacturerWholesalerRetailerConsumer Channel. The
manufacturerwholesalerretailerconsumer channel of distribution is the most
commonly used structure for consumer goods. This is because most consumer goods
are so widely used. It would be virtually impossible for the ITC, for example, to deal
individually with every retailer stocking cigarettes, let alone every consumer of cigarettes.
Thus, a long channel, with at least two intermediaries, is needed to distribute the product.
Wholesalers can also be used in the distribution of services.
Channels That Include Agents. A familiar type of agent is the real estate agent.
Consumers marketing their homes or unconstructed plots often lack time and marketing
skills, so they hire agents. Manufacturers, especially those lacking expertise in marketing
a particular product line, may choose to permit manufacturers agents or selling agents
to handle the marketing of their products. Such agents do not take title to the goods
they sell and usually earn commissions rather than a salary.
In marketing channels for consumer goods, agents may, depending on the circumstances
and the product they offer, sell to retailers or wholesalers. The manufacturer-agent-
wholesaler-retailer-consumer channel is widely used in the marketing of consumer
products, especially convenience goods.
It might seem that travel agents used by airlines function as retailers. Technically,
however, they are part of a channel involving an agent. The service producer-agent
channel is common in marketing of consumer services like insurance, tours travel,
postal saving scheme etc.
Channels of Distribution for Business-to-business Marketing
Business-to-business marketers use channels that are similar to those used by the
marketers of consumer products. The primary channels are illustrated in Figure 10.4.
The Direct Channel in Business-to-Business Marketing. The name business-
to-business suggests the importance of the direct channel in the marketing of
organizational products. Indeed, the direct channel is the one most commonly used in
the marketing of organizational goods. Direct organizational sales of industrial machinery
such as escalators, power-generating machinery such as turbine engines, metals such
as titanium, and many other products require well-informed salespersons, and perhaps
engineers, who can help the buyer fit the product into its organizational facility or
manufacturing process. Otis Elevator, for example, it a business-to-business marketer
that uses a direct channel to reach multistorey construction companies.
Many business-to-business marketers now use the Internet for electronic commerce.
This constitutes a direct channel.
The ManufacturerWholesalerOrganizational User Channel : Because, by
definition, retailers deal with consumers, there is no distribution channel for organizational
goods that directly parallels the manufacturerretailer channel. However, there is a
trade channel for organizational goods that relies on just one wholesale intermediary,
which performs a function much like that of a retailer. This is the manufacturer-
distribution-organizational user channel. The names for this type of wholesaler
vary from industry to industry; among the most common terms used are jobber and
distributor.
Jindal Steel, maker of not rolled & cold rolled steel, uses distributors who, working out
in a given area sell directly to small customers, like utensil makers. Distributors selling
to organizational users may also operate store-like facilities that buyers such as
electricians or plumbers may patronize. In either format, organizational distributors
peform storage and communication functions. They may, as in the Jindal steel example,
provide delivery, and they may also supply credit or perform other functions. The
organizational distributor is classified as a merchant intermediary, because this distributor
takes title to the goods. Channels of distribution for organizational goods sometimes
include more than one merchant wholesaler. This arrangement is most common in
international marketing.
Business-to-Business Marketers Also Use Agents. The manufacturer-agent-
organizational user channel is commonly used in business-to-business marketing by
small manufacturers that market only one product to many users. The wide range of
customers to which agents sell suggests the main attraction of agents for manufacturers
: flexibility. One type of agent intermediary, the broker, can be used on an occasional
basis, as needed. No continuing relationshipand therefore no continuing financial
remuneration or other obligationis necessary. Similarly, manufacturers agents operate
on a commission basis within fixed geographic territories. Therefore, they appeal to
small organizations whose limited financial resources make it difficult for them to fund
their own sales forces. Manufacturers agents are also attractive because they can be
employed in thin market areas or in foreign countries where potential sales do not
seem to justify a manufacturers forming its own sales force.
Disintermediation
Disintermediation : The compression, or shortening of marketing channels because one or more
intermediaries have been eliminated.
A shift in many channels of distribution is currently under way because of the dramatic
impact of e-commerce on business-to-consumer and business-to-business distribution.
Because the Internet allows direct communication with customers and online selling,
many channels are being disintermediated. Disintermediation refers to the
compression, or shortening, of marketing channels because one or more intermediaries
have been eliminated. When IBM decided that it would market its Aptiva computers
directly, on the Internet, and no longer sell them in stores, it disintermediated a portion
of its distribution system.
Remember, however, that eliminating a middleman does not eliminate the need for
that intermediarys function. When a manufacturer decides to disintermediate, it must
itself perform those distribution functions previously performed by the intermediary.
Alternatively, it may choose to outsource some distribution functions. For example, it
may contract with UPS or FedEx to provide transporation and storage services.
One of the most revolutionary changes resulting from disintermediation is the growth of
infomediaries, providing a new form of intermediation.
Infomediaries and Vertical Exchanges
The communication function of intermediaries has always been important, because
buyers and sellers need information to make decisions. In some situations, buyers also
need to search out organizations or individuals
that are marketing the product they desire. In
the past, a consumer might read a copy of
Consumer Report to reduce the time spent
searching for information and to learn experts
evaluations of products. The consumer would then go to a store to purchase the desired
item.
Infomediary : An intermediary that services as an electronic information broker.
In todays digital world, a new form of intermediary has emerged. An infomediary
serves as an electronic information broker, providing shopping services or information
buying assistance to help buyers and sellers find each other. Infomediaries can offer
sophisticated and highly specific information searches at a very low cost. Autto-By-
Tel, for example, supplies its customers with the names of local automobile dealers that
will provide the exact car the buyer wants at a rock-bottom, no-negotiation price. Auto-
By-Tels role as an intermediary is to provide information. The physical transaction
takes place elsewhere.
In addition, another new breed of intermediaries is emerging to facilitate business-to-
business e-commerce. These new intermediaries are online trading communities that
specialize in vertical markets. (Vertical markets focus on specific industries, such as
chemicals, or specific business processes, such as food processing.
Vertical exchange : A business-to-business intermediary that specilizes in using the internet to
connect and asist numerous buyers and numerous sellers in a vertical market.
Horizontal markets offer products, such as office supplies, that a wide range of
companies across industries use.) Such e-commerce intermediaries have been called
aggregators, vertical market makers, vertical marketplaces, vortals, and several
other names; however, we prefer the term vertical exchanges. A vertical exchange
Informediaries can offer
sophisticated and highly
specific information searches
at a very low cost.
specializes in using the Internet to connect and assist numerous buyers and numerous
sellers in a vertical market. Vertical exchanges provide portals or electronic hubs that
function as electronic marketplaces; administer Web-based procurement systems that
allow for the transfer of title; and provide customized services such as online tracking
of shipments.
Most of the vertical exchanges operating these Web-based marketplaces do not take
title to the products or physically handle them. They are just pure information and
Web-service intermediaries. They create value several ways. The greatest benefit is
created by bringing together a critical mass of buyers and sellers and aggregating
information from buyers and sellers. By aggregating information for vertical market,
the vertical exchange allows a buyer to compare many suppliers simultaneously. Buyers
benefit because they have more choices. Sellers benefit because they have access to
more buyers. Geographical barriers and the need for extensive travel are minimized.
Overall, a vertical exchange improves matching for both buyers and sellers. In addition,
operating a standardized system, perhaps business-to-business online auction, redcues
search and information transfer costs. Vertical exchanges create value because the
costs related to doing business on the Internet are shared by all participants and thus
reduced for any particular member of the vertical exchanges trading community.
Consider an example. Chemdex is a vertical exchange for the life sciences research
industry. Through its Chemdex Marketplace, it exhibits 250,000 products from more
than 120 suppliers, including biological chemicals and reagents like antibodies, enzymes,
and organic and inorganic chemicals. Buyers are biotech and pharmaceutical companies,
as well as academic and research institutions. Buyers can access the market place via
the Chemdex Web site and search for specific products. Chemdexs primary function
as an intermediary is to provide information and e-commerce solutions. Supplier
companies, such as SmithKline Beecham and Genetech, are connected to potential
buyers through the Chemdex portal, which contains an electronic catalog, a search
engine, and an easy-to-use ordering system. Once a transaction occurs between trading
partners, Chemdex provides services that support order fulfillment and other after-the-
sale activities.
Vertical Marketing Systems
In many industries, such as the fast-food restaurant industry, the dominant distribution
structure is the vertical marketing system. The concept of a vertical marketing system
emerged with the need to manage or administer the functions performed by
intermediaries at two or more levels of the channel of distribution.
Vertical marketing system : A network of vertically aligned establishments that are managed
professionally as centrally administered distribution systems.
Vertical marketing systems, or vertically integrated marketing systems, are networks
of vertically aligned establishments that are professionally managed as centrally
administered distribution systems. Central adminsitration is intended to provide
technological, managerial, and promotional economies of scale through the integration,
coordination, and synchronization of transactions and marketing activities necessary to
the distribution function. There are three types of vertial marketing systems : corporate
systems, contructural systems, and adminsitered strategic alliances.
Corporate SystemsTotal Ownership
Corporate vertical marketing system : A vertical marketing system in which two or more channel
members are connected through ownership.
The corporate vertical marketing system connects two or more channel members
through ownership. It is exemplified by a retailer, such as Sears, that integrates
backward into manufacturing to assure quality control over production and corporate
control over the distribution system. A manufacturer may obtain complete control of
the successive stages of distribution by vertically integrating through ownership.
Raymonds exclusive retail outlets. Arvind Mills is also doing the same through Newport
outlets.
Contractual SystemsLegal Relationships
Contractual vertical marketing system : A vertical marketing system in which channel coordination
and leadership are specified in a contractual agreement.
In a contractual vertical marketing system, channel leadership is assigned not by
ownership but by a contractual agreement. In such a channel, relationships are spelled
out so that there is no questions about distribution coordination. The relationship between
McDonalds franchise holders and McDonalds headquarters is a contractual one wherein
the rights and responsibilities of both parties are clearly identified. The idea behind such
an approach to distribution is that if all parties live up to the agreement, the system will
work smoothly and well. In the main, this has certainly been the case for McDonalds,
although the secret of McDonalds success is not merely the employment of a contractual
vertical marketing system but also the hard work required to make it succeed.
Retailer cooperative organization : A group of independent retailers that combine resources and
expertise to control their wholesaling needs through use of a centralized wholesale buying center.
There are three subtypes of contractual systems; retailer cooperative organizations,
wholesaler-sponsored voluntary chains, and franchises. A retailer cooperative
organization is a group of independent retailers, that maintains a centralized buying
center to perform a wholesaling function. These retailers have combined their financial
resources and their expertise to more effectively control their wholesaling needs. By
capitalizing on economies of scale they lower wholesaling costs with their cooperative
effort. At the same time, they retain independence.
Wholesaler-sponsored voluntary chain : A vertical marketing system, initiated by a wholesaler,
that links a group of independent retailers in a relationship with the wholesale supplier.
The wholesaler-sponsored voluntary chain is similar to a cooperative organisation
except that the wholesaler initiates and manages the collaborative effort so that it has a
strong network or loyal retailers. The independent retailers served agree to use only
this one wholesaler, while the wholesaler agrees to service all organized retailers. Ace
Hardware is a voluntary chain. Each of the stores uses common name and receives
marketing support that helps the independent retailer compete with chain stores.
Franchise : A contractual agreement between a franchisor and a franchisee by which the franchisee
distributes the franchisors product.
A franchise is a contractual agreement between a fracnchisor, typically a manufacturer
or a wholesaler, and a number of independent retailers, or franchisee. The franchise
agreement often gives the franchisor much discretion in controlling the operations of
the small retailers. in exchange for fees, royalties and a share of the profits, the frachisor
offers assistance and, often, supplies. Franchise assistance may take the form of
marketing research information or strategic marketing planning aids (for example, new
product planning) from franchisor experts. The franchisee is usually responsible for
paying for insurance, property taxes, labour and supplies.
The franchise has been popular and successful in the fast-food industry. McDonalds
Wimpys, Nirulas and many other familiar fast-food restaurant are franchises. Subway
is one of the fastest-growing fast-food franchise opeation. Franchising is prominent in
the service industry as well. Consider computer education institutes and universities
distance education centers.
One of the main advantages of the franchise system, as well as some other contractual
marketing systems, is that it offers brand identity and a nationally recognizable storefront
for a retail outlet. McDonalds, Burger Kings, and other franchise operations have
strong identities. The person driving down the highway has a very clear conception of
what products or services will be found at the franchise outlet.
Administered Strategic AlliancesStrong Leadership
Adminsitrated strategic alliance : A vertical marketing system in which a strong channel leader
coordinates marketing activities at all levels in the channel through planning and management of a
mutually beneficial program.
The third major type of vertical system is the administered strategic alliance. Here,
a strong position of leadership, rather than outright ownership, may be source of influence
over channel activities. The administrator may be any channel member larger enough
market clout to dominate the others. Alternatively, a strategic alliance may be built on a
commitment to establish long-term relationship based on collaborative efforts.
Caterpillars dealerships are all independently owned, but the heavy equipment
manufacturer considers its dealers as vital partners. Caterpillar is as concerned about
dealers performance as the dealers are, because the companys enormous and loyal
dealer network is one of its major competititve advantages. According to Caterpillars
president, We have a tremendous regard for our dealers. We cannot bypass or undercut
them. Some of our competitors do and their dealers quit Caterpillars dealers dont quit
: they die rich. Caterpillars strong focus on administering the strategic alliances leads
the company to offer a range of supplier and consulting services aimed at helping
dealers boost their profitability. Often Caterpillar service ensures that dealers inventories
are at the right level. An intranet connects all dealers to the Caterpillar ordering system
so that they can order any part they need for next-day delivery. When you buy the
iron, you own the company, Caterpillar literature says.
Administered systems generally are constructed around a line of merchandise rather
than the complete manufacturing, wholesaling, or retailing operations example, a
manufacturer wishing to ensure that wholesalers and retailers in its comprehensive
program of marketing activities might use an administered strategic alliance to coordinate
marketing activities and make them attractive to all parties (perhaps by offering discounts
or financial assistance). Adminsitered strategic alliances may include arrangemnets to
share or pool inventory information or exchange other databases so that purchase orders
are executed automatically by computers.
Channel-design Decisions
A new firm typically starts as a local operation selling in a limited market. It usually
uses existing intermediaries. The number of intermediaries in any local market is apt to
be limited; a few manufacturers sales agents, a few wholesalers, several established
retailers, a few trucking companies, and a few warehouses. Deciding on the best
channels might not be a problem. The problem might be to convince the available
intermediaries to handle the firms line.
If the firm is successful, it might branch into new markets. It might have to use different
channels in different markets. In smaller markets, the firm might sell directly to retailers;
in larger markets, it might sell through distributors. In rural areas, it might work with
general-goods merchants; in urban areas, with limited-line merchants. In one part of
the country, it might grant exclusive franchises; in another, it might sell through all
outlets willing to handle the merchandise. In one country it might use international sales
agents; in another, it might partner with a local firm. In short the channel system
evolves in response to local opportunities and conditions.
Designing a channel system calls for analyzing customer needs, establishing channel
objectives, and identifying and evaluating the major channel alternatives.
Analyzing Customers Desired Service Output Levels
In designing the marketing channel, the marketer must understand the service output
levels desired by the target customers. Channels produce five service outputs :
1. Lot size: The number of units the channel permits a typical customer to purchase
on one occasion. In buying cars for its fleet, a travel agency prefers a channel
from which it can buy a large lot size; a household wants a channel that permits
buying a lot size of one.
2. Waiting time: The average time customers of that channel wait for receipt of the
goods. Customers normally prefer fast delivery channels. Customers are willing
to wait only for made-to-order goods or those whose early delivery is very
expansive.
3. Spatial convenience: The degree of which the marketing channel makes it easy
for customers to purchase the product. Maruti Suzuki, for example, offers greater
spatial convenience than Ford, because there are more Maruti dealers. Marutis
greater market decentralization helps customers save on transportation and search
costs in buying and repairing an automobile. Maruti even clain in one of its
advertisement. Wherever you are you are not far from Maruti Service Station.
4. Product variety: The assortment breadth provided by the marketing channel.
Normally customers prefer a greater assortment because more choices increase
the chance of finding what they need. So we find the shops that deal exclusively
in readymade garments or shoes.
5. Service backup: The add-on services (credit, delivery, installation, repairs)
provided by the channel. The greater the service backup, the greater the work
provided by the channel. For example computers, commercial xerox machine
etc. require frequent backup service.
The marketing-channel designer knows that providing greater service outputs means
increased channel costs and higher prices for customers. The success of discount
stores indicates that many consumers are willing to accept lower-service outputs if
they can save money.
Establishing Objectives and Constraints
Channel objectives should be stated in terms of targeted service output levels. According
to Bucklin, under competititve conditions, channel institutions should arrange their
functional tasks to minimize total channel costs with respect to desired levels of service
outputs. Usually, several market segments that desire differing service output levels
can be identified. Effective planning requires determining which market segments to
serve and the best channels to use in each case.
Channel objectives vary with product characteristics. Perishable products require more
direct marketing. Bulky products, such as building materials, require channels that
minimize the shipping distance and the amount of handling in the movement from producer
to consumers. Non-standardized products, such as custom-built machinery and
specialized business forms, are sold directly by company sales representatives. Products
requiring installation or maintenance services such as heating and cooling systems are
usually sold and maintained by the company or exclusively franchised dealers. High-
unit-value products such as generators and turbines are often sold through a company
sales force rather than intermediaries.
Channel design must take into account the strengths and weaknesses of different types
of intermediaries. For example, manufacturers reps are able to contact customers at
a low cost per customer because the total cost is shared by several clients. But the
selling effort per customer is less intense than if company sales reps did the selling.
Channel design is also influenced by competitors channels.
Channel design must adapt to the larger environment. When economic conditions are
depressed, producers want to move their goods to market using shorter channels and
without nonessential services that added to the final price of the goods. Legal regulations
and restrictions also affect channel design.
Chart 10.1: Linkage between channel objectives and channel design
Channel objectives Channel design
Castrol India
Provide locational convenience to customers; make
the products available everywhere (strong reach).
Provide choice in products to customers.
Provide speedy delivery; fulfill orders from outlets
within 24 hours.
Reliance Textiles (Vimal)
Use channel to project the exclusive image of Vimal
fabrics.
Concentrate on urban market to fall in line with
the segmentation/positioning strategy.
Go for vast network of outlets.
Make available all products/all varieties/all pack sizes
(1,800 Stock keeping units) in all outlets and allow
the customer to pick what he wants. This means the
outlets have to be backed by an extensive network
of CFAs/stockists/warehouses/delivery facilities.
This again means extensive back-up and a multi-tier
design.
Go for exclusive showrooms (Vimal has a chain of
over 2,000 showrooms).
Ensure that the outlet in itself serves as a commu-
nication device.
Have showrooms in all cities/class 1 towns of the
country. Have jumbo showrooms in the metros/big
cities.
Contd...
Philip (Appliances/Personal care products)
Cover the market intensively and extensively.
Make after-sales service an integral part of channel
function.
Build barriers to competitors through channel
strength.
Archies Gifts and Greetings
Proximity to customers.
Convert low involvement purchase into high
involvement purchase.
Make purchase of greeting cards/gifts an enjoyable
experience.
BBLIL (Pre merger with HLL)
Make the products available everywhere (strong
reach).
Provide choice of brand; ensure different brands
are available at the right place, right time.
Always give fresh stocks to consumers.
Louis Phillippe
Promote Louis Philippe as a complete and
premium wardrobe line, with shirts, trousers, ties,
socks, blazers belts, etc.
Cover the target market (the well-to-do gents)
adequately.
Maintain an edge over competition by competing
on quality, service, image and value.
ITC-Tobacco Division
Ensure easy availability of ITC cigarates.
Build brands through merchandising.
Have a three-tier channel, with C&F agents,
distributors, and retailers. Philips has set up a large
base of 2,200 retailers.
Establish APSCs (athorised Philips service centres);
Philips now has 110 APSCs four CRCs (consumer
response centres), and a team of 60 engineers liaising
with the APSCs.
Motivate the channel for attending to service
requirements. Philips gives a guaranteed 30 per cent
return on investment to the APSC.
Pre-empt the march of competitors by embracing
practically all strong dealers in the market as Philip
dealers.
Establish outlets close to the target buyersthe upper
echelons of society.
Go for exclusive shops/shop-in-shops.
Go for trendy interior design and peppy ambience.
Stock a wide range of highly appealing merchandise.
Embrace all types of shops, supermarkets, grocery
stores and kirana shops, as part of the companys
channel.
BBLIL has adopted a three-tier channel with C&F
agents, redistribution stockists and retailers.
Provide for proper inventory/delivery back-up.
At each level, minimise the distance between issuing
and receiving points.
Go for exclusive showrooms; ensure availability of
the whole line at these outlets.
Showrooms alone will not be enough.
Go for dress circles (Similar to showrooms, but stocks
are bought and resold by the retailers).
Go for multi-brand outlets too.
Go for Shop-in-Shop in super stores like Akbar Alis,
Mumbai, where special areas (Shops within shops)
are available for exclusive marketing of specific
brands.
Go for CFAs as well as wholesalers, who will distribute/
resell to retailers (ITC has more than 8,000 retailers).
Go for different types of retailers : Branded,
traditional and Non-traditional.
Have branded retailers/franchisee retailers who sell
only ITC cigarettes and not other brands.
Table 10.1: Selected Distribution Goals by Party.
Party Distribution Goals
Suppliers/Manufacturers To gain access to the distribution channel.
To ensure that all distribution functions are performed by one
party or another
To hold down distribution and inventory costs
To foster relationship marketing with distribution intermediaries
and customers
To obtain feedback from distribution intermediaries and
customers.
To have some control over the distribution strategy
To optimize production runs and achieve economies of scale.
To secure some exclusivity with distribution intermediaries
To resist the payment of slotting allowances (the fees charged
by some distribution intermediaries to secure shelf space)
To receive a fair share of profits.
Distribution Intermediaries To have on-time deliveries and quick turnaround time for orders
To ensure that all distribution functions are performed by one
party or another.
To service multiple suppliers/manufacturers in order to present
a choice for customers
To meet customer needs
To foster relationship marketing with manufacturers/suppliers
and customers
To obtain feedback from distribution manufacturers/suppliers
and customers.
To have some control over the distribution strategy.
To be as efficient as possible in shipping and inventory
management.
To secure some exclusivity with suppliers/manufactuers
To reveive a fair share of profits
Customers To have an assortment of products from which to choose
To have a variety of resellers from which to choose
To purchase in small quantities
To shop at convenient locations
To find items in-stock, including those on sale
To have a number of payment options
To be able to easily return products that are unsatisfactory
To be treated in a respectful manner
To have enough information to make informed decisions
To pay fair prices.
Identifying Major Channel Alternatives
After a company has defined its target market and desired positioning, it should identify
its channel alternatives. A channel alternative is described by three elements : the
types of available business intermediaries, the number of intermediaries needed, and
the terms and responsibilities of each channel member.
Types of Intermediaries
The firm needs to identify the types of intermediaries available to carry on its channel
work. Here are two examples :
A test-equipment manufacturer developed an audio device for detecting poor
mechanical connections in machines with moving parts. Company executives felt
this product would sell in all industries where electric, combustion, or steam engines
were used, usch as aviation, automobiles, reailroads, food canning, construction,
and oil. The sales force was small. The problem was how to reach these diverse
industries effectively. The following alternatives were identified :
l Company sales force: Expand the companys direct sales force. Assign sales
representatives to territories to contact all prospects in the area. Or develop
separate sales forces for the different industries. The first option of assigning
sales force to territories is better because in the second option much higher number
of sales persons will be needed and itll increase marketing costs.
l Manufacturers agency: Hire manufacturers agents in different regions or end-
use industries to sell the new equipment. These agents know well about the
various companies and they also know whom to contact and how to sell the product
to different companies.
l Industrial distributors: Find distributors in the different regions or end-use
industries who will buy and carry the device. Give them exclusive distribution,
adequate margins, product training, and promotional support. They will get the job
done through their own sales force.
A consumer electronic company produces cellular car phones. It identified the following
channel alternatives :
l OEM market : The company could sell its car phones to automobile manufacturers
to be installed as original equipment. OEM stands for original equipment
manufacture. For e.g., NOKIA can sell car phones to Hindustan Motors to
install them in Ambassador cars.
l Auto-dealer market : The company could sell its car phones to auto dealers.
The dealers can promote them as add-ons if the customer desires.
l Retail automotive-equipment dealers : The company could sell its car phones to
retail automotive-equipment dealers through a direct sales force or through
distributors.
l Car phone specialist dealers : The company could sell its car phones to car
phone specialist dealers through a direct sales force or dealers.
l Mail-order market : The company could sell its car phones through mail-order
catalogs.
Companies should search for innovative marketing channels. The Conn Organ Company
merchandises organs through department stores and discount stores, thus drawing more
attention than it ever enjoyed in small music stores. The Book-of-the-Month Club
merchandises books through the mail. Other sellers have followed with record-of-the-
month clubs, candy-of-the-month clubs, flower-of-the-month clubs, fruit-of-the-month
clubs, and dozens of others.
Sometimes a company chooses an unconventional channel because of the difficulty or
cost of working with the dominant channel. The advantage is that the company will
encounter less competition during the initial move into this channel. After trying to sell
its inexpensive Timex watches through regular jewellry stores, the U.S. Time Company
placed its watches in fast-growing mass-merchandise outlets. Avon chose door-to-
door selling because it was not able to break into regular department stores. The
company made more money than most firms selling through department stores.
Number of Intermediaries
Companies have to decide on the number of intermediaries to use at each channel
level. Three strategies are avilable; exclusive distribution, selective distribution and
intensive distribution.
Exclusive distribution means severely limiting the number of intermediaries. It is used
when the producer wants to maintain control over the service level and service outputs
offered by the resellers. often it involves exclusive dealing arrangements, in which
the resellers agree not to carry competing brands. By granting exclusive distribution,
the producer hopes to obtain more dedicated and knowledgeable selling. It requires
greater partnership between seller and reseller and is used in the distribution of new
automobiles, some major appliances, and some womens apparel brands.
Selective distribution involves the use of more than a few but less than all of
the intermediaries who are willing to carry a particular product. It is used by
established companies and by new companies seeking distributors. The company does
not have to dissipate its efforts over too many outlets; it enables the producer to gain
adequate market coverage with more control and less cost than intensive
distribution. Nike, the worlds largest athletic shoe maker, is a good example of selective
distribution:
Nike Inc. Nike sells its atheletic shoes and apparel through six different kinds
of stores : (1) specialized sports stores, such as golfers proshops, where Nike
has announced plans for a new line of athletic shoes; (2) general sporting goods
stores, which carry a broad range of styles; (3) department stores, which carry
only the newest styles; (4) mass-merchandise stores, which focus on discounted
styles; (5) Nike retail stores, including Niketowns in major cities, which feature
the complete line, with an emphasis on the newest styles; (6) factory outlet
stores, which stock mostly seconds and closeouts. Nike also limits the number
of stores that can carry its products.
Intensive distribution consists of the manufacturer placing the goods or services in as
many outlets as possible. This strategy is generally used for items such as tobacco
products, soap, snake foods, and gum, products for which the consumer requires a
great deal of location convenience.
Manufacturers are constantly tempted to move from exclusive or selective
distribution to more intensive distribution to increase coverage and sales. This
strategy may help in the short term but often hurts long-term performance. If
colorplus expanded from its current high-end retailers to mass merchandisers, it would
loss some control over the display arrangements, the accompanying service levels,
and the pricing. As the product entered lower-cost retail outlets, they would undercut
other retailers, resulting in a price war. Buyers would attach less prestige to
colorplus apparel, and the manufacturers ability to command premium prices would be
reduced.
Table 10.2: Intensity of Chennel Covereage
Features Exclusive Distribution Selective Distribution Intensive Distribution
Objectives Prestige image, channel Moderate market cove- Widespread market cove-
control and loyalty, price rage, solid image, some rage, channel acceptance,
stability and high profit channel control and loyalty, high volume sales and
margins. good sales and profits. total profits.
Resel l ers Few in number, well-estab- Moderate in number, well- Many in number, all types
lished, reputable firms established, better firm of firms (outlets)
(outlets) (outlets)
Customers Final consumers : Final consumers : Final consumers :
fewer in number, trend moderate in number, brand many in number, conveni-
setters, willing to travel to conscious, somewhat ence oriented
store, brand loyal willing to travel to store
Organizational consumers Organizational consumers Organizational consumers
focus on major accounts, focus on many types of focus on all types of
service expected from accounts, services expected service expected from
manufacturer. from manufacturer or intermediary.
intermediary
Marketing Final consumers Final consumers Final consumers
Mix personal selling, pleasant promotional mix, pleasant mass advertising, nearby
shopping conditions, good shopping conditions, good location, items in stock.
service service
Organizational consumers Organizational consumers Organizational consumers
availability, regular commu- availability, regular commu- availability, regular commu-
nications, superior service nications, superior service nications, superior services
Major Limited sales potential May be difficult to carve Limited channel control
Weakness out a niche
Examples Autos, designer clothes, Furniture, clothing, mecha- Household products, groce-
capital equipment, complex nis tools, industrialized ries, office supplies, routine
services service services.
Exhibit 10.2: Wrong Choice of Chennel Intensity : P&G and Nestle
P&G, Nestle and HLL are FMCG companies operating in India. P&G and Nestle thought that it
would be appropriate for them to follow the HLL channel model. It was only after losing some
precious money and time that they realised that they neither needed nor could afford channel intensity
on the HLL pattern.
HLL maintains a channel consisting of over a million retail points and 7,500 distributors, the largest in
the country, The arrangement has suited HLL very well.
HLL has a large basket of products and brands covering every possible price/demographic/geographic
segment. At the last count, it had over 110 actively selling brands. HLLs marketing channel has to
naturally cover every income group and every geographical segment in the country. And HLL has an
annual sales turnover of over Rs. 10,000 crore.
P&G and Nestle were different from HLL in all these respects.
Moreover, the HLL model comes with its associated costs. Setting up marketing networks in rural
areas and small towns takes both time and money. HLL had incurred the associated investment and
had absorbed a dent on its bottomline on this account over the past several years, and it is not affected
currently by this strategy.
After learning the lessons the hard way, P&G decided to forget the HLL model and drastically
downsized its distribution.
It now confined itself to Class I and Class II towns, and exited practically all rural areas. Only for some
select products like Vicks Action-500, it continued its distribution in rural areas.
It also reduced the number of pack sizes in which it offered its products as another measure towards
reducing distribution costs.
Nestle too decided to move away from the HLL model. Earlier, embracing the HLL model, it had gone
in for high channel-intensity. For example, between 1993 and 1996, Nestle had added on 350,000 retail
points to its distribution network in India, the bulk of them in smaller towns and rural areas.
Contd...
As its sales were nowhere near the HLL level, it could not sustain the channel intensity. It reduced it
considerably. It also compressed its product mix and product line. It now concentrated on products
in which it was traditionally strongmilk products and beveragesand weeded out the low-profit
products from the portfolio.
It also went in for tighter market targeting and limited its attention to urban population. In fact, it
limited its focus to roughly half of the urban population.
With these moves, it could reduce the cost of servicing the channel. Its new policy was to be on
perpetual guard in the matter of channel intensity, limiting it to the level warranted by its sales and
pofitspresent and planned.
Terms and Responsibilities of Channel Members
The producer must determine the rights and responsibilities of participating channel
members. Each channel member must be treated respectfully and given the opportunity
to be profitable. The main elements in the trade-relation mix are price policies,
conditions of sale, territorial rights, and specific services to be performed by each party.
Price policy calls for the producer to establish a price list and schedule of discounts
and allowances that intermediaries see as equitable and sufficient.
Conditions of sale refers to payment terms and producer guarantees. Most producers
grant cash discounts to distributors for early payment. Producers might also guarantee
distributors against defective merchandise or price declines. A guarantee against price
declines gives distributors an incentive to buy large quantities.
Distributors territorial rights define the distributors territories and the terms under
which the producer will enfranchise other distributors. Distributors normally expect to
receive full credit for all sales in their territory, whether or not they did the selling.
Mutual services and responsibilities are conditions that must be carefully spelled out,
especially in francised and exclusive-agency channels. McDonalds provides franchisees
with a building, promotional support, a record-keeping system, training, and general
administrative and technical assistance. In turn, franchisees are expected to satisfy
company standards regarding physical facilities, cooperate with new promotional
programs, furnish requested information, and buy supplies from specified vendors.
Evaluating the Major Alternatives
Each channel alternative needs to be evaluated against economic, control and adaptive
criteria. Consider the following situation :
Godrej furniture wants to sell its line to retailers in Western India. The manufacturer is
trying to decide between two alternatives :
1. One calls for hiring 10 new sales representatives who would operate out of a
sales office in Pune. They would receive a base salary plus commissions.
2. The other alternative would use a Punes sales agency that has extensive contacts
with retailers. The agency has 30 sales representatives, who would receive a
commission based on their sales.
Economic Criteria
Each alternative will produce a different level of sales and costs. The first step is to
determine whether a company sales force or a sales agency will produce more sales.
Most marketing managers believe that a company sales force will sell more. They
concentrate on the companys products; they are better trained to sell those products;
they are more aggressie because their future depends on the companys success; and
they are more successful because many customers prefer to deal directly with the
company.
However, the sales agency could conceivably sell more. First, the sales agent has 30
representatives, not just 10. Second, the agencys sales force might be just as aggressive
as a direct sales force, depending on the commission level. Third, some customers
prefer dealing with agents who represent several manufacturers rather than with sales
persons from one company. Fourth, the agency has extensive contacts and market
place knowledge, whereas a company sales force would need to build these from
scratch.
The next step is to estimate the costs of selling different volumes through each channel.
The cost schedules are shown in Figure 10.5. The fixed costs of engaging a sales
agency are lower than those of establishing a company sales office. But costs rise
faster through a sales agency because sales agents get a larger commission than company
salespeople.
Figure 10.5: Break-Even Cost Chart for the Choice between a Company Sales
Force and a Manufacturers Sales Agency
The final step is comparing sales and costs. As Figure 10.5 shows, there is one sales
level (S
B
) at which selling costs are the same for the two channels. The sales agency
is thus the better channel for any sales volume below S
B
, and the company sales branch
is better at any volume above S
B
. Given this information, it is not surprising that sales
agents tend to be used by smaller firms, or by large firms in their smaller territories
where the sales volume is too low to support company sales people.
Control Criteria
Using a sales agency poses a control problem. A sales agency is an independent firm
seeking to maximize its profits. Agents may concentrate on the customers who buy the
most, not necessarily of the manufacturers goods. Furthermore, agents might not
master the technical details of the companys product or handle its promotion materials
effectively.
Adaptive Criteria
To develop a channel, members must make some degree of commitment to each other
for a specified period of time. Yet these commitments invariably lead to a decrease in
the producers ability to respond to a changing marketplace. In rapidly changing, volatile,
Level of sales (dollars)
S
e
l
l
i
n
g

c
o
s
t
s

(
d
o
l
l
a
r
s
)
Manufacturer's
sales agency
Company
sales force
S
B
or uncertain product markets, the producer needs channel structures and policies that
provide high adaptability.
Channel-management Decisions
After a company has chosen a channel alternative, individual intermediaries must be
selected, trained, motivated, and evaluated. Channel arrangements must be modified
over time.
Selecting Channel Members
Producers vary in their ability to attract qualified intermediaries. Toyota was able to
attract many new dealers for its new Lexus. However, when Polaroid started, it could
not get photographic-equipment stores to carry its new cameras and was forced to use
mass-merchandising outlets. Consider what happened at Epson :
l Epson Japans Epson Corporation, a leading manufacturer of computer printers,
decided to add computers to its product line. Not happy with its current distributors
nor trusting their ability to sell to new types of retail outlets. Epson quietly
recruited new distributors. Epson gave Hergenrather, a recruiting company, the
following instructions :
l Search for applicants who have two-step distribution experience (factory to
distributor to dealer) in either brown goods (TVs) or white goods (refrigerators).
l Applicants have to be CEO types who would be willing and able to set up their
own distributorships.
l They will be offered $80,000 yearly salary plus bonus and $375,000 to help them
set up in business; each will add $25,000 of his or her own money, and each will
get equity in the business.
l They will handle only Epson products but may stock other companies software.
Each distributor will hire a training manager and run a fully equipped service
center.
The recruiting firm placed want ads in the Wall Street Journal, which pulled
almost 1,700 letters, mostly from unqualified people. Then the firm used the Yellow
Pages to get the names of existing distributors and phoned the second-in-command
managers. It arranged interviews and, after much work, produced a list of highly
qualified individuals. It chose the 12 most qualified candidates.
The final step called for terminating Epsons existing distributors. They were given
a 90-day termination notice. Yet in spite of all these steps, Epson never succeeded
as a computer manufacturer.
Whether producers find it easy or difficult to recruit intermediaties, they should at least
determine what characteristics distinguish the better intermediaries. They will want to
evaluate number of years in business, other lines carried, growth and profit record,
solvency, cooperativeness, and reputation. If the intermediaries are sales agent,
producers will want to evaluate the number and character of other lines carried and the
size and quality of the sales force. If the intermediaries are department stores that
want exclusive distribution, the producer will want to evaluate locations, future growth
potential, and type of clientele.
Training Channel Members
Companies need to plan and implement careful training programs for their distributors
and dealers, beacause the intermediaries will be viewed as the company by end users.
Here are some examples of reseller training programs :
l Microsoft requires third-party service engineers to complete a set of courses and
take certification exams. Those who pass are formally recognized as Microsoft
Certified Professions, and they can use this designation to promote business.
l Ford Motor Company beams training programs and technical information via its
satellite-based Fordstar Network to more than 6,000 dealer sites. Service engineers
at each dealership sit around a conference table and view a monitor on which an
instructor explains procedures such as repairing on-board electronics and asks
and answers questions.
Motivating Channel Members
A company needs to view its intermediaries in the same way that it views its end users.
The company needs to determine intermediaries needs and construct a channel
positioning such that its channel offering is tailored to provide superior value to these
intermediaries. The company should provide training programs, market research
programs, and other capability-building programs to improve intermediaries
performance. The company must constantly communicate its view that the intermediaries
are partners in the joint effort to satisfy end-using consumers.
Stimulating channel members to top performance must start with understanding their
needs and wants. Mcvey listed the following propositions to help understand
intermediaries :
[The intermediary often acts] as a purchasing agent for his customers and
only secondarily as a selling agent for his suppliers..... He is interested in
selling any product which these customers desire to buy from him .......
The [intermediary] attempt to weld all of this offerings into a family of items
which he can sell in combination, as a packaged assortment, to individual
customers. His selling efforts are directed primarily at obtaining order for
the assortment, rather than for individual items. .........
Unless given incentive to do so [intermediaries] will not maintain separate
sales records by brands sold....... Information that could be used in product
development, pricing packaging, or promotion planning is buried in non-
standard records of [intermediaries], and sometimes purposely secreted from
suppliers.
Producers vary greatly in skill in managing distributors. They can draw on the following
types of power to elicit cooperation :
l Coercive power occurs when a manufactuer threatens to withdraw a resource
or terminate a realtionship if intermediaries fail to cooperate. This power can be
quite effective if the intermediaries are highly dependent upon the manufactuer.
But the exercise of coercive power produces resentment and can lead the
intermediaries to organize countervailing power. In India HLL can use this power
very effectively.
l Reward power occurs when the manufactuer offers intermediaries an extra benefit
for performing specific acts or functions. Reward power typically produces better
result than coercive power but can be overrated. The intermediaries are conforming
to the manufacturers wishes not out of conviction but because of an external
benefit. They may come to expect a reward every time the manufacturer wants
a certain behavior to occur. If the reward is later withdrawn, the intermediaries
feel resentment. Some financial or non-financial reward can be offered to the
channel members if they achieve specific target in a given time period.
l Legitimate power is wielded when the manufacturer requests a behaviour that is
warranted under the contract. Thus Tata Motors may insist that its dealers carry
certain inventory levels as part of the franchise agreement. The manufacturer
feels it has this right and the intermediaries have this obligation. As long as the
intermediaries view the manufactuer as a legitimate leader, legitimate power works.
l Expert power can be applied when the manufactuer has special knowledge that
the itnermediaries value. For example, a manufactuer may have a sophisticated
system for sales-lead generation or for distributor sales training. This is an effective
form of power, if intermediaries would perform poorly without this help. Once the
expertise is passed on to the intermediaries, however, this basis of power weakens.
The manufacturer must continue to develop new expertise so that the intermediaries
will want to continue cooperating.
l Referent power occurs when the manufacturer is so highly respected that
intermediaries are proud to be associated. Companies such as (HLL, Ranbaxy,
Cipla and Maruti-Suzuki) have high referent power. Manufacturers will gain
cooperation best if they would resort to referent power, expert power, legitimate
power, and reward power, in that order, and generally avoid using coercive power.
Intermediaries can aim for a relationship based on cooperation, partnership, or distribution
programming. Most producers see the main challenge as gaining intermediaries
cooperation. They often use positive motivators, such as higher margins, special
deals, premiums, cooperative advertising allowances, display allowances, and sales
contests. At times they will apply negative sanctions, such as threatening to reduce
margins, slow down delivery, or terminate the relationship. The weakness of this approach
is that the producer is using crude stimulus-response thinking.
More sophisticated companies try to forge a long-term partnership with distributors.
The manufacturer clearly communicates what it wants from its distributors in the way
of market coverage, inventory levels, marketing development, account solicitation,
technical advice and services, and marketing information. The manufacturer seeks
distributor agreement with these policies and may introduce a compensation plan for
adhering to the policies.
The most advanced supplydistributor arrangement is distribution programming,
which can be defined as building a planned, professionally managed, vertical marketing
system that meets the needs of both manufactuer and distributors. The manufacturer
establishes a department within the company called distributor-relations planning.
Its job is to identify distributor needs and build up merchandising programme to help
each distributor operate as efficiently as possible. This department and the distributors
jointly plan merchandising goals, inventory level, space and visual merchandising plans,
sales-training requirements, and advertising and promotion plans. The aim is to convert
the distributors from thinking that they make their money primarily on the buying side
(through tough negotiation with the manufacturer) to seeing that they make their money
on the selling side (by being part of a sophisticated vertical marketing system). Kraft
and Procter & Gamble are two companies with excellent distributor-relations planning.
Evaluating Channel Members
Producers must periodically evaluate intermediaries performance against such
standards as sales-quota attainment, average inventory levels, customer delivery time,
treatment of damaged and lost goods, and cooperation in promotional and training
programs.
A producer will occasionally discover that it is paying too much to particualr intermediaries
for what they are actually doing. One manufacturer was compensating a distributor
for holding inventories but found that the inventories were actually held in a public
warehouse at the manufacturers expense. Producers should set up functional discounts
in which they pay specified amounts for the trade channels performance of each
agreed-upon service. Underperformers need to be counseled, retrained, remotivated,
or terminated.
Modifying Channel Arrangements
A producer must periodically review and modify its channel arrangements. Modification
becomes necessary when the distribution channel is not working as planned, consumer
buying patterns change, the market expands, new competition arises, innovative
distribution channels emerge, and the product moves into later stages in the product life
cycle.
No marketing channel will remain effective over the whole product life cycle. Early
buyers might be willing to pay for high value-added channels, but later buyers will
switch to lower-cost channels. Small office copiers were first sold by manufacturers
direct sales forces, later through office-equipment dealers, still later through mass
merchandisers, and now by mail-order firms and Internet marketers.
Miland Lele developed the grid in Figure 10.6 to show how marketing channels have
changed for PCs and designer apparel at different stages in the product life cycle :
l Introductory stage : Radically new products or fashion tend to enter the market
through specialist channels (such as hobbyist shops, boutiques) that spot trends
and attract early adopters.
l Rapid growth stage : As interest grows, higher-volume channels appear (dedicated
chains, department stores) that offer services but not as many as the previous
channels.
l Maturity stage : As growth slows, some competitors move their product into
lower-cost channels (mass merchandisers).
l Decline stage : As decline begins, even lower-cost channels emerge (mail-order
houses, off-price discounters).
In competitive markets with low entry barriers, the optimal channel structure will
inevitably change over time. The current structure will necessarily change in the direction
of the optimal structure. The change could involve adding or dropping individual channel
members, adding or dropping particular market channels, or developing a totally new
way to sell goods.
Adding or dropping individual channel members requires an incremental analysis. What
would the firms profits look like with and without this intermediary ? An automobile
manufacturers decision to drop a dealer requires subtracting the dealers sales and
estimating the possible sales loss or gain to the manufacturers other dealers.
Sometimes a producer considers dropping all intermediaries whose sales are below a
certain amount. Consider the following :
l Navistar. Navistar noted at one time that 5 percent of its dealers were selling
fewer than three or four trucks a year. It cost the company more to service
these dealers than their sales were worth. But dropping these dealers could
have repercussions on the system as a whole. The unit costs of producing
trucks would be higher, because the overhead would be spread over fewer trucks;
some employees and equipment would be idled; some business in these markets
would go to competitors; and other dealers might become insecure. All these
factors would have to be taken into account.
The most difficult decision involves revising the overall channel strategy. Distribution
channels clearly become outmoded with the passage of time. A gap arises between a
sellers existing distribution system and the ideal system that would satisfy target
customers needs and desires. Examples abound : Avons door-to-door system for
selling cosmetics had to be modified as more women entered the workforce, and IBMs
exclusive reliance on a field sales force had to be modifed with the introduction of low-
priced personal computers.
Stern and Sturdivant have outlined an excellent framework, called Customer-Driven
Distribution System Design, for moving a poorly functioning distribution system closer
to target customers ideal system. Essentially, companies have to reduce the gaps
between the services outputs that target customers desire, those that the existing channel
system delivers, and those that management thinks are feasible within the existing
contraints. Six steps are involved:
Figure 10.6: Channel Value Added and Market Growth Rate.
High Low
High
Low
1. Introductory
- PC's : hobbyist stores
- Designer apparel :
boutiques
4. Declining
- PC's : mail order
- Designer apparel
off price stores
M
a
r
k
e
t

G
r
o
w
t
h

R
a
t
e
Value Added by the Channel
1. Research target customers value perceptions, needs, and desires regarding channel
service outputs.
2. Examine the performance of the companys and competitors existing distribution
systems in relation to customer desires. Whether customers are able to find what
they desire or not ? Whether the customers receive quick service, courteous
behaviour, friendly behaviour from the channel members etc. or not ?
3. Find service output gaps that need corrective action. How much satisfied is the
customer ? Time taken to locate the desired products, total time spent in the store
and in the queue, ability of the channel members employees to solve the customers
problems etc. can help in identifying the service gaps. After identifying the gaps,
steps must be taken to eliminate them.
4. Identify major constraints that will limit possible corrective actions. For e.g., the
store might attract large number of customers during evening time and this results
in the foremation of queue.
5. Design a management-bounded channel solution. In order to minimize customers
waiting time additional cashiers must be stationed at the check out.
6. Implement the reconfigured distribution system. Single cashier during daytime
and 2 or 3 cashiers during peak time (evening).
Issues Surrounding Channel Relationships
Because the actions of one channel member may greatly influence the performance of
another channel member, the relations among channel members are of considerable
interest. The retailer relies on the manufacturer to create an adequate sales potential
through advertising, product development, and other marketing strategies. An exclusive
dealers welfare is in jeopardy if a manufacturers marketing strategy is not successful.
A manufacturer may depend on the successful performance of a small number of
wholesalers, which cannot be left to sink or swim on their own merits. In the following
sections, we examine several issues related to relationship among interdependent channel
members.
Channel Cooperation
Channel cooperation : Coordinated effort by distribution channel members whose marketing
objectives and strategies complement each other.
Channel conflict : Antagonism between distribution channel members.
The objectives and marketing strategies of two channel membersfor example, a
manufacturer and a retailermay be in total harmony. Both parties may recognize
that their tasks are linked and that by working together they can jointly exploit a marketing
opportunity. the manufacturer promptly delivers a high-quality product with a good
reputation; the retailer prices the product as expected and carries an inventory of the
full product line. Channel cooperation exists when the marketing objectives and
strategies of two channel members are harmonious.
Table 10.3: Methods of Channel Cooperation
Manufacturers/Service Dsitribution
Factors Providers Actions Intermediarys Actions
New-product Thorough testing, adequate Good shelf location and space, enthusiasm
introduction promotional support. for product, assistance in test marketing.
Delivery Prompt filling of orders, adherence Proper time allowed for delivery, shipments
to scheduled dates immediately checked for accuracy
Marketing Data provided to resellers Data provided to manufacturers/service
research providers.
Pricing Prices such that intermediaries can Infrequent sales from regular prices, main-
gainreasonable profits, intermediary taining proper image
flexibility encouraged.
Promotion Training resellers salespeople, sales Attractive stores displays, knowledgeable
force incentives, developing approp- salespeople, participation in cooperative
riate ad campaign, cooperative ad programs.
programs
Financing Liberal financial terms Adherence to financial terms.
Product quality Product guarantees Proper isntallation and servicing of products
for customers
Channel control Shared and specified decision making Shared and specified decision making.
Channel Conflict
Channel conflict exists when channel members have disagreements and their
relationship is antagonistic. Channel conflict often results from the absence of a clearly
identified locus of formal channel power. Channel members may disagree about the
channels common purpose or the responsibility for certain activities. The behavior of
one channel member may be seen as inhibiting another channel member from attaining
its goals. (Channel conflict describes vertical conflicts among members of the same
channel of distribution. It should not be confused with economic competition between
two like intermediaries at the same level in a channel, such as between two retailers,
which is sometimes referred to as horizontal conflict).
Consider the following instance of channel conflict. In 1992, Goodyear began selling
its products to Searssomething it had not done before. In fact, for more than 60
years, Goodyear tires could be purchased only on new cars or from the companys
exclusive network of independent dealers. Then in 1993, Goodyear started selling
replacement tires to Discount Tire Company, a big independent tire retailer. The
alignments with Sears and Discount caused considerable channel conflict. Goodyears
independent dealers expressed anger and feelings of betrayal. They prostested that
Goodyears actions had eroded their competititve positions. Many dealers retaliated by
taking on competing brands, especially private brands.
Vertical conflict can also arise when a wholesaler is frustrated because the manufacturer
bypasses it and sells directly to larger accounts. Another typical source of conflict is a
situation in which a dealer wishes to minimize its investment in inventory but cannot do
so because the distributor does not maintain the
proper inventory level and thus cannot be relied
on to guarantee speedy delivery. Vertical
conflict may occur when sales are down and,
consequently, manufacturers accuse dealers or
Channel conflict often results
from the absence of a clearly
identified locus a formal
channel power.
distributors of failing to promote aggressively. Conflict can also arise if manufacturers,
wholesalers, or retailers believe that they are not making enough money on the product
line.
In some cases, the causes of conflict are overt and readily identifiable; they arise from
differences in channel members opinions, goals, or attitudes. For example, when Levi
Strauss started marketing its five-pocket jeans through Sears and the JCPenney
Company, there was no question about why managers of store that had carried Levis
for years were upset. Department store chains interpreted the new Levis channel
strategy as damaging to the brands fashion credibility and a threat to their mark-ups.
So they made the conflict more identifable and more intense by ordering replacement
brands such as Lee. In other instances, however the cause of conflict may be latent
frustration or slowly smoldering antagonism between parties. Disagreements may arise
and cooperation break down when each partys objectives, strategies, and procedures
are not adequately communicated or fully appreciated by other channel members.
Early theorists on channel conflict suggested that a channel systems goal should be to
minimize conflict and maximize cooperation. Excessive conflict is likely to be detrimental
to efficient performance in the channel of distribution; however, at times a certain level
of conflict may be desirable. Conflict may be regarded as potentially beneficial to the
system when it brings about a more equitable allocation of decision-making authority
and economic resource and greater balance and stability within the system. Conflict is
destructive when a lack of recognition of mutual objectives results.
Although there is some question about the most efficient level of the conflict, it is
generally agreed that conflict should not go unmanaged. Unfortunately, Mark Twains
comment about the weather (Everybody talks about the weather, but nobody does
anything about it) to some extent applies to discussion of conflict within channels of
distribution. Once they recognize conflicts, channel members should discuss or negotiate
the issues to try to resolve the problems before they lead to major confrontations.
Table 10.4: Potential Causes of Channel Conflict
Manufacturers/Service Dsitribution
Factors Providers Goal Intermediarys Goal
Pricing To establish final price consistent To establish final price consistent with the
with product image intermediarys image.
Purchase terms To ensure prompt, accurate payments To defer payments as long as possible and
and minimize discounts secure discounts.
Shelf space To obtain plentiful shelf space with To allocate shelf space among multiple
good visibility so as to maximize brands so as to maximize total product sales
brand sales
Exclusivity To hold down the number of compe- To hold down the number of competing inter
ting brands each intermediary stocks mediaries carrying the same brands while
while selling via many intermediaries selling different brands itself.
Delivery To receive adequate notice before To obtain quick service
deliveries are required
Advertising To secure ad support from inter- To secure ad support from manufacturers/
support mediaries service providers
Profitability To have adequate profit margins To have adequate profit margins.
Contd...
Continuity To receive orders on a regular basis To receive shipments on a regular basis
Order size To maximize order size To have order size conform with consumer
demand to minimize inventory investment.
Assortment To offer a limited variety To secure a full variety
Risk To have intermediaries assume risks To have manufacturers/service provides
assume risks
Branding To sell products under the manufac- To sell products under private brands as well
turers/service providers name as manufacturers/service providers brands.
Channel access To distribute products wherever desired To carry only those items desired by
by the manufacturer/service provider intermediaries. (Say retailers)
Importance of To not allow any one intermediary to To not allow any one manufacturer/service
account dominate provider to dominate
Consumer To have consumers loyal to the manu- To have consumers loyal to the intermediary
loyalty facturer/service provider
Channel control To make key channel decisions To make key channel decisions.
Channel Power
Channel power : The extent to which a channel member is able to influence the behaviour of another
channel member.
Channel leader : A distribution channel member that is able to exert power and influence over other
channel members; also known as a channel captain.
An organization that is able to exert its channel power and influence over other channel
members is referred to as the channel leader or channel captain. A channel leader
has mutually agreed-on authority to reward, punish, plan, coordinate, or otherwise dictate
the activities of channel members. For instance, Home Box Office is the channel leader
for the distribution of movies on pay TV. HBO virtually dictates how much it will pay
for a film. Furthermore, HBO finances film production; in recent years, it has become
a major source of financing for independent movie producers.
There are several sources of channel power. Because of the size of its purchases, a
large retailer such as Wal-Mart may be able to dictate marketing strategy to less powerful
channel members. In placing an order for a private-label brand, Wal-Mart may insist
on certain product specifications, prices, or delivery dates. A small manufacturer may
be so dependent on the Wal-Mart order that it changes the specifications of its own
brand so that it can economically produce a product that meets Wal-Marts specifications.
Wal-Mart thus has channel power. More specifically, it has coercive power, the ability
to force compliance from other channel members by threatening to take its business
elsewhere and reward power, the ability to offer an economic reward, such as a
large, profitable order.
An organization such as a manufacturer of technical instruments may be able to wield
channel power because of its expertise and ability to introduce technological innovations.
It has expert power based on knowledge. Hindustan Lever Limited (HLL) is a channel
leader because of its marketing expertise. To support its wholesalers, HLL offers
extensive training seminars on topics such as financial management and warehousing.
It has developed a computerized shelf-space management program for retailers that
audits sales, margins, and turnover by brand and package.
In addition to benefiting from HLL expertise, channel members respect the company
because they believe it is trustworthy and has other admirable characteristics. HLL
thus has referent power, which stems from other channel members respect, admiration,
and identification with the channel leader.
When a SSI Computers franchise contractually agrees to perform specific activities,
such as placing a common logo on all promotional materials, it grants legitimate power
to SSI computers franchisor, Legitimate power results from formal agreements.
Reverse Distribution
In recent decades, the recycling of waste has become an important ecological goal.
The major problem in recycling is determining who is responsible for the reverse
distribution process it involves. The macromarketing task is to establish a backward
channel of distribution, one in which the ultimate consumer who seeks to recycle
waste materials must undergo a role change.
By recycling your old newspapers or metal cans, you become a producer of a usuable
product that has some economic utility. Thus, in this backward channel, the consumer
is the first link in the process rather than the last. The backward channel in this case is
likely to be run by traditional manufacturers of paper or cans. Yet the flow of goods is
the reverse of what most descriptions of marketing operations suggest. Backward
channels of distribution have historically been very primitive, although some recycling
has always existed. For example, ecologically concerned civic groups have sponsored
paper drives and community clean-up days. Such groups are, in essence, performing
channel intermediary functions. In some cases, traditional intermediaries have long
practiced as a sideline what have come to be recognized as recycling activities. Soft
drinks bottlers have accepted returnable glass bottles for years, but this practice was
not seen as either a major part of their business or a contribution to the economy.
In recent years, however, a growing sophistication has been brought to the operation of
reverse channels of distribution. For example, brokers are often employed to negotiate
the sale of used packaging cardboard to paper mills that can reprocess the product.
Larger supermarkets ships the waste directly to the mills with the broker taking
neither title nor possession but simply arranging the transfer. Such an operation reflects
considerable thought in its development and requires a sizable management effort to
succeed. Some soda vending machines have been modified or designed from scratch
to accept empty aluminum cans for recycling and to reimburse the recycling patron
with a small reward. This is clearly a step or two beyond having ragpickers scour
roadsides for old containers.
Ethical, Political, and Legal Forces in Distribution Management
You might think of recycling as involving certain ethical issues as well as issues of
distribution. Indeed, several ethical issues arise in connection with distribution and its
macromarketing role. One such issue, already touched on earlier, is the supposed cost
of distribution. Other issues have been dealt with institutionally and are now regulated
by laws.
Does Distribution Cost Too Much?
As mentioned earlier, a commonly heard cry is eliminate the middleman ! Previous
discussions explored the reasons for specialization in the distribution channel. An
intermediary may provide storage, selling, or other marketing functions more efficiently
than either a manufacturer or a retailer. Eliminating the intermediary does not eliminate
the functions intermediaries perform. Thus, a manufacturer that eliminates wholeslaers
will have to perform the wholesaling function itself. This may cost more than using
independent wholesalers if the wholesalers were better at their job than the manufacturer
can be. Or, performing intermediary functions itself may radically alter a companys
marketing strategy. For example, a company that sells on the Internet has no intermediary
to communicate persuasive information, so it must do this via other means.
A critic might note that some individual aspects of the distribution system are nonessential.
Yet it has been shown repeatedly that nonessentials such as convenience are important
to consumers. The success of 7-Eleven, Quick-Trip, and similar stores proves that
consumers wantand will pay forconvenient location and quick service. The
customers decide the trade-offs in this case, agreeing to pay a little more money to
avoid paying with their time. People can quickly and profoundly influence the distribution
system simply by where they shop. It is arguable that distribution is the aspect of
marketing that is most responsive to consumer demands. The high rate of business
failure, especially among retailers, is strong proof that intermediaries must perform
valuable functions if they are to survive.
Legal Regulation of Distribution in the United States
In the United States, in many other countries, and in international trade agreements,
dealings in the area of distribution may be subject to numerous restrictions. For example,
a manufacturers ability to exercise power over channels is often regulated in an attempt
to preserve the independence of intermediaries and to assure that unfair competition
does not result from the structure of the channel.
The Sherman Antitrust Act, the Clayton Act, the Federal Trade Commission Act, and
other laws dealing with antitrust policy are the bases for much U.S. legislation influencing
distribution. In the United States, the three main legal issues surrounding distribution
are exclusive dealing, exclusive territories, and tying agreements.
Exclusive dealing : A situation in which a distributor carries the products of one manufacturer and
not those of competing manufacturers.
Exclusive Dealing. Exclusive dealing refers to a restrictive arrangement by which
a supplier prohibits intermediaries that handle its product from selling the products of
competing suppliers. A manufacturer may wish to deal only with those distributors that
will agree to market its brand exclusively. Is such an arrangement legal ? The answer
to this question depends on whether the arrangement abuses the intermediarys right to
act independently or the rights of other business competitors to succeed.
It is illegal for a manufacturer to prevent an intermediary from selling products that
compete with that manufacturers products if the activity tends to restrict competition.
A new brand of refrigerator would never reach the marketplace if all makers of
refrigerators already in the market enforced exclusive dealing agreements with their
wholesalers and retailers. Such arrangemnets, in blocking entry of a new product,
would appear to be restricting competition.
An exclusive dealing arrangemnet is likely to lessen competition if (1) it encompasses a
substantial share of the market; (2) the rupee amount involved is substantial; or (3) it
involves a large supplier and a smaller distributor, in which case the suppliers disparate
economic power can be inherently coercive. Exclusive dealing arrangements are
generally legal if the parties to the arrangements can show that the exclusivity is necessary
for strategic reasons, such as a franchisors need to protect a products image. Exclusive
dealing may also be legal if the suppliers own sales are restricted because of limited
production capacity.
Exclusive territory: An area defined by geographical boundaries or population and assigned to a
retailer, wholesaler, or other dealer with the understanding that no other distributors will be assigned
to operate in that area.
Exclusive Territories A manufacturer that grants a wholesaler or retailer an exclusive
territory may be acting illegally. The key point, as in so many legal matters relating to
business, is restriction of competition. If the granting of exclusive territories does not
violate the statutes relating to restriction of competition, then limiting the number of
outlets within an area of assigning exclusive territories may be considered proper. Again,
in many cases, this evaluation must be made by the legal system.
What about Cadillac? This organization attracts dealers in part by promising that no
other dealers will be set up within the same areas. A number of defenses might be
offered by organizations engaged in this sort of practice. They might argue that the
investment expected from new dealers is so great that dealers could not be recruited
unless they were offered some sort of exclusive territory. In this case, the defense is
that the nature of the business demands such exclusivity. They might also agrue that
the image of the product offered demands some exclusivity. Cadillac, for example, is
portrayed as a luxury product. Thus, excellent sales and service people are necessary;
Cadillac dealers and mechanics are carefully selected and trained. If Cadillac dealerships
were allowed to open on every other street corner, this might destroy the elite image
Cadillac Motor Division is trying to create.
Tying contract : An agreement tying the purchase of one product to the purchase of another. The
buyer who wishes to purchase a certain product is required by the seller to purchase additional
products, whether the buyer wants to purchase those products or not.
Tying Contracts. Tying contracts require a channel intermediary or a buyer to purchase
lines of merchandise that the seller sees as supplementary to the merchandise the
purchaser actually wants to buy. The seller tells the buyer, in effect, If you want to
have this product [say, a printing press], you must also buy my other product [paper].
Thus, two or more products are tied togehter. The Clayton Act makes tying contracts
illegal, but whether a particular agreement is, in fact, a tying contract can be open to
debate. Certain tying agreemnets can be legalfor example, in the case of a printing
press, the seller could require a certain kind of paper if using other brands of paper
would cause the press to break down.
Legalities of International Distribution
The many restraints on and problems associated with domestic distribution are
compounded in the international marketplace. Domestic laws, the laws of the country
to which goods are being shipped, the laws of the nations through which goods are
being shipped, and the general conventions associated with international trade must all
be obeyed. A full discussion of the many aspects of international constraints on
distribution is beyond the scope of this chapter, but the immense problems that flow
from them should be recognized by all students of marketing.
Retailing and Wholesaling 341
(A) Retailing and Its Importance
Retailing consists of all business activities associated with the sale of goods and services
to ultimate consumers. Retailing involves a retailertraditionally a store or a service
establishmentthat deals with consumers who are acquiring goods or services for
their own use rather than for resale. Of course, Shoppers stop, Ebony, Parnami Jaipur
and other familiar organizations offering products for sale to consumers are retailers.
However, the definition of retailing includes some less-than-obvious service marketers,
such as hotels, movie theaters, restaurants, and ice-cream trolly operators. And even if
an intermediary calls itself a factory outlet, a wholesale club, or a shopping channel,
it is a retailer if its purpose is to sell to the ultimate consumer. Furthermore, Amazon.com
and many other new dot-com companies that sell on the Internet are retailers. Because
these retailers are e-commerce firms, they are often called e-tailers.
Retailing : All business activities concerned with the sale of products to the ultimate users of those
product.
e-tailers : e-commerce firms with retailing operations on the Internet.
Viewed in the context of the channel of distribution, retailers are the important final link
in the process that brings goods or services from producers to consumer. Poor marketing
on the part of retailers can negate all the planning and preparation that have gone into
other marketing activities.
In the United States, there are more than 15 lac retailing institutions accounting for
about Rs. 9600 crore in sales. About 15 percent of U.S. workers are employed in
retailing.
Retailing Institutions
Toward a System of Classifications
Retailers are a diverse group of businesses. In the distribution of food there are
supermarkets, convenience stores, restaurants, and various specialty outlets. Merchandise
retailers may be department stores, apparel stores, consumer electornics stores, home
shopping. Service retailers, such as movie theaters and banks, are as diverse as the
types of services offered for sale.
Retailing is dynamic, and retail institutions evolve constantly. For example, institutions
such as mom and pop grocery stores are at the end of their life cycle. Individual
companies like Sears, which began in the late 1880s as a
mail-order retailer of watches and jewelry, are continually
transforming themselves into new types of retailers.
Warehouse clubs and interactive shopping on the Internet
are but two retailing innouvations that have developed in recent decades. In the next 20
years, retailers will inevitably adjust to their changing environments by transforming
themselves further.
Chapter 11
Retailing and Wholesaling
Retailing is dynamic,
and retail institutions
evolve constantly.
In light of this constant change, and of the very large number of retailers in the United
States, how can retail institutions be sorted into more easily analyzed groups ? Two
commonly used methods classify retailers on the basis of ownership and prominent
strategy.
Classifying Retailers by Ownership
Independent retailer : A retail establishment that is not owned or controlled by any other
organization.
One popular method of categorizing retailers is by ownership. Most retailers are
independent retailers, operating as single-unit entities. Independent operations may
be proprietorships, partnership, or corporations, but they are usually owned by one
operator, a family, or a small number of individuals. They are not generally integrated
into a larger corporation. These retailers are often thought of as small, but some are
quite sizable. Taken together, they are the most important part of the Indian retailing
scene.
Leased department retailer : An independent retailer that owns the merchandise stocked but leases
floor space from another retailer, usually operating under that retailers name.
An independent retailer that owns the merchandise stocked but leases floor space from
another retailer is a leased department retailer. A leased departmentfor example,
a branch bank, a jewelry department, or a watch repaireroperates independently
from the lessor retailer (the retailer that rents out the floor space), although it often
operates under the lessors name. The lessor grants leased department retailers this
degree of independence because they have special expertise in handling the particular
product line, will increase total store traffic, or are necessary to the lessor because
consumer expected to find the departments merchandise in the store.
If a retail establishment is not independent, it is classified as either a chain or an ownership
group. The more familiar of these classifications is the chain store one of a group of
shops bearing the same name and having roughly the same merchandise assortment
and store image. Chain-store systems consist of two or more stores of a similar type
that are centrally owned and operated.
Chains have been successful for a number of reasons, but one of the most important is
the opportunity they have to take advantage of economies of scale in buying and selling
goods. Conducting certralized buying for several stores permits chains to obtain the
lower prices associated with large purchases. They can then maintain their prices, thus
increasing their margins, or they can cut prices, attracting greater sales volume. Unlike
small independents with lesser financial means, chains can also take advantage of
promotional tools, such as television advertising, by spreading the expense among many
member stores, thus stretching their promotional budget. Other expenses, such as costs
for computerized inventory control systems, may also be shared by all stores.
According to the U.S. Department of Commerce, the term corporate chain is used for
chains with 11 or more stores. Typically, as the number of units in a chain increases,
management becomes more centralized, and each store manager has less autonomy in
determining the overall marketing strategy. Although corporate chains possess many
advantages over independents, some analysts say independents and smaller chains are
more flexible. They may be better able to apply such marketing techniques as
segmentation than are bigger operations, whose appeal must be more general.
Retail franchise operations are a special type of chain. Although the broad marketing
strategy in such chains is centrally planned, the retail outlets are independently owned
and operated. Franchises provide an excellent example of the evolution of retail institutions
to fit the American culture. As the countrys mobile citizenry moves from place to
place, a familiar retail outlet is waiting for them when they arrive. Each new franchise
benefits from the companys experience, reputation, and shared resources.
Chain store : One of a group of two or more stores of a similar type, centrally owned and operated.
Corporate chain : A chain consisting of 11 or more stores.
Ownership group : An organization made up of stores or small chains, each with a separate name,
identity, and image but all operating under the control of a central owner.
The other type of retailing organization is the ownership groupan organization made
up of various stores or small chains, each having a separate name, identity, and image
but all operating under the ultimate control of a central owner. Typically, the members
of such groups are former corporate chains bought out by much larger ownership
groups.
Classifying Retailers by Prominent Strategy
Retailers can also be classified based on their most prominent retail strategies. The
decision as to whether to market products and services with an in-store retailing strategy
(also called a bricks-and-mortar strategy) or a direct marketing (nonstore) retailing
strategy is such an important discriminating factor that these two major groupings will
be discussed separately. Figure 11.1 shows these groupings and their subcategories.
In-Store Retailing Many fundamental strategies differentiate in-store retailers. The
variety of products they sell, store size, price level relative to competitors, degree of
self-service, location, and other variables can be used to categorize retailers. Each
strategy has its particular advantage and disadvantages, and each fits particular markets
and situations. Try to envision the following store classes as responses to pariticular
marketing opportunities.
Specialty store : A retail establisment that sells a single product or a few related lines.
Specialty Stores Specialty stores, also called single-line retailers or limited-line
retailers, are differentiated from other retailers by their degree of specializationthat
is, the narrowness of their product mixes and the depth of their product lines. These
traditional retailers specialize within a particular product category, selling only items
targeted to narrow market segments or items requiring a particular selling expertise,
such as childrens shoes, contact lens, swimming costumes, or wall clocks. Service
establishments, such as restaurants and banks, are often classified as specialty retailers.
These retailers do not try to be all things to all people. In fact one can never be all
things to all peoples.
General stores dominated Indian retailing and they are likely to dominate because,
except in large cities, too few people could be found to justify specialty retailers. The
remarkable success enjoyed by specialty stores in recent years, however, illustrates the
importance of effective market segmentation and target marketing. The major reason
for their success is the development of considerable expertise in their particular product
lines.
Department store : A departmentalized retail outlet, often large, offering a wide variety of products
and generally providing a full rang of customer services.
Department Stores Department stores are typically large compared with specialty
stores. They carry a wide selection of products, including clothing, furniture, home
appliances, housewares, anddepending on the size of the operationgood many
other products as well. These stores are departmentalized both physically and
organizationally. Each department is operated largely as a separate entity headed by a
buyer, who has considerable independence and authority in buying and selling products
and who is responsible for the departments profits. Independent department stores do
exist, but most department stores are members of chains or ownership groups.
Most department stores are characterized by a full range of services, including credit
plans, delivery, generous return policies, restaurants, and a host of other extras such as
fashion clinics, closed-door sales for established customers only and even etiquette
classes for customers children. Such services, as well as the need to carry a wide
variety of merchandise and maintain a large building, increase store operating costs and
MAJOR RETAILER
GROUP CLASSIFICATION BRIEF DESCRIPTION
IN-STORE RETAILING Specialty Store Narrow variety, deep selection within a
product class, Personalized
service; makes up large bulk of all retailing
operations
Department store Generally chain operations, wide variety, full
range of services
Supermarket Wide variety of food and nonfood products,
large departmentalized operation featuring
self-service aisles and centralized checkouts
Convenience store Little variety, shallow selection, fast service
General mass Wide variety, shallow selection of high-
merchandiser turnover products, low prices, few customer
services
Catalog showroom General mass merchandiser that uses a catalog
to promote items
Warehouse club General mass merchandiser that requires
memberships if customers
wish to shop; store goods warehouse-style
Specialty mass Less variety but greater depth than general
merchandiser mass merchandiser, low prices, few customer
services
Off-price retailer Specialty mass merchandiser that sells a
limited line of nationally known brand names
Category superstore Specialty mass merchandiser that offers deep
discounts and
extensive assortment and depth in a specific
product category
DIRECT MARKETING Mail-order/direct response Generally low operating costs, emphasis on
convenience; often
retailing uses computerized databases; includes
mail order, television home shopping, and
telephone sales
Door-to-door selling High labour cost, image problems; popularity
is decreasing in developed countries, increasing
in less-developed countries
e-tailing Consumer initiates contact with retailer via
computer and the
Internet
Vending machines High-turnover products, low prices
Figure 11.1: Some Retailers Classified by Prominent Strategy.
necessitate higher prices than those at discount stores. Some consumer seek the service
and atmosphere of the department store but then make actual purchases at a discount
store. In short, discounters and other types of store operators are formidable competitors
for traditional department stores.
Supermarkets and Convenience Stores The supermarket of today differs greatly
from the grocery store from which it evolved. The grocery operator of the early part
of last century knew most customers, personally filled customers orders and was
likely to offer both delivery service and credit. With the advent of the telephone, the
grocer accepted phone orders and dispatched a delivery boy to the customers home.
Supermarket : Any large, self-service, departmentalized retail establishment, but especially one that
sells primarily food items.
Todays supermarket is a large departmentalized retail establishment selling a variety
of products, mostly food items but also health and beauty aids, housewares, magazines,
and much more. The dominant features of a supermarket marketing strategy are large
in-store inventories on self-service aisles and centralized checkout lines. Often,
supermarkets stress the low prices resulting from self-service. The inclusion of nonfood
items on supermarket shelves was once novel, in that it represented the stocking of
items that did not traditionally belong in the supermarkets group of offerings. The
name given to this practice is scrambled merchandising Scrambled merchandising permits
supermarkets (as well as other types of retailing institutions) to sell items that carry a
higher margin than most food items; thus it provides a means to increase profitability.
Across the board, however, supermarket profit margins are slimonly 1 to 2 percent
of total sales. Supermarkets rely on high levels of inventory turnover to attain their
return on investment goals.
Scrambled merchandising : The offering by retail establishment of products not traditionally
associated with that establishment.
Supermarkets were among the first retailers to stress discount strategies. Using such
strategies, large self-service retail establishments sell a variety of highturnover products
at low prices. A good part of a retailers ability to hold process down stems from the
practice of offering few services. Other than the costs of the goods they sell, most
retailers find that personnel costs are their largest financial outlay. Thus, by eliminating
most of the sales help, having no delivery staff, and hiring stock clerks and cash-register
operators rather than true salespeople, discounters are able to take a big step toward
reducing their prices. Buying in large volume also reduces the cost of goods sold.
Convenience store : A small grocery store stressing convenient location and quick service and
typically charging higher prices than other retailers selling similar products.
Convenience stores are, in essence, small supermarkets. They have rapidly developed
as a major threat to their larger cousins. 7-Elevens, Quick-Trips, and other imitative
convenience store have sprung up and multiplied across the United States. These stores
carry a carefully selected variety of high-turnover consumer products. As their names
generally imply, the major benefit these stores provide to consumers is convenience
convenience of location and convenience of time. By choosing handy locations and
staying open 15, 18, or 24 hours a day, 7 days a week, convenience stores offer extra
time and place utility. Consumers must pay for these conveniences and seem quite
willing to do so. Managers of these stores price most of their convenience goods at
levels higher than supermarketers, to provide high profit margins. Convenience stores
are unusual among retailers because they have both a high margin and a high inventory
turnover.
Mass merchandise retailer : A retailer that sells products at discount prices to achieve high sales
volume; also called a mass merchandise discount store. There are two basic types of mass merchandise
retailers: general mass merchandesers and specialty mass merchandisers.
Mass Merchandisers Mass merchandise retailers, sometimes called mass
merchandise discount stores or superstores, sell at discount prices to achieve high sales
volume. Mass merchandisers cut back on their stores interior design and on customer
service in their efforts to reduce costs and maintain low prices. Supermarkets were the
forerunners of mass merchandisers. In fact, the term supermarket retailing has been
used to describe Target, Wal-Mart, and many other stores that have adopted the
supermarket strategy, incorporating large inventories, self-service, centralized checkouts,
and discount. Using supermarket-style discount strategies helps mass merchandisers
to offer prices lower than those at traditional stores.
Mass merchandisers can be classified as general or specialty. General mass
merchandisers, such as Wal-Mart, carry a wide variety of merchandise that cuts across
product categories. They may sell everything from drug and cosmetic items to electrical
appliances to clothing, toys, and novelty items. The wide variety of goods general mass
merchandisers offer at low prices means that they usually cannot afford to carry a
deep selection of goods in any product line. Retailers usually carry either a wide variety
or a deep selection, but not both. The expense associated with having many kinds of
goods and many choices of each kind makes the two possibilities largely mutually
exclusive. (Indeed, small retailers can often compete with giant mass merchandisers
on the basis of selection.
In contrast with general mass merchandisers, specialty mass merchandisers carry a
product selection that is limited to one or a few product categories. For example, some
specialty mass merchandisers sell only clothing.
We will discuss two types of gerneral mass merchandisers, catalog showrooms and
warehouse clubs, and two types of specialty mass merchandisers, category superstores
and off-price retailers.
Catalog showroom : A gerneral mass merchandise outlet where customers select goods from a
catalog and store employees retrieve the selected items from storage.
Catalog showrooms, like Service Merchandise, publish large catalogs identifying
products for sale in the store. Typically, these are high-margin items. The catalogor
an accompanying price listshows the normal retail price of the item and the catalog
discounters much lower price. Often, the discounters price is printed without a dollar
sign in the form of an easily decipherable code to let the buyer know that a special
dealnot available to just anyoneis being offered. Catalog discounters, like other
discounters, do not offer customer conveniences or salesperson assistance. Service is
slowed by the need to wait for purchased products to be delivered from a storage
place. However, this successful formula permits lower prices.
Warehouse club : A general mass merchandise oulet at which only members are allowed to shop;
also called a closed-door house.
Some discounters operate a special sort of store called a ware house club or a closed
-door house. At Sams Wholesale Club and Price Club, customers are asked to become
members and are issued cards that permit entry to the store. Some closed-door
houses require that customers already be members of some specific group, such as a
labour union or the civil service. While these operations run the risk of being seen as
discriminating against persons not in the target customer group, the membership idea
has been found by some retailers to be an effective way build store loyalty. Moreover,
if in building its membersship base the club develop an actual list of customers, direct
mail advertisements can be sent to these people, eliminating, to a large extent, other
forms of advertising with their large proportions of waste circulation. Warehouse clubs
combine wholesaling and retailing functions. For these marketers, the showroom facility
doubles as a storage place, or warehouse, allowing the retailer to hold far greater
amounts of stock than traditional retailers retain. Furthermore, when they sell to service
organizations or business members, such as schools, restaurants, and day-care centers,
the clubs are actually wholesalers. However, many members who purchase as small-
business customers also use these stores for personal shopping, and these are retail
sales.
Warehouse clubs focus on sales volume and often sell in bulk. This requires that
manufacturers change their packaging strategy. For example, Kelloggs which initially
refused to package in bulk, now provides dual packages of its cereals and Pop-Tarts
for warehouse clubs.
Off-price retailer A specialty mass merchandise outlet offering a limited line of nationally known
brand names.
Off-price retailers are specialty mass merchandisers that aggressively promote
nationally known brand names of clothing at low prices. Off-price retailers can purchase
brand name goods such as apparel or footwear at below-wholesale prices (even below
prices paid by traditional mass merchandisers) because they typically do not ask for
promotional allownces, return privileges, extended payment terms, or the highest-quality
merchandise. They also keep their costs low by offering few services. Off-price stores
have evolved because many name-brand manufacturers that once sold exclusively to
retailers such as Saks Fifth Avenue, Neiman-Marcus, and Bloomingdales are now
more willing to sell seconds, overruns, discontinued items, or out-of-season merchandise
to large-volume retailers, even when retail prices are below suggested level. When a
manufacturer owns and operates an offprice store, the store is called a factory outlet.
Category superstore A specialty mass merchandise outlet offering extensive assortment and depth in
a specific product category; also called a category killer.
Direct marketing Marketing in which advertising, telephone sales, or other communications are
used to elicit a direct response, such as an order by mail or phone, also called direct-response
retailing.
Toys R Us, Petsmart, and Sportmart are specialty mass merchandisers that apply the
supermarket format to the marketing of toys, pet food and supplies, and sporting goods.
A mass merchandise discounter specializing in a certain product category is called a
category superstore or category killer. Sportsmart, which sells 100,000 different items,
provides an example. It is radically different from the typical independent sports store
because it stocks virtually all competing brands of soccer balls, base ball gloves, sports
team jackets, and the like, rather than carrying a single brand, as most sports stores do.
Category superstores apply a deep discount strategy, setting prices even lower than
those of general mass merchandisers, and offer the most extensive assortment and
greatest depth in the product lines they carry. This retailing strategy is designed to
attract most of the local business for the product category and to eliminate (kill) the
competition.
Direct Marketing : Retailing without a Bricks-and-Mortar Store Direct marketing
involves the use of advertising, telephone sales, catalogs, the Internet, or other
communications to elicit a direct response consumers. Direct marketing in a retailing
context has also been called nonstore retailing and direct response retailing. The
many means of direct marketing include mailorder sales, door-to-door selling, vending
machines, and e-tailing on the Internet. Whether direct marketing uses the telephone,
catalogs, letters, other print media, television, or the Internet to reach consumer, it
always calls for a direct response, generally an order by mail, telephone, or the Internet.
Mail-order retailing through catalogs is one of the oldest forms of direct marketing.
Sears, Roebuck and Company began in the mail-order business and moved on to other
types of marketing. Today, the famous Sears wish book catalog no longer exists.
However, companies such as Banana Republic and Sharper Image still combine catalog
advertising with both mail-order and in-store retailing. Others, like Sundance, are
exclusively committed to direct marketing operatons. Consumers perceive mail order
buying as more risky than in-store shopping. In fact, catalog buying is among the shopping
methods perceived as riskiet by consumers. Those who have had a favorable experience
with this nonstore shopping method are more favorably inclined toward it.
Catalog retailers and some other mail-order marketers make extensive use of data-
based marketing. They buy computer-generated mailing lists from companies that
specialize in developing them, or they compile lists themselves. The lists can be narrowly
focused on selected groupsteens, homeowners, newlyweds, and so on.
Advertising in magazines and other print media may call for a direct response and thus
may constitute direct marketing. Certain target customer may be reached effectively
by such marketing efforts. Purveyors of vitamins and other health aids for senior citizens,
for example, conduct a brisk business through advertisements placed in such magazines
a Modern Maturity.
Direct marketers that advertise on television and fill orders by mail or express delivery
services have multiplied rapidly. They now hawk everything from cutlery to Elvis Presley
memorabilia. The familiar television campaigns that urge viewers to write or call a toll-
free number are good illustrations of this approach to retailing.
Television home shopping is a direct marketing innovation developed with the advent
of cable TV. Viewers tuning in to a cable shopping channel see a show where
products are demonstrated by a host. Consumers can call the host while the show is
on the air to ask questions about the product or to purchase it.
Telemarketing, the selling of retail merchandise by telephone, is a growing aspect of
direct marketing. It involves both database management and personal selling.
What most attracts consumers to the various forms of direct marketing is convenience.
Shopping at home, especially at such hectic times of the year as the Christmas holidays,
provides an undeniable attraction. So does the fact the many direct marketers will ship
gift-wrapped orders directly to the person for whom the merchandise was bought, thus
freeing the customer from wrapping and delivery chores. Direct marketing may attract
retailers because it offers many opportunities to reduce operating costs. No in-store
salespeople need to be hired, trained, or paid. Often businesses may be headquartered
in rural areas or unattractive industrial parks that ordinary retailers would avoid.
Indeed, the retailer that conducts business out of the consumers view can cut many
corners.
On the other hand, direct marketing retailers face certain special expenses. The catalog
retailer incurs considerable expense in the preparation and mailing of catalog, for example.
Effective direct marketing retailers concentrate on fulfillment operations to make sure
that goods are shipped promptly so that customers receive their orders quickly and in
good condition. In part to overcome the sense of unease some feel about
buying merchandise they cannot examine, many direct retailers offer liberal return
policies.
Door-to-Door Selling Cutlery, vacuum cleaners, magazines, and cosmetics are among
the many products successfully sold door-to-door. This kind of retailing is an expensive
method of distribution. Labor costs, mostly in the form of commissions, are quite high.
Yet many consumers enjoy the personal in-home service provided by established
companies like Cutco, Fuller Brush, and Avon. In general, products sold door-to-door
are of the type that particularly benefit from demonstration and a personal sales approach.
Vacuums and carving knives are among the many products that lend themselves to
such demonstrations.
In-home retailing is often performed by organizations with outstanding reputations.
Unfortunately for the many legitimate companies practicing this form of retailing, the
image of the door-to-door approach has been tarnished by some unethical salespeople.
A number of laws make door-to-door selling difficult. For example, Green River
ordinances, in effect in many local areas, put constraints on the activities of door-to-
door salespeople by limiting the hours or neighborhoods in which they may call or by
requiring stringently controlled licenses.
It is interecting to observe that while door-to-door retailing is decreasing in importance
in the United States, it is growing in some less-develop countries. Avon, for example,
has a major door-to-door organization in China, and Tupperware parties are popular in
many countries.
Vending Machines The coin-operated vending machine is an old retailing tool that
has become increasingly sophisticated in recent years. For the most part, items dispensed
through vending machines are relatively low-priced convenience goods.
There is a vending machine for about every 40 people in the United States. Vending
machines can be found almost everywhereand this is a big part of their appeal to the
marketers that use them. Cigarettes, gum, and other items can be sold in hotels, college
dormitories, and church basements without an investment in a store or in personnel.
Items sold through vending machines are generally small, easily preserved, high-turnover
goods such as candy and soft drinks. Technological improvements in vending machines
have allowed machines to dispense airline tickets, travelers insurance, customized
greeting cards, and breathalyzer tests.
Table 11.1: Key Characteristics of Retail Ownership Forms
Characteristics
Ownership Distinguishing Major Major
Form Features Advantages Disadvantages
Independent Operates one outlet, easy entry Personal service, convenient Much competition, poor
location, customer contact management skills,
limited resources
Retail Common ownership of Central purchasing, strong Inflexibility, high
chain multiple units managment, specialization of investment costs, less
tasks, larger market
enterpreneurial
Retail Contractual arrangement To franchisor To franchisor: some loss
franchising between central management investment from franchisees, of control, franchisees
(franchisor ) and independent faster growth, entrepreneurial not employees, harder to
businesspersons (franchisees) spirit of franchisees maintain uniformity
to operate a specified To franchisee : To franchisee : strict
form of business established name, training, rules, limited decision
experience of franchisor, ability, payments to store
cooperative ads
Leased Space in a store leased to To lessor : expertise of lessee, To lessor : some loss of
department on outside operator little risk, diversification control, poor
To lessee : lower investment performance reflects on
instore fixtures, customer store
To lessee : strict rules,
traffic, store image
limited decision-making
ability, payments to store
Table 11.2: Comparing Retail Strategy Mixes : A Discount Store Versus a
Traditional Department Store
Discount Store Strategy Department Store Strategy
1. Less expensive rental locationlower
level of pedestrian traffic. (Note : Some
discount stores are using more expensive
locations.)
2. Simpler fixtures, linoleum floor, certral
dressing room, fewer interior and window
displays.
3. Promotional emphasis on price. Some
discounters do not advertise brand names,
but say famous brands.
4. Fewer alterations, limited phone orders,
delivery, and gift wrapping; less
availability of credit.
5. More reliance on self-service, plain
displays with piles of merchandise; most
merchandise visible.
6. Emphasis on branded product; selection
may not be complete (not all models and
colors). Some discounters feature
seconds, remove labels from goods if
asked by manufacturers, and stock low-
price, little-known items.
7. Year-round use of low prices.
1. More expensive rental location in shopping
center or districthigher level of pedestrian
traffic.
2. More elaborate fixtures, carpeted floor,
individual dressing rooms, many interior and
exterior displays.
3. Promotional emphasis on full service, quality
brands, and store image.
4. Many alterations included in prices, phone
orders accepted, and home delivery at little
or no fee; credit widely available.
5. Extensive sales assistance, attractive mer-
chandise displays, a lot of storage in back
room.
6. Emphasis on a full selection of branded and
privately branded firstquality products; does
not stock closeouts, discountinued lines, or
seconds.
7. Sales limited to end-of-season clearance and
special events.
e-tailing on the Internet
The newest development in nonstore retailing is e-tailing, or computer-interactive retailing
on the Internet. Consumers can shop from their homes or offices by using personal
computers to interact with retailers via the
Internet. For example, Egghead.com sells
consumer eletronics products and computer
software. Preview Travel.com allow owners of
personal computers to book airline flight and hotel reservations on-line. E*Trade makes
it possible for investors to buy and sell stocks via the Net. The number of Internet Web
sites, or store fronts, where products can be ordered has been growing very rapidly.
And the operations of e-tailers are expected to continue expanding dramatically. Two
years ago, Amazon.com was only an Internet bookstore, but today shoppers can find
thousands of items ranging from toys to sporting goods to consumer electronics products
at the Amazon.com site. Its slogan, Earths Biggest Selection, communicates the
message that no physical store could possibly offer the variety and depth of merchandise
available at Amazon.com.
An Internet retailing strategy is not limited by the geographical store. An e-tailer can
market to customers every where. An e-tailer must maintain a web site, which requires
high-speed computers and sophisticated software, but it does not have to maintain
physical stores or employ sales clerks and other store personnel. In some cases, e-
tailers do not even hold any inventory. Hence, marketing costs can be relatively low.
Savings from operations may be passed on to customers.
Interactivity is a fundamental and vital aspect of an Internet retail strategy. Shoppers
visiting an internet store use hyperlinks to narrow their search efforts or to get additional
details about a product. When consumers provide information about their unique needs,
marketers can address their specific requirements on a one-to-one basis. For example,
customers who return to a Web site can be greeted by name and offered product
recommendations based on their past purchases and their specific tastes.
In addition to interactivity, e-tailing offers many other advantages for consumers. Internet
shopping at home is convenient. No travel is required, and consumers have access to e-
tailers 24 hours a day, 7 days a week (24/7). Prices are often lower than prices at
bricks-and-mortar stores. Priceline.com, Buy.com, and numerous other e-tailers offer
rockbottom pricessome even let you name you own price. The Internet allows many
retailers to offer broader and deeper product lines than they could in bricks-and-mortar
stores or through printed catalogs. Shelf space does not limit the number of items in a
product line. For example, Amazon.com offers an assortment of 3,500 video games,
three times the selection of a typical electronics store. Because going from one Web
site to another is a simple task, comparison shopping can be done relatively easily.
Automated Shopping Tasks Performed by Shopbots
FUNCTION WHAT THE BOT DOES
Search Searches for products available for sale online
Alert Alerts shopper to new releases or recommends new purchases based on
past purchase behaviour
Compare Acts as a comparison shopper, collecting information about price and
availability from competing e-tailers
Negotiate Buys, sells, and bargains with other bots based on price or other criteria set
by the user
An Internet retailing strategy is
not limited by the geographical
location or a physical store.
Shopbot : A smart agent software program that performs shopping tasks for online shoppers.
Several companies provide automated shopping programs known as shopbots to make
shopping easier for their customer. Shopbots are smart agent software programs designed
to perform shopping tasks, as summarized in Exhibit 13.2. Search, Alert, Compare, and
Negotiate. For example, Saleseeker.com and Bottomdollar.com provide lists of items
and prices available at various Web site stores. MySimon.com locates goods and services
based not only on price but also on certain policies (e.g., merchandise return and technical
support policies), shipping time, and overall quality of the marketers. Respond.com
connects buyers and sellers via email. Mercata.com uses a shopbot to aggregate buyers
and use the power of volume purchasing to drive down prices. The more people who
want to buy the same item, the lower the price.
New Web site shopping malls and other innovative retailing approaches are being created
as Internet shopping evolves. For example, The Della & James Web site contains an
online gift registry, combining the convenience of the Internet, the opportunity to choose
among brands that customers know and trust, and lists of local retailers in-stock
merchandise.
Shopping on the Internet is not without its disadvantage. The most obvious disadvantage
is that a shopper cannot touch, pick up, or carefully examine a product. Although
Furniture.com and other companies make furniture available online, consumers cannot
sit on a couch without visiting a bricks-and-mortar store. Another disadvantage is that
consumers who purchase goods online must wait for delivery. (However, there are
exceptions. For example, software and digital music can be purchased and downloaded
from the Internet extremely quickly). Finally, a major disadvantage of Internet shopping
for many consumers is potential problems with privacy. Many are reluctant to provide
credit card numbers online, even though credit card fraud on the Internet is no more
likely than credit card fraud in other retail situations.
The Internet, with its worldwide audience, is dramatically changing the nature of
retailing. And because the Internet is a communication medium as well as a retail
transaction medium, many aspects of Internet strategy and tactics are interrelated with
the design of the organizations Web site.
Patterns of Retail Development
Many types of retailing institutions have been developed by marketers. Many more will
be developed as retail marketing continues to respond to changes in its environment. If
some pattern of retail institutional development could be identified, retailers would have
a powerful management toola means of predicting what new forms of retailing will
emerge. Unfortunately no hard-and-fast predictive method has yet been developed;
but several theories have been formulated. Three such theories are discussed here.
THE WHEEL OF RETAILING
The best-known hypothesis relating to retail institutional development is called the wheel
of retailing. This theory states that new retailing institutions enter the marketplace as
low-status, low-margin, low-price operations and than move toward higher status margin,
and price positions. The formulator of the theory viewed this process as the spinning of
wheel, as shown in Figure 11.2 The emergence of discount stockbrokers like Charles
Corverl|ora|
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Vosl serv|ce
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Schwab illustrates the entry process. These brokers made an impact on the marketplace
by charging low commission fees; however, they did not provide investment advice as
traditonal full-price brokers do. And, with the emergence of Internet brokers such as
E*Trade, the wheel continues to turn.
Figure 11.2: Some Positions on the Wheel of Retailing
in Order of Decreasing Markups
Wheel of retailing: The theory that new forms of retail institutions enter the marketplace as lowstatus,
low-margin, low-price operations and then gradually trade up, opening a market position for a new
low-end retailer.
Retailing scholars have observed that a pattern of trading up does exist. As time goes
by, retailers that started out small with inexpensive facilities begin to operate businesses
far larger and fancier than those with which
they began. One cause of this trading up is
the American tradition of competing, at the
retail level, more on the basis of nonprice
variables than on the basis of price
variables. Americans do not have a tradition
of haggling over prices. Instead, retailers
tend to compete with one another by such
nonprice means as offering free services,
frequent-purchaser programs, and more
attractive stores. These things tend to drive up margins and prices. Whatever the causes
of trading up, the end result, with respect to the wheel of retailing theory, is the same :
A low spot on the wheel, once occupied by a low-margin retailer that has traded up, is
left open for an innovatives retailer that can operate at a margin lower than those
earned by existing retailers. The lower margin should attract customers. The innovator
is thus tempted to snatch that lower spot, and the evolutionary process continues. Many
With respect to the wheel of
retailing theory, a low spot on the
wheel, once occupied by a low
margin retailer that has traded up,
is left open for an innovative
retailer that can operate at a
margin lower than those earned
by existing retailers.
T|es|s Arl|l|es|s 3yrl|es|s
6r|c|s-ard-rorlar,
Fu||-serv|ce sloc|
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ro researc|
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|e|g|oor|ood
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of the discounters of the 1930s and 1940s followed this pattern and eventually ended up
much like the department stores from which they sought to differentiate themselves.
The discounters then became vulnerable to the newer, low-margin, low-price retailers
such as warehouse clubs and category superstores.
The wheel hypothesis has much intuitive appeal and has been borne out in general by
many studies of retail development, but it ever intended to describe the development of
every individual retailer. There are many nonconforming examples of retail managers
who, for whatever reasons, have not traded their stores up form the positions they
originally occupied. Some abservers suggest that modern marketing methods, including
research and positioning, will stop or slow the wheel of retailing as retail marketers
resist abandoning market positions they have carefully selected.
Figure 11.3: The Challenge-and-Response Behavior of Retailing Institutions
The Dialectic View of Retail Development
Dialectic theory A theory describing the interaction of an existing retail institution (the thesis) with
a challenging institution (the antithesis), to yield a new retail institution (the synthesis) that has some
characteristics of both.
In the early nineteenth century, the German philosopher G.W. Hegel proposed a Logical
view of change, a pattern that fits nearly every situation. Briefly stated, the dialectic
theory is this : If a given institution exists, it wil be challenged eventually by another. In
Hegels terminology, the original thesis will be opposed by an antithesis. Except in rare
cases, both sides will have something to recommend them. As they interact, a new
ideasome combination of the twowill develop. Hegel called this hybird the synthesis
will be challenged by another antithesis, and so on.
Patterns like this can be discerned in retailing. As Exhibit 11.3 shows, one type of
retailing institution is challenged by another. What evolves from this confrontation is a
new kind of institution combining elements of both. For example, out of the historical
confrontation between the full-service bricks-and-mortar stock broker (the thesis) and
the discount Internet stock broker without research services (the antithesis) emerged
the clicks-and-mortar stock broker (the synthesis).
The challenge-and-response concept inherent in the dialetic process appeals to many
observers of retailing because it suggests the competitive battles that retailers wage.
And the wheel of retailing hypothesis alone is insufficient to explain institutional change,
because it lacks the elements of competition that are inherent in retailing. Some
combination of the wheel and the dialectic may therefore best explain retailings changing
patterns.
A General-specific-general Explanation
General-specific-general theory A theory describing the development of retailing as a cyclic process
in which general merchandisers are replaced by specialty merchandisers, which in turn are replaced
by general merchandisers, and so on.
General stores once dominated the U.S. retailing scene. Then, as populations grew and
became concentrated in cities, more and more stores specializing in just a few products
began to appear. Recent years have seen the successful development of general mass
merchandisers that sell enormous numbers of products under one roof. It is not too
great a leap of the imagination to view these general mass merchandisers as giant
general stores, Indeed, like the general stores of old, they are popular and successful in
part because they offer one-stop shopping and something for everyone.
The general-specific-general theory suggest that retail change goes in cyclesfrom
retailers offering general merchandise (that is, wide merchandise assortments) to retailers
offering specific merchandise (narrow assortments) and back to stores offering general
merchandise. This theory is also called the accordion theory, because merchandise
offerings, like an accordion, expand and contract over time.
Marketing Decisions
Retailers today are anxious to find new marketing strategies to attract and hold customers.
In the past they held customers by offering convenient location, special or unique
assortments of goods, greater or better services than competitors, and store credit
cards. All of this has changed. Today, national brands such as Calvin Klein, Izod, and
Levi are found in most department stores, in their own shops, in merchandise outlets,
and in off-price discount stores. In their drive for volume, national brand manufactures
have placed their branded goods everywhere. The result is that retail-store assortments
have grown more alike.
Service differentiation also has eroded. Many department stores have trimmed services,
and many discounters have increased services. Customers have become smarter
shoppers. They do not want to pay more for identical brands, especially when service
differences have diminished. Nor do they need credit from a particular store, because
bank credit cards have become almost universal.
In the face of increased competition from discount houses and specialty stores,
department stores are waging a comeback war. Once located in the center of cities,
many opened branches in suburban shopping centers, where parking is plentiful and
family incomes are higher. Others run more frequent sales, remodel their stores, and
experiment with mail-order and telemarketing. Facing competition from superstores,
supermarkets have opened larger stores, carrying a larger number and variety of items,
and upgraded their facilities. Supermarkets have also increased their promotional budgets
and moved heavily into private brands to increase profit margins.
We will examine retailers marketing decisions in the areas of target market, product
assortment and store atmosphere, price, promotion, and place.
Target Market
A retailers most important decision concerns the target market. Until the target market
is defined and profiled, the retailer cannot make consistent decisions on product
assortment, store decor, advertising messages and media, price, and service levels.
Retailers need to conduct periodic marketing research to ensure that they are reaching
and satisfying their target customers. At the same time, a retailers positioning must be
somewhat flexible, especially if it manages outlets in locations with different
socioeconomic patterns.
Product Assortment and Procurement
The retailers product assortment must match the target markets shopping expectations.
The retailer has to decide on product-assortment breadth and depth. Thus a restaurant
can offer a narrow and shallow assortment (small lunch counters), a narrow and deep
assortment (delicatessen), a broad and shallow assortment (cafeteria), or a broad and
deep assortment (large restaurant). The real challenge begins after defining the stores
product assortment. The challenge is to develop a product-differentiation strategy. Here
are some possibilities :
l Feature exclusive national brands that are not available at competing
retailers: Thus a premium ready-to-water garment store might get exclusive
right to carry the dresses of a well-known international designer.
l Feature mostly private branded merchandise : Benetton and Gap design most
of the clothes carried in their stores. Many supermarket and drug chains carry
private branded merchandise.
l Feature blockbuster distinctive merchandise events : Bloomingdales will run
monthlong shows featuring the goods of another country, such as India or China,
throughout the store.
l Feature surprise or ever-changing merchandise : Benetton changes some
portion of its merchandise every month so that customers will want to drop in
frequently. Loehmanns offers surprise assortments of distress merchandise
(goods that the owner must sell immediately because it needs cash), overstocks,
and closeouts.
l Feature the latest or newest merchandise first : The Sharper Image leads
other retailers in introducing electronic appliances from around the world.
l Offer merchandise customizing services : Harrods of London will make custom-
tailored suits, shirts, and ties for customers, in addition to ready-made menswear.
l Offer a highly targeted assortment : Lane Bryant carries goods for the larger
woman. Broopstone offers unusual tools and gadgets for the person who wants
to shop in an adult toy store.
After deciding on the product-assortment strategy, the retailer must establish procurement
sources, policies. In the corporate headquarters of a supermarket chain, specialist buyers
(sometimes called merchandise managers) are responsible for developing brand
assortments and listening to presentations by salespersons. In some chains, buyers
have the authority to accept or reject new items. In other chains, they are limited to
screening obvious rejects and obvious accepts they bring other items to the buying
committee for approval.
Even when an items is accepted by a chain-store buying committee, individual stores in
the chain may not carry it. About one-third of the items must be stocked and about two-
thirds are stocked at the discretion of each strore manager.
Manufacturers face a major challenge trying to get new items onto store shelves. They
offer the nations supermarkets between 150 and 250 new items each week, of which
store buyers over 70 percent. Manufacturers need to know the acceptance criteria
used by buyers, buying committees, and store managers. A.C. Nielsen Company
interviewed store managers and found that they are most influenced (in order of
importance) by strong evidence of consumer acceptance, a well-designed advertising
and sales-promotion plan, and geneous financial incentives to the trade.
Retailers are rapidly improving their skills in demand forecasting, merchandise selection,
stock control, space allocation, and display. They are using computers to track inventory,
compute economic order quantities, order goods, and analyze dollars spent on vendors
and products. Supermarket chains are using scanner data to manage their merchandise
mix on a store-by-store basis.
Clearly, vendors are facing increasingly sophisticated buyers. Table lists several vendor
marketing tools for improving their attractiveness to retailers. Consider how GE initiated
better policies to serve its dealers :
Table 11.3: Vendor Marketing Tools
1. Cooperative advertising : The vendor pays a portion of the retailers advertising costs for the
vendors product.
2. Preticketing : The vendor places a tag on each product listing price, manufacturer, size,
identification number, and color; these tags help the retailer reorder merchandise.
3. Stockless purchasing ; The vendor carries the inventory and delivers goods to the retailer on
short notice.
4. Automatic reordering systems ; The vendor supplies forms and computer links for the
automatic reordering of merchandise.
5. Advertising aids : Glossy photos and broadcast scripts, for example.
6. Special prices : Storewide promotion
7. Return and exchange privileges.
8. Allowances for merchandise markdowns.
9. Sponsorship of in-store demonstrations.
General Electric Before the late 1980s, GE operated a traditional system of
trying to load its dealers with GE appliances. This approach created problems,
especially for smaller independent dealers who could not afford to carry a large
stock and who could not meet the price competition of the larger multibrand dealers.
So GE dealers carry only display models and rely on a virtual inventory to fill
orders. Dealers can access GEs order-processing system 24 hours a day, check
on model availability, and place for nextday delivery. Dealers get GEs best price,
GE financing, and no interest charge for the first 90 days. In exchange, dealers
must commit to selling 9 major GE product categories, generating 50 percent of
their sales in GE products, opening their books to GE for review, and paying GE
every month through electronic funds transfer. GE dealers profit margins have
skyrocketed, and GE has dealers who are more committed to and dependent on
GE. GE now knows the actual sales of its goods at the retail level, which helps it
to schedule production more accurately.
Services and Store Atmosphere
Retailers must also decide on the services mix to offer customers :
l Prepurchase services include accepting telephone and mail orders, advertising,
window and interior display, fitting rooms, shopping hours, fashion shows, trade-
ins.
l Postpurchase services include shipping and delivery, gift wrapping, adjustments
and returns, alterations and tailoring, installations, engraving.
l Ancillary services include general information, check cashing, parking, restaurants,
repairs, interior decorating, credit, rest rooms, baby-attendant service.
The services mix is one of the key tools for differentiating one store from another.
Atmosphere is another element in the store arsenal. Every store has a physical layout
that makes it hard or easy to move around. Every store has a look. The store must
embody a planned atmosphere that suits the target market and draws consumers toward
purchase. A funeral parlor should be quiet, somber, and peaceful. A dance club should
be bright, loud, and vibrating. Victorias Secret stores work on the concept of retail
theater : Customers feel they are in a romance novel, with lush music and faint floral
scents in the background. Supermarkets have found that varying the tempo of music
affects the average time spent in the store and the average expenditures. Some fine
dapartment stores vaporize perfume fragrances in certain departments. Restaurants
are also presenting packaged environments :
Price Decision
Prices are a key positioning factor and must be decided in relation to the target market,
the product-and-service assortment mix, and competition. All retailers would like to
achive high volumes and high grow margins. They would like high Turns x Earns, but
the two usually do not go together . Most retailers fall into the high-markup, lower-
volume group (fine specialty stores) or the low-markup, higher-volume group (mass
merchandisers and discount stores). Within each of these groups are further gradations.
Retailers must also pay attention to pricing tactics. Most retailers will put low prices on
some items to serve as traffic builders or loss leaders. They will run storewide sales.
They will plan markdowns on slower-moving merchandise. For example, shoe retailers
expect to sell 50 percent of their shoes at the normal markup, 25 percent at a 40
percent markup, and the remaining 25 percent at cost.
Some retailers have abandoned sales pricing in favour of everyday low pricing (EDLP).
EDLP could lead to lower advertising costs, greater pricing stability, a stronger image
of fairness and reliability, and higher retail profits. General Motors Saturn division
states a low list price for its cars and its dealers dont bargain. Wal-Mart also practices
everyday low prices. Feather cites a study showing that supermarket chains practicing
everyday low pricing are often more profitable than those practicing sales pricing.
Promotion Decision
Retailers use a wide range of promotion tools to gernerate traffic and purchases. They
place ads, run special sales, issue money-saving coupons, and run frequent shopper
reward programs, in-store food sampling, and coupons on shelves or at checkout points.
Each retailer must use promotion tools that support and reinforce its image positioning.
They will carefully train sales people to greet customers, interpret their needs, and
handle complaints. Off-price retailers will arrange their merchandise to promote the
idea of bargains and large savings, while conserving on service and sales assistance.
Place Decision
Retailers are accustomed to saying that the three keys to success are location, location,
and location. Customers generally choose the nearest bank and gas station. Department-
store chains, oil companies, and fast-food franchisers exercise great care in selecting
locations. The problem breaks down into selecting regions of the country in which to
open outlets, then particular cities, and then particular sites. A supermarket chain might
decide to operate in the Haryana; within the Haryana, in the cities of Karnal, Ambala
and Rohtak; and within the National Capital, in 14 locations, mostly suburban. Retailers
whose product lines later the requirements of youngsters will put the majority of their
new locations in areas with rapidly growing numbers of young families.
Retailers can locate their stores in the central business district, a regional shoping center,
a community shopping center, a shopping strip, or within a larger store :
n General business districts: This is the oldest and most heavily trafficked city
area for e.g., Connaught Place in New Delhi often known as downtown in USA
Store and office rents are normally high. Most downtown areas were hit by a
flight to the suburbs in the 1960s, resulting in deteriorated retailing facilities. But in
the 1990s, a minor renaissance of interest in downtown apartments, stores, and
restaurants began in many cities.
n Regional shopping centers: These are large suburban malls containing 40 to
200 stores. They usually draw customers from a 5to 20mile radius. Typically,
malls feature one or two nationally known anchor stores and great number of
smaller stores, many under franchise operation. Malls are attractive because of
generous parking, one-stop shopping, restaurants, and recreational facilities.
Successful malls charge high rents and may get a share of stores sales.
n Community shopping centers: These are smaller malls with one anchor store
and between 20 and 40 smaller stores.
n Strip malls (also called shopping strips): These contain a cluster of stores, usually
housed in one long building, serving a neighborhoods needs for groceries, hardware,
laundry, shoe repair, and dry cleaning. They usually serve people within a five -to
ten-minute driving range.
n A location within a larger store : Certain well-known retailersMcDonalds,
Starbuckslocate new, smaller units as concession space within larger stores or
operations, such as airports, schools, or department stores.
In view of the relationship between high traffic and high rents, retailers must decide on
the most advantageous locations for their outlets. They can use a variety of methods to
assess locations, including traffic counts, surveys of consumer shopping habits, and
analysis of competitive locations. Several models for site location have also been
formulated.
Retailers can assess a particular stores sales effectiveness by looking at four indicators
(1) number of people passing by on an average day; (2) percentage who enter the
store; (3) percentage of those entering who buy; and (4) average amount spent per
sale.
(B) Wholesaling
Wholesaler An organization or individual that serves as a marketing intermediary by facilitating
transfer of products and title to them. Wholesalers do not produce the product, consume it, or sell it
to ultimate consumers.
A wholesaler neither produces nor consumes the finished product. A wholesaler is a
marketing intermediary that buys products and resells those product to retailers, other
wholesalers, or organizations that use the products in the production of other goods or
services. A wholesalers primary function is facilitating either the transportation of
products or the transfer of title to them.
Wholesalers have much in common with retailers; both of these types of marketers act
as selling agents for their suppliers and as buying agents for their customers. Both are
creators of time and place utility. Both must carefully evaluate the needs of their customer
and deliver an appropriate total package of goods and services if they are to succeed in
business. And both have developed ways of performing marketing functions that specially
suit market conditions.
Classifying Wholesalers
Intermediaries performing wholesaling functions are traditionally divided into two
groupsmerchants and agents. The only distinction between these categories lies in
whether the intermediaries take title to the goods they sell. Merchant intermediaries
take title; agent intermediaries do not. This has nothing at all to do with physical
possession of goods. Some merchants take possession of merchandise and other do
not; some agents take possession of the goods they sell, but most do not. Taking title to
goods means that the merchant intermediary owns that merchandise and must be
prepared to handle any risks associated with ownershipincluding getting stuck with
merchandise that, for whatever reason, turns out to be unsellable.
A recent Census of Wholesale Trade reported that there were 453,470 wholesale trade
establishments in the United States. Of these, 376,330 were merchant wholesalers, and
they accounted for almost 60 percent of wholesale sales volume. There were 29,305
manufacturers sales branches, and they accounted for slightly less than a third of the
wholesale sales volume. The 47,835 agents and brokers accounted for approximately
11 percent of wholesale sales volume.
Merchant Wholesalers
Merchant wholesaler An independently owned wholesaling concern that takes title to the goods it
distributes.
Merchant wholesalers are independently owned concerns that take title to the goods
they distribute. Merchant wholsalers represent about 80 percent of all wholesaling
concerns in the United States. Valley Media, for example is a top wholesale distributor
of music and video products, such as CDs, DVDs, videocassettes, and video games. It
distributes products to more than 6,000 bricks-and-mortar retailers, such as Best Buy,
Wherehouse Entertainment, and Sears. However, its customer also include CDnow,
Amazon.com, and more than 100 Internet retailers.
Not all merchant wholesalers operate on a national basis. Small merchant wholesalers
often restrict their business to a limited geographical area. They may cover single cities
or areas stretching only 100 or 200 miles from the main office. This allows them to
replace retailers inventory quickly. It also reduces or eliminates the need for overnight
trips by trucks or sales personnel and so holds down expenses.
Merchant wholesalers may be clssified in terms of the number and types of services
they provide to their customers. In this regard, they provide perfect examples of how
marketing firm adjust their total product offering of goods and services to reflect the
demands of particular situations and market segments.
Full-service merchant wholesaler A merchant wholesaler that provides a complete array of services,
such as delivery, credit, marketing informtion and advice, and managerial assistance; also called a
full-function wholesaler.
Full-Service Merchant Wholesalers As their name suggests, full-service merchant
wholesalers provide their customers with a complete array of services in addition to
the merchandise they offer. Such services include delivery, credit, marketing information
and advice, and possibly even such managerial assistance as accounting aid or other
nonmarketing aid. Full-service wholesalers are also called fullfunction wholesalers.
General merchandise wholesaler A full-service merchant wholesaler that sells a large number of
different product lines.
General line wholesaler A full-service merchant wholesaler that sells a full selection of products in
one product line.
Specialty wholesaler A full service merchant wholesaler that sells a very narrow selection of
products.
Within this category, three subsets of wholesalers are identifiable by lines of goods
offered : general merchandise wholesalers, which sell a large number of different product
types : general line wholesalers, which limit their offerings to a full array of products
within one product line; and specialty wholesalers, which reduce their lines still further.
A coffee and tea wholesaler or a spice wholesaler exemplifies this last class.
Wholesalers determine how wide or narrow a line to carry by carefully considering the
customers they serve and the industry in which they operate. When the target customers
are operators of general stores, the decision to be a general merchandise wholesaler is
logical. In some industries, however, traditional marketing practices may require some
digree of specialization.
Limited-service merchant wholesaler A merchant wholesaler that offers less than full service and
charges lower prices than a full-service merchant wholesaler; also called a limited-function
wholesaler.
Limited-Service Merchant Wholesalers : Regardless of the product line carried,
full service merchant wholesalers provide an essentially complete line of extra services.
However, some customers may not wantor may not want to pay forsome of
those services. They may prefer to sacrifice services to get lower prices. Thus, a group
of limited-service merchant wholesalers, or limited-function wholesalers, has
developed.
Cash-and-carry wholesaler A limited-service wholesaler that does not offer delivery or credit.
Cash-and-Carry Wholesalers : Buyers who are not willing to pay for and who do
not need certain wholesaler services, such as delivery and credit, may choose to patronize
cash-and-carry wholesalers. Such intermediaries eliminate the delivery and credit
functions associated with a full-service wholesaler and permit buyers to come to the
warehouse or other point of distribution to pick up their merchandise and to pay cash.
The resulting savings are passed on to buyer who are, after all, performing several
functions normally associated with wholesalers.
Truck wholesaler A limited-service wholesaler that sells a limited line of items (often perishable
goods) from a truck, thus providing immediate delivery; also called a truck jobber.
Truck Wholesalers : Truck wholesalers, also called truck jobbers, typically sell a
limited line of items to comparatively small buyers. Most of these merchant wholesalers
sell perishable items. Their mode of operation, selling from a truck full of merchandise,
can be justified by the increased freshness immediate delivery offers. Some truck
wholesalers sell items that are not particularly perishable but that face keen competition.
Although truck jobbing is an expensive means of distributing relatively small amounts of
merchandise, it is an aggressive form of sales provides instant delivery to buyers.
Direct-marketing wholesaler A limited-service wholesaler that uses catalogs or the Internet, mail
or telephone ordering, and parcel delivery.
Direct Marketing Wholesalers : Direct-marketing wholesalers operate in much
the same way as mail-order catalog retailers and othe direct marketers. Traditionally
they used catalogs and direct mail, took phone and fax orders, and then forwarded
merchandise to buyers via mail or a parcel delivery service. These wholesalers have
been most important in reaching remote rural locations where market potential is low.
However, in recent years, many types of wholesalers, such as office supply wholesalers,
have made strategic decisions to focus on direct marketing via the Internet.
Drop shipper A limited-service wholesaler often dealing in bulky products, that takes customer
orders and arranges for shipment of merchandise from the producer directly to the customer; also
called a desk jobber.
Drop Shippers : Drop shippers are merchant wholesalers that take title to goods
but do not take possession of the goods or handle them in any way. Drop shippers
accept a buyers order and pass it on to a producer or supplier of the desired commodity,
which then ships the product directly to the buyer. (See Figure 11.4). The big advantage
of this system is that the product need not be loaded and unloaded several times. Also,
it goes directly to where it is needed, which lowers transportation costs, These advantage
are especially important when the product is bulky, unwieldy, and comparatively
inexpensive.Thus, drop shipping is most commonly used for products such as coal,
cement, building blocks, and logs.
Because the drop shipper does not physically handle any productts, no investment in
warehousing facilities or equipment is requied. In fact, so little equipment of any sort is
required that these wholesalers can often get by with little more than a small officer, a
desk, and a telephone. For this reason, they are also called desk jobbers.
Rack jobber A limited-service wholesaler that contracts with a retailar to place display racks in a
store and to stock those racks with merchandise.
Rack Jobbers : Rack jobbers are a type of merchant wholesaler that came to
prominence in the 1930s when supermarket operators began to practice scrambled
merchandising and started selling cosmetics and other items they had not previously
carried. To do this easily, they contracted with wholesalers willing to come to the store,
set up a display rack, stock and replenish it, and give the super market operator a
percentage of the sales. Now rack jobbers sell many different product lines, such work
gloves, paper back books, magazines, toys, cosmetics, etc.
The attraction of this system for the store operator is the chance to stock and sell
certain items at little risk. The great attraction for the rack jobber is the chance to place
merchandise in a high-traffic supermarket location. Like most relationships between
members of a channel of distribution, theirs is a mutually beneficial one.
Figure 11.4: Operation of a Drop Shipper
AGENTS
Agent : A wholesaler that does not take title to goods. Agents sometimes take possession of goods
but function primarily to bring buyers and sellers together or otherwise help consummate a marketing
transaction.
Agents the second general category of wholesalers, may take possession of goods they
deal in but do not take title to them. Agents, as a rule, do not carry an inventroy or
extend credit, but they may provide physical facilities for conducting business. They
may help to arrange for delivery or credit as part of their services, which can be generally
described as bringing buyer and seller together. Agents typically receive commisions
based on the selling prices of the products and the amount of products they help to sell.
The commission percentage varies tremendously depending on the industry. Agents
are expected to be familiar with their products and with who wants to sell and who
wants to buy them. In short, they are expected to have on expert knowledge of the
market in which they operate.
Broker An agent intermediary whose major role is placing buyers and sellers in touch with one
another and assisting in contractual arrangements.
Brokers Brokers are agent intermediaries that receive a commission for putting
sellers in touch with buyers and assisting with contractual negotiations. Brokers generally
portray themselves as neutral in the selling process, working for both buyers and
sellers. Brokers are found in many fields. Such commodities as coffee, tea, crude
petroleum, and scrap metal are frequently brokered; so are the financial instruments
handled by the familiar stock broker. Effective brokers are experts in the market for
the products in which they deal. In effect, they sell their expertise. They have relatively
low expenses. Their commissions are also likely to be small, generally 6 percent or less
of the selling price.
Use of brokers holds particular appeal for sellers because brokers work strictly on
commission and do not enter into long-term relationships with the companies that use
them. A broker can be used only when needed and does not tie sellers to continuous
expenses the way a full-time sales force does.
Because they are commonly used sporadically, brokers as a group do not constitute a
major selling force in the day-to-day marketing activities of most organizations. A notable
exception is the food broker, which represents a number of manufacturers of food
Order and payment Order and payment
(less commission)
Merchandise shipped directly to buyer
Buyer
Drop
shipper
Supplier
products on a continual basis and actively attempts to sell their products to wholesalers
or supermarkets. Such an operation really violates the standard description of a broker,
because food brokers may be seen as working more for the seller than for the buyer. In
many ways, food brokers better fit other categories of agents. By tradition as much as
anything else, however, they continue to be referred to as brokers.
Commission merchant An agent intermediary similar to a broker but having certain additional
decision-making powers, such as the power to make price adjustments.
Commission Merchants. The commission merchant is an agent intermediary similar
to a broker. Unlike brokers, however, commission merchants are usually given certain
power by sellers. They might be empowered, for example to atempt to bid up the selling
price or to accept a selling price as long as it is above a previously agreed-on floor.
Commission merchants thus perform a pricing function and more clearly work in league
with the seller than do most brokers. They are most commonly found representing
producers of agricultural products. Commission merchants, despite the name, are like
other types of agents in that they do not take title to the goods they sell. However, they
often take possession of those goods so that potential buyers can inspect them. Once a
sales agreement has been reached, the commission merchant deducts a commission
form the selling price and returns the balance to the producer.
Auction company An agent intermediary that brings together buyers and sellers. Auction companies
often assemble merchandise for sale in a central location and sell it by means of bidding process.
Auction Companies Auction companies are agent intermediaries that perform
valuable services in the buying and selling of livestock, tobacco, and other commodities,
as well as artwork and used mechanincal equipment. In a sense, many of these
companies take possession of the goods they deal in, because frequently they provide
some special place in which the auction can be held. The auction company receives a
commission based on the final, highest bid offered for an item or product, provided that
this bid is above a minimum agreed-on figure.
The products sold through auction could be sold in some other manner, but auction
companies offer a certain convenience in that they bring buyers together in one spot
and expedite a bidding process that might otherwise take a long time. Some industries,
such as the tobacco industry, have traditionally used auction companies and continue to
do so for that reason.
The operation of the auction system provides some less-than-obvious advantages : (1)
products can generally be examined by potential buyers; (2) sellers and buyers may, if
they choose, remain anonymous; and (3) buyers may enjoy the thrill of the auction and
savor their victory over other bidders. This last factor may not be important to a tobacco
buyer, but it is to a patron of art autions.
Auction companies are beginning to appear on the Internet. For example, FastParts is
an online auction site for overstocked electronic parts. An auction on the Internet has
the advantage of appealing to a greatly expanded geographical market.
Manufacturers agent An independent agent intermediary that represents a limited number on non-
competing suppliers in a limited geographical area; also called a manufacturers representative.
Selling agent An independent agent intermediary simlar to a manufacturers agent but representing
a given product in every area in which it is sold, rather than in a limited geographical area.
Manufacturers Agents and Selling Agents Manufacturers agents, also called
manufacturers representatives, are independent intermediaries that specialize in selling
and are available to producers that do not want to perform sales activities themselves.
These agents operate in geographically limited areas, such as a few states or a portion
of a state, representing two or more noncompeting producers and spreading selling
costs among them. Suppose a maker of photocopying equipment wants to employ a
sales force only in major markets, not in smaller cities or rural areas. It might decide to
hire a series of manufacturers agents to cover areas with low market potential and to
let the companys own sales force take the more important markets. The existence of
markets with low market potential is not the only good reason to use manufacturers
agents. Their familiarity with local markets is often an advantadge. Another reason is
that the producer may lack the interest or expertise to perform sales and marketing
functions. Still another is finance : A company that has relatively few financial
resources is more likely to use an agent because the agent need not be paid until a sale
is made.
Selling agents are also paid a commission and are expected to be familiar with
the products they handle and the markets they serve. However, they differ
from manufacturers agents in one major respect. They sell the products manufactured
by the producers they represent not in a single geographical area but in all the areas
in which the products are sold. Because, in effect, they function as sales and
marketing departments, they are often given more responsibility than manufacturers
agents. They may be permitted to handle the advertising and pricing of the
products sold and determine any conditions of sale to be negotiated. The manufacturer
that uses a selling agent obtains what might be called an external marketing
department. Table 11.5 it gives an overview of the various wholesalers in the two basic
classifications.
Manufacturers that do their Own Wholsaling
Throughout this section, we have been considering wholesaling as if it were performed
entirely by independent organizations other than manufacturers. Actually although the
various agent and merchant intermediaries are extremely important, especially in
particular lines of trade, many manufacturers perform the wholesaling functions
themselves. Some manufacturers have become disenchanted with wholesalers for a
number of reasons. They believe that wholesalers handling the products of many
manufacturers cannot promote any one manufacturers product as that producer feels
it should be promoted.
Sales office : A wholesaling establishment that is maintained by a manufacturer for its own product
and does not carry an inventory of the product.
Sales branch : A wholesaling establishment that is maintained by a manufacturer for its own
product and carries an inventory of the product.
When manufacturers do their own wholesailng, whether to retailers or to industrial
users, they may use sales offices, sales branches, or both. (The U.S. Department of
Commerce classifies sales branches and sales offices as wholesalers even though,
according to our definition, they are not independent intermediareis.) Sales offices and
sales branches are wholsaling establishments maintained by producers of the products
sold, and both may serve as headquarters for outside salespeople or as offices for
inside salespeople. The central difference between the two is that the sales branch
carries an inventory of products whereas the sales office does not. The bulk of the
product, the need for fast delivery, the technical aspects of the product, and the opportunity
to sell a standardized product rather than a custom-made one all contribute to the
decision to whether to use offices or branches.
The reason manufacturers choose to do their own wholesaling can be expressed in one
word : control. The maintenance of sales offices and branches permits manufacturers
to control more effecticely the flow of goods to their customer, the training and selling
acitvities of their sales pepole, and the flow of information returned to headquarters by
a staff that is actually out in the field.
Table 11.5
Merchant Wholesalers Agent Wholesalers
Merchant wholesalers take title to goods and earn Agents do not take title, but some may
take profits possession of products; they
receive a commission based on the product
selling price; they usually do not extend
credit.
Full-service merchant Take title; take possession; Brokers Assist in contractual
wholesalers deliver goods; extend negotiations; bring
credit; provide marketing buyers and sellers
information; provide together
managerial assistance
Limited-service merchant Commission Perform pricing
wholesalers merchants function for sellers
l Cash-and-carry Do not provide delivery or
wholesalers credit
l Truck wholesalers Have a limited product Auction Offer convenience
line; deliver goods companies in bringing buyers and
sellers together
l Direct-marketing Use catalogs and the Manufacturers Help manufacturers
whloesalers Internet; are important in agents often in thin markets,
rural locations to sell products
l Drop shippers Dont physically handle Selling agents Like manufacturers
product; generally deal in agents, specialize in
bulky products selling but also act
as an external
marketing department
l Rack jobbers Deal in a wide variety of
small products; are
responsible for stocking
prodcts
Factors
Control/
Functions
Ownership
Cash Flow
Best Use (s)
Figure 11.5: The Broad Categories of Wholesaling
Table 11.6: Characteristics of Independent Wholesalers
Major Functions
Provides Provides Performs
Stores Merchandising Personal Research
Provides and Takes and Promotion Sales and
Wholesaler Type Credit Delivers Title Assistance Force Planning Special Features
1. Merchant wholesaler
A. Full service
1. General Yes Yes Yes Yes Yes Yes Carries nearly all items
merchandise a customer usually needs
2. Specialty Yes Yes Yes Yes Yes Yes Specializes in a narrow
merchandise product range, extensive
assortment
3. Rack jobber Yes Yes Yes Yes Yes Yes Furnishes racks and shel-
ves, consignment sales
4. Franchise Yes Yes Yes Yes Yes Yes Use of common business
format, extensive mana-
ment services
5. Cooperative
a. Producerowned Yes Yes Yes Yes Yes Yes Farmer controlled, pro-
fits divided among
members
b. Retailerowned Yes Yes Yes Yes Yes Yes Wholesaler owned by
several retailers
l The manufacturer/service
provi der control s
wholesaling and performs
all function
l The wholesaler controls
wholesaling and
performs many or all
functions.
l The manufacturer/
service provider and
wholesaler each have
some control and
perform some functions.
l The manufacturer/
service provider owns
products until they are
bought by retailers or
other organizational
consumers.
l The wholesaler buys
products from the
manufacturer/service
provider and resells
them.
l The manufacturer/
service provider owns
the products and pays
the wholesaler a fee/
commission.
l The manufacturer/
service provider does
not receive payment
until the retailer or
other customer buys
products.
l The manufacturer/
service provider is paid
when the wholesaler
purchases products.
l The manufacturer/
service provider does
not receive payment
until products are sold.
l The manufacturer/
service provider deals
with a small group of
large and geographically
concentrated customers;
rapid expansion is not a
goal.
l The manufacturer/
service provider has a
large product line that is
sold through many small
and geographically
dispersed customers;
expansion is a goal.
l The manufacturer/service
provider is small, has little
marketing expertise, and
is relatively unknown to
potential customers;
expansion is a goal.
Manufactuere/Service
Provider Wholesaling
Merchant Wholesaling
Agents and
Brokers
Contd...
B. Limited service
1. Cash and carry No Stores, no Yes No No No No outside sales force,
delivery wholesale store
for business needs
2. Drop shipper Yes Delivers, no Yes No Yes Sometimes Ships items without phy-
storage sically handing them
3. Truck/wagon Rarely Yes Yes Yes Yes Sometimes Sales and delivery on same
call
4. Mail order Sometimes Yes Yes No No Sometimes Catalogs used as sole
promotion tool
II. Agents and brokers
A. Agents
1. Manufactures No Sometimes No Yes Yes Sometimes Sells selected items
(service providers) for several firms
2. Selling Sometimes Yes No Yes Yes Yes Markets all the items
of a firm
3. Commission Sometimes Yes No No Yes Yes Handles items on a
(factor) merchants consignment basis
B. Brokers
1. Food No Sometimes No Yes Yes Yes Brings together buyers
and sellers
2. Strok Sometimes Sometimes No Yes Yes Yes Brings together buyers
and sellers
Wholesaler Marketing Decisions
Wholesaler-distributors have faced mounting pressures in recent years from new sources
of competition, demanding customers, new technologies, and more directbuying programs
by large industrial, institutional, and retail buyers. They have had to develop appropriate
strategic responses. One major drive has been to increase asset productivity by managing
their inventories and receivables better. They also have had to improve their strategic
decisions on target markets, product assortment and services, price, promotion, and
place.
Target Market
Wholesalers need to define target their target markets. They can choose a target group
of customers by size (e.g., only large retailers), type of customer (e.g., convenience
food stores only), need for service (e.g., customers who need credit), or other criteria.
Within the target group, they can identify the most profitable customers and design
stronger offers to build better relationships with them. They can propose automatic
reordering systems, set up management-training and advisory systems, and even sponsor
a voluntary chain. They can discourage less profitable customers by requiring larger
orders or adding surcharges to smaller ones.
Product Assortment and services
The wholesalers product is their assortment. Wholesalers are under great pressure
to carry a full line and maintain sufficient stock for immediate delivery. But the costs of
carrying huge inventories can kill profits. Wholesalers today are reexamining how many
lines to carry and are choosing to carry only the more profitable ones. They are also
examinig which services count most in building strong customer relationships and which
ones should be dropped or charged for. The key is to find a distinct mix of services
valued by their customers.
Promotion Decision
Wholesalers usually mark up the cost of goods by a conventional percentage, say 20
percent, to cover their expenses. Expenses may run 17 percent of the gross margin,
leaving a profit margin of approximately 3 percent. In grocery wholesaling, the average
profit margin is often less than 2 percent. Wholesalers are beginning to experiment
with new approaches to pricing. They might cut their margin on some lines in order to
win important new customers. They will ask suppliers for a special price break when
they can turn it into an opportunity to increase the suppliers sales.
Promotion Decision
Wholesalers rely primarily on their sales force to achieve promotional objectives. Even
here, most wholesalers see selling as a single salesperson talking to a single customer
instead of a team effort to sell, build, and service major accounts. Wholesalers would
benefit from adopting some of the image-making techniques used by retailers. They
need to develop an overall promotion strategy involving trade advertising, sales promotion,
and publicity. They also need to make geater use of supplier promotion materials and
programs.
In the past, wholesalers typically located in low-rent, low-tax areas and put little money
into their physical setting and offices. Often the materials-handling systems and order-
processing systems lagged behind the available technologies. Today progressive
wholesalers have been improving materials-handling procedures and costs by developing
automated warehouses and improving their supply capabilities through advanced
information system.
Importance of Physical Distribution/
Marketing Logistics
Physical distribution/marketing logistics forms a pivotal part of the marketing task.
1. Confers Place and Time Utility on Products
It is physical distribution that confers place-utility and time-utility to a product by
making it available to the user at the right place and at the right time. Thereby, it
maximises the chance to sell the product and strengthen the companys
competitive position. If any product made in any place could be consumed in its
entirety at the very place of production and at the very time of production,
there would be no need for physical distribution of that product. But such products
are very rare. In practice, almost every product gets consumed at places and
times that are different from those of their manufacture. They have to be
carried to place of consumption; they have to be stored; and they have to be
distributed.
2. Where Production Locations and Markets are Distanced, Physical
Distribution Becomes more Crucial
In some cases, production locations are totally dictated by considerations, like
proximity to sources of raw material. As a result, the points of production might
be far away from the markets for the product. In some cases, huge production
capacities get established at a given location on considerations of technology and
economies of scale. In all such cases, the product has to be marketed over an
extended territory; it has to be transported over long distances, stored for a
considerable length of time and sold. Then, there are products, which are impacted
by the seasonality factoreither production is continuous but demand is seasonal
or demand is continuous but production is seasonal. Here too, physical distribution
becomes particularly crucial. It has to perform the balancing act between
production and consumption.
3. Helps Build Clientele
It is physical distribution that determines the customer service level to a large
extent. As a result, it serves as a vital tool in building clientele/market for the
product. And conversely, ineffective physical distribution leads to loss of customers
and markets.
Chapter 12
Physical Distribution System
Physical Distribution System 371
Chart 12.1: Importance of Physical Distribution/Marketing Logistics
l Ensures the physical flow of the product from the producer to the consumer. Without this
flow, marketing cannot take place.
l Confers place and time utility on products.
l Helps build clientele.
l Where production locations and markets are distanced, physical distribution becomes all the
more crucial.
l A promising area for cost reduction.
4. A Promising Area for Cost Reduction
Physical distribution is a fertile area for cost savings. Over the years, in most
businessess, physical distribution costs have grown into a sizeable chunk of the
total costs and now ranks second among all cost elements, next only to material
costs. And surprisingly, it has remained one of the neglected areas of cost control.
Supply Chain and Logistics Defined
Logistics : The activities involved in moving raw materials and parts into a firm, moving inprocess
inventory through the firm, and moving finished goods out of the firm.
Logistics describes the entire process of moving raw materials and component parts
into a firm, moving in-process inventory through the firm, and moving finished goods
out of the firm. Effective marketers create and maintain long-term relationships with a
chain of organizations to perform this logistics function. The term supply chain is used
to describe all the organizations that regularly supply a marketing company and all
members of the marketers channel of distribution. The ideal supply chain is a
collaborative arrangement in which all organizations see themselves as partners working
together to increase logistical efficiency.
Supply chain : All the collaborating organizations that help supply a marketing company and help
distribute the marketers products. The supply chain always includes the channel of distribution.
Supply chain management, or logistics management, thus involves planning,
implementing, and controlling a chain of organizational relationships to assure the efficient
flow of both inbound materials and outbound finished products.
Clearly, the term supply chain management is broad in scope because it encompasses
planning and coordinating the physical distribution of finished goods and managing the
movement and storage of raw materials and supply parts needed during the procurement
and production processes. Materials management is concerned with only part of
this process : bringing raw materials and supplies to the point of production and moving
in process inventory through the firm. General Motors Corporation wants to get to the
point where every time a dealer sells a Cadillac, Firestone or Goodyear automatically
sends another set of tires to one of GMs plants. This goal illustrates the importance of
materials management and how a flexible company can coordinate logistical activities
to react to the market faster.
Supply chain management deals with the big picture of an organizations distribution
process. Physical distribution involves the flow of products from producers to consumers.
Computerization, automation, and information technology assist with the management
of physical distribution. These technologies, especially integrated information sharing
on the Internet, have helped marketers to minimize costs.
Physical distribution is a term employed in manufacturing and commerce to describe
the broad range of activities concerned with efficient movement of finished products
from the end of the production line to the consumer. In short, physical distribution
refers to the flow of products from producers to consumers. Its major focus is the
physical aspects of that flow rather than the institutional activities within channels of
distribution dealing with changing title, facilitating exchanges, and negotiating with
intermediaries.
Physical distribution can have a dramatic influence on marketing success. For example,
the physical distribution system for McDonalds Triple Ripple, a three flavored ice-
cream product, was the major reason the product was dropped. Experiments indicated
that the product would freeze, defrost, and refreeze in the course of distribution. Solving
the problem would have required each McDonalds city to have an ice-cream plant
with special equipment to roll the three flavors into one. As this example shows physical
distribution has a dramatic influence on a products success. As part of the place
portion of the overall marketing mix, physical distribution activities contribute time and
place utility.
Supply chain management : The planning, implementing, and controlling of a chain of organizational
relationships to assure the efficient flow of both inbound materials and outbound finished products.
Materials management : The activities involved in bringing raw materials and supplies to the point
of production and moving inprocess inventory through the firm.
Physical distribution : The activities involved in the efficient movement of finished products from
the end of the production line to the consumer.
Figure 12.1, shows the supply chain and the logistical interrelationship of materials
management and physical distribution. It is common, as the exhibit indicates, to think of
materials management as consisting
of the activities performed up to the
point of production and to think of
physical distribution (narrowly
defined) as including the activities that occur after production. Logistics management
encompasses these two functions, assuring coordination of their activities.
Figure 12.1: The Flow of Materials in the Supply Chain
Inventory
Raw
Materials
Parts
G
G
Materials Management
Physical Distribution Management
Transportation Transportation Customer
or user
G
G
Field
inventory
Storage
Materials
handling
G
G
G
Pakaging
Finished goods
inventory
Order
processing
G
G
Materials
handling
Production
scheduling
and control

Goods-in-
process
inventory
Transportation
(inbound)
Procurement
activities
Logistical planning is market-oriented.
It starts with the needs of the customers
and works back to the plant.
Logistics, dealing as it does with the big picture of an organizations distribution process
relies heavily on demand estimation (sales forecasting) to achieve its goal of smoothly
controlling the physical flow of goods through an organization and its channels of
distribution. Forecasting enables managers concerned with logistics to synchronize the
activities that make up the distribution effort. With a properly constructed sales forecast
at hand, indicating what sales totals are expected and when they are expected, the
marketing manager can plan for the following events and needs (and many others) :
l Handling and holding incoming inventories of raw materials, parts, and the like.
l Monitoring stocks, materials, and finished goods inventories.
l Handling finished goods and shipping them to points of storage or intermediaries.
l Disposing of waste, by-products and imperfectly manufactured output.
l Monitoring and coordinating the members of channels of distribution.
Note that logistical planning is market-oriented. It does not start at the production-
related plant operations and work toward the customers. It starts with the needs of the
customers and works back to the plant.
The Objectives of Physical Distribution
Physical distribution has many objectives. All of them can be condensed into one
overall statement of purpose : to minimize cost while maximizing customer service.
This goal is the statement of an ideal. Unfortunately, means of realizing the lowest total
cost and the highest level of service almost always work at cross-purposes. For example,
to achieve high-level customer service, an appliance marketer should operate many
warehouses, each carrying a large inventory so that local customers orders can be
filled rapidly. If this isnt feasible, the marketer should have a fleet of jet transports
ready at all times to fly merchandise to customer within a few hours of receiving their
orders. Both of these approaches to maximizing customer service are likely to prove
inconsistent with the other half of the physical distribution objective, which calls for
minimizing cost. Minimizing cost generally requires few warehouses, low inventories,
and slow, inexpensive means of transportation. The twin goals of maximum service
and lowest cost, while not necessarily totally contradictory, can rarely be fully met. It
is usually necessary to compromise on one or both of them. Thus, physical distribution
managers, while striving for the ideal, must work toward realistic objectives, performing
a sort of balancing act in the process.
How does marketing management develop reasonable objectives for physical distribution
? A good place to start is with the marketing concept. The marketing concept dictates
that marketing managers should strive for consumer satisfaction in all that they do,
including physical distribution. Therefore, the distribution system should be designed to
fit the wants and needs of the customer.
Just as in any other element of the distribution system, cost should be evaluated in
terms of customer wants. Suppose an analysis of the market shows that customer are
most concerned with rapid and on-time deliveries. If the marketing company determines
that such service can be provided and guaranteed only at an increase in the products
price, does that mean customers cannot be served ? No, but it does mean that a further
stepdetermining whether customers are willing to pay a premium price of that
serviceis in order. For example, Federal Expresss customers seem to be willing to
pay for quick service, as are the customers who use the U.S. Postal Systems Express
Mail. In many cases, however, customers may have some priority other than rapid
delivery. Buyers of furniture and appliances, though eager to possess their new
purchases, often prefer to have the retailer from whom the purchase was made deliver,
set up, and install the product, even if this means waiting a week or two to take delivery.
These buyers are willing to pay a premium of time, sacrificing quick delivery for the
opportunity to have installation done properly by skilled workers. Other kinds of buyers,
such as purchasers of repair parts for machinery, fall somewhere in the middle; they
may seek both a steady flow of parts to maintain an in-shop inventory and access to
parts on an emergency basis. Therefore, marketing managers must research and
calculate how the customer sees the problem of balancing maximum service and
minimum cost. An important consideration here is the competitions physical distribution
policies. UPS, Emery Worldwide, Airborne, and other Federal Express competitors
clearly have developed their distribution methods with Federal Expresss market offering
in mind. Each competitor is seeking a competitive advantage over the others.
Establishing a Competetive Advantage
In many cases, organizations can establishes competitive advantages over rivals through
more effective physical distribution. This is especially true where the products of one
organizations are essentially the same as those of competitors, as in the coal and the
steel industries. Marketers in such industries experience difficulty in establishing
competitive advantages through price differentials or product.
WHAT WENT RIGHT?
Wal-Mart. Despite its lofty status as the countrys largest retailer, Wal-Mart Stores Inc. works
hard to cultivate the high-touch image of a country store in each of its 2,450 retail outlets.
Company policy calls for people greeters at every front door. Fund-raising bake sales for local
charities are encouraged. All thats missing is a cat by the cash register and a checkerboard on the
porch.
Behind the scenes, however, in the mission-critical logistical systems for replenishing the goods on
store shelves, things are becoming less high-touch and more high-tech. In fact, Wal-Mart is now
piloting an extension to its mainframe-based replenishment system, which uses a sophisticated
decision support system to quickly recognize market trends and give human merchandising experts
highly structured advice on what the merchandise assortment should be. In addition, the system
automatically initiates actions in the replenishment system.
In the future, our [merchandising] associates will be managing exceptions rather than making
every replenishment decision that comes up, says Rob Fusillo, Wal-Marts director of
replenishment information system. In the end, we think well get better decisions.
Wal-Mart is just one of a growing number of companies attempting to get a jump on the competition
by creating closed-loop decision support systems to improve their decisions decisions about
merchandise assortment uperiority, but physical distribution offers an avenue to develop an
advantage. Providing more reliable or faster delivery, avoiding errors in order processing and
delivering undamaged goods are all potential sources of competitive advantage. Should competitors
be weak in any of these areas, opportunities for competitive advantage are especially attractive.
Many salespeople emphasize rapid delivery as a selling appeal. They may say, We
can provide you with the goods within 24 hours of the order, whereas competitors
cannot guarantee delivery in under 3 days. Rapid delivery is especially important in
certain industries. Pharmacists, for instance, may insist on 1-or 2-hour service from
suppliers. If its is not available, the pharmacist may lose a sale and possibly even a
regular customer. Auto repair parts are likely to be available with 24-hour notice even
in smaller towns. Produce marketers like sweet makers, vegetable and fruits sellers
and baked goods marketers, whose products are perishable, may seek a competitive
advantage by marketing products fresher than those of their rivals.
Innovative organizations may employ the most advanced technology to establish rapid
delivery, which becomes the basis for a competitive advantage. In no other area of
marketing can computerization, automation, and modern quantitative techniques be so
extensively and profitably employed as in physical distribution. Many of the marketing
applications of computerization and automation are in the areas of handling inventory,
recording orders, billing, and other aspects of order processing.
A Cross-Section of the Physical Distribution System
1. Inventory management. For example, a retailer determines how many Newport
Jeans is an adequate number to stock and when to order them.
2. Order processing. Sales office personnel receive customers orders and then
arrange for the requested merchandise to be shipped and for the customer to be
billed.
3. Warehousing and storage. Producers of seasonal goods, such as air conditioners,
air coolers, water and room heaters, hold products in storage for distribution as
needed through the seasons.
4. Materials handling. Forklifts, cranes, conveyor belts, and other means are used
to move merchandise into and within warehouses, retail stores, and wholesalers
facilities.
5. Protective packaging and containerization. For example, paper for photocopiers
is bound into packs of 200 sheets, the packs are put into cardboard boxes containing
10 packs, and the cardboard boxes are placed on pallets.
6. Transportation. For example, coal is shipped by rail from Bihar and other coal
producing states around India wherever it was needed.
Regular physical distribution activities (excluding selection of a warehouse location)
are shown in Figure 12.2.
Figure 12.2: Physical Distribution Activities
Customer
order
Order
entry
process
Storage and
material
handling
at warehouse
Packaging
and
shipping
Transportation
outbound to
retailer
Inbound
transportation
from
suppliers
Inventory
control
Breaking physical distribution down into components permits us to concentrate on
individual aspects of a complex subject. However, this approach is somewhat misleading,
because it suggests that each component is carried out separately, without interacting
with the others. It is important to understand that the components operate as a system.
Systems concept : The idea that elements of a distribution system (or another system) are strongly
interrelated and interact to achieve a goal.
The system conceptthe idea that elements may be strongly interrelated and may
interact to achieve one goalis of special value in considerations of distribution. Even
the casual observer can see that a warehouse is of no meaningful use unless it fills and
empties as part of a system intended to achieve some distribution goal. No shipment of
merchandise via railroad or plane is of any real value unless it is taken from the carrier
and moved to where it is actually needed. In seeking to satisfy customer service
demands at reasonable cost, marketing managers can use each part of a distribution
system to help attain that goal, but only within the context of the system. Each part
affects the others. That is the very meaning of the word system.
Total Cost : A Systems Approach
Total cost concept : In relation to physical distribution, a focus on the entire range of costs
associated with a particular distribution method.
The key ideas inherent in the systems approach to physical distribution have contributed
to the development of the total cost concept. When marketing managers adopt this
way of thinking they see the answer to the distribution problem as a systema system
aimed at reducing total physical distribution cost.
The distribution manager, seeking to realize the physical distribution objective of holding
down total cost, must weigh a large number of variables. Consider this partial list :
l Handling costs at the point of production (of raw material inventory, work-in-
progress inventory and finished goods inventory).
l Cost of transportation to a wholesaler, if necessary (by railways or roadways).
l Handling costs at the wholesaler level (storage space cost, personnel &
administration cost, locked working capital cost).
l Cost of transportation to a retailer or industrial user (local transportation cost,
loading & unloading cost).
l Handling costs at the retailer level (shelf space cost, personnel & material cost,
locked working capital cost).
l Cost of transportation to a buyer, if necessary (free home delivery).
Lets consider the case of an organizational good : a file cabinet, produced in Hyderabad
and intended for sale in Hisar. A partial list of physical distribution costs might include
the following :
l Handling costs involved in moving the file cabinet from the factory to a warehouse
near New Delhi (say).
l Storage costs at the warehouse.
l Handling and shipping costs to a point of storage convenient to the Hisar buyer.
l Storage costs at Hisar.
l Local transportation costs to move the file cabinet from the Hisar warehouse or
another point of storage to the purchaser.
l Expenditures for paperwork, local taxes, and any additional handling or moving of
the item, plus the further cost of customer concerns, worries, and dissatisfaction.
A glance at this list of costs quickly reveals the basic lesson of the systems approach to
distribution. A relatively slow means of transportation from Hyderabad to Hisar, such
as train, would reduce the cost of the shipment. But if the purchaser of the file cabinet
could not wait for a slow shipment, the distributor would have a problem. Should the
manufacturer warehouse a large inventory at New Delhi, thus incurring high expenditures
for paperwork, inventory handling, and local taxes ? The cost in terms of lost sales
could be even greater if the inventory were not available. Or could the problem be
solved simply by using a more expensive means of transportation directly from the
Hyderabad, eliminating the need for New Delhi warehouse? Using air freight would
likely reduce problems of storage and handling at both ends of the transaction and
would probably lessen the total cost. Cheap transportation could prove more costly in
the long run.
Clearly, minimizing the cost associated with only one or two steps of a multi-step process
can result in increasing the cost of the whole process. Systems-oriented managers
make trade offs, increasing the cost of some parts of the system to produce even
greater cost reductions in other parts of the systemthus reducing the total cost.
Total cost is an important measure that was not always appreciated. At one time,
shippers selected their transportation modes in a one-dimensional way. If management
thought a product required quick delivery, the fastest mode of transportation was chosen.
If quick delivery was thought not to be a major concern, the cheapest means of
transportation, within reason, was selected. Looking back, you may wonder why
transportation experts frequently did not bother to determine whether it was possible to
lower the total cost of distribution, even if that meant using a more expensive means of
transportation; but this approach was uncommon until relatively recently in marketing
history. Sometimes the customers satisfaction may be more important than a dollars-
and-cents cost reduction. One possible payoff of increasing some system costs may
come in the form of greater buyer satisfaction. Unfortunately, it is easy for distribution
managers to become so wrapped up in dealing with dollars that they neglect customer
costs and payoffs.
Many opportunities to cut distribution costs present themselves to the effective marketing
manager because so much of the distribution system operates beyond the observation
of target buyers. Customers are concerned with the results of distribution, not how it is
accomplished. Often, management finds that costs can be reduced through improvements
in existing physical distribution systems. Here are some examples of such improvements:
l Using robotics and automating warehouses, thereby reducing employee payroll
expenses.
l Replacing numerous small warehouses located near markets with a few large
national warehouses that serve multiple markets, thereby reducing inventory carrying
costs at numerous locations.
l Correcting inefficient procedures in order processing, thus eliminating needless
red tape and paper handling. It means going for computerisation in order placing,
order confirmation and delivery.
l Using low-cost transportation carriers, such as inland navigation through rivers.
l Moving offices, plants, warehouses, and retail outlets to low-cost locations, perhaps
in a foreign country where labor costs are low. It means production and other
different services to foreign counteries to get cost advantage.
l Requiring customers to perform some logistics functions (as when the marketer
stipulates that retailers or wholesalers must carry certain minimum inventories),
thus allowing the marketer to shift part of the warehousing and storage costs to
customers. (channel members).
Cost-cutting measures can lower prices to buyers, increase the sellers margin, or
achieve some combination of these goals. The extent of the possible savings from cost
cutting is illustrated by the experience of one company that reported a potential savings
of one-fifth of its total physical distribution costs of $40 million as the result of a
hardnosed physical distribution audit. Some of the problems that the audit uncovered
were small shipments moving separately to common destinations, fragmented
inventories, different warehousing costs at different locations, and high costs per order.
Table 12.1: Selected Symptoms and Cost Ramifications of a Poor Physical
Distribution System
Symptom Cost Ramifications
1. Slow-turning and/or too-high Excessive capital is tied up in inventory. The
inventory firm has high insurance costs, interest expenses,
and high risks of pilferage and product
obsolescence. Merchandise may become stale.
2. Inefficient customer service Costs are high relative to the value of shipments;
warehouses are poorly situated; inventory levels
are not tied to customer demand.
3. A large number of interwarehouse Merchandise transfers raise physical distribution
shipments cost because items must be handled and verified
at each warehouse.
4. Frequent use of emergency shipments Extra charges add significantly to physical
distribution costs.
5. Peripheral hauls and/or limited The firm uses its own trucking facilities; but
backhauling many hauls are too spread out and trucks may
only be full one way.
6. A large number of small orders Small orders often are unprofitable. Many
distribution costs are fixed.
7. Excessive number of returns The firm incurs high handling costs and may lose
disgruntled customers.
Managing the Components of Physical Distribution
As mentioned earlier, six major areas of concern may be isolated in the physical
movement of products. They are transportation, warehousing, inventory control,
materials handling, order processing, and packaging. As we look at each of these
separately, keep in mind their interrelationships as well as their individual contributions
to the overall physical distribution system.
Transportation
Transportation : The physical movement or shipment of products to locations in the distribution
channel.
Transportation decisions involve selecting the specific mode that will be used to
physically move products from a manufacturer, grower, wholesaler, or other seller to
the receiving facilities of the buyer. The major alternative modes of transportation are
motor carrier, air freight, water transportation, railroad, and pipeline. Their comparative
rankings on various attributes are shown in Figure 12.3. Other means of transporting
merchandise that may come to mind, such as parcel post or overnight delivery services,
themselves use one or more of these major transportation methods.
The physical distribution manager, or transportation manager, must consider the cost
trade-offs mentioned earlier in selecting one of the modes of transportation. The first
consideration is always the needs of the buyer. If these needs are extraordinarily
difficult or expensive to meet, the manager must investigate the buyers willingness to
bear extra costs to satisfy those needs. Other considerations include the nature of the
product (bulk, perishability, weight, fragility), how fast and dependable the delivery
must be, and the cost and availability of transportation methods and storage space.
Alternatives may be evaluated in terms of these variables.
Motor Carrier. At one time the trucking industry was tightly regulated by the federal
government. Implementation of the Motor Carrier Act of 1980 dramatically transformed
this situation, essentially deregulating the trucking industry. Motor carriers are now
able to set rates for individual customers based on costs rather than having to comply
with a uniform set of rates. Although not all trucking industry members favour
deregulation, it seems to have resulted in heightened competition, greater efficiency,
enhanced services, and innovative pricing.
Ability to Deliver Reputation for
to Many Delivering
Reliability Geographical Undamaged
Low Cost Speed of Delivery Areas GOODS
(1) Pipeline (1) Air (1) Pipeline (1) Motor (1) Pipeline
(2) Water (2) Motor (2) Air (2) Rail (2) Water
(3) Rail (3) Rail (3) Motor (3) Air (3) Air
(4) Motor (4) Pipeline (4) Rail (4) Water (4) Motor
(5) Air (5) Water (5) Water (5) Pipeline (5) Rail
Figure 12.3: General Comparison of Attributes of Various Transportation Modes
Note. These comparisons are of a very general nature intended only to show the trade-offs involved
when cost of use is compared with other attributes of modes of transportation.
Motor carrier : A member of the trucking industry or another carrier, such as Greyhounds
packages service, that transports products over roads.
Damage in transit : Breakage, spoilage, or other injury to products that occurs while the products
are being transported.
Trucks, and even the far less important motor carrier operations like Greyhounds
package service, which uses buses as carriers, are preferred over rail shipment
especially by marketers of consumer products in boxed cartonsdespite the fact that
trains can move great quantities of product at lower prices. One reason is that damage
in transit is less likely with trucks than with trains. Furthermore, trucks are more
accessible and more flexible than railroads, and they are generally more reliable in
terms of delivery deadlines. Although they are most efficient moving comparatively
small shipments over short distances, they are also effective for long distances. While
trucking companies may not fully believe it, times of economic recession make motor
carriers even more attractive to shippers. Manufacturers, forced by high cost or lower
margins to reduce inventories, become increasingly vulnerable to delivery delays. With
little or no cushion of spare parts or supplies, they depend on reliable trucking service.
Air freight : The shipment of products by air carrier.
Air Freight. The primary advantages of air freight are its speed and distance
capabilities. For many shippers, these advantages compensate for the high costs
associated with air transportation. There are other advantages as well. Fast
transportation permits inventory reductions and savings in warehousing costs. Air freight
has a superb reputation for seldom damaging goods in transit. In remote areas that are
inaccessible by truck or railroad, air freight may be the only transportation choice
available. Traditionally, air transportation has been used primarily to move goods of
high unit value, perishable goods, and emergency orders. The growth of international
trade has contributed to a dramatic increase in the use of air transport during the past
two decades. As with trucking, recession and high interest rates have a significant
impact on the use of air freight.
Manufacturers, especially producers of high-technology products, often choose to ship
goods on demand via air freight rather than incur the costs of carrying inventory. Physical
distribution has moved away from the old ways of using regional warehouses and
trucks to an instant supply cycle.
A popular strategy among air carriers is the hub-and-spoke approach. For example,
Federal Expresss hub is in Memphis, Tennessee. All packages arrive in Memphis and
then depart on jet airplanes to spoke locations throughout the United States and around
the world. Hub routing of commercial airline flights through major airports such as
Dallas-Fort Worth, Atlanta, and Chicago has helped commercial airlines to establish
new time and cost standards. The hub-and-spoke idea is not totally new. It was
common in the early days of U.S. rail transportation marketing, when almost all livestock
and grain were shipped into Chicago for sale, then resorted and redirected to new
owners or food-processing facilities elsewhere. However, computerized resorting,
reloading, and rerouting facilities have made major improvements in hub-and-spoke
efficiency, allowing shippers to provide customers with major savings in both time and
dollars.
WHAT WENT WRONG ?
Meltdown A load of margarine travels from Denmark to Tacoma, Washington, where a ramp worker
notices a leak in the shipping container. The cargo is placed in a truck bound for a warehouse, but en
route the driver looks in his rearview mirror and notices yellow globs flying out of the back of the truck.
About 2,000 cartons of margarine have done a complete meltdown; the shipping documents from
Denmark never specified a temperature setting for the cargo.
Water transportation : The shipment of products by ship, boat, or barge.
Water Transportation As a rule, water transportation offers a very low-cost means
of moving products. It is most appropriate for bulky, low-value, nonperishable goods
such as grain and coal. It is also appropriate for some fairly expensive items, such as
automobiles from Germany or Japan being sent to U.S. or Canadian markets, if they
can be properly protected from damage during transit. Goods are transported on inland
bodies of water, such as the the Ganga River, as well as on oceans. Water ways are
subject to certain problems, such as the closing of some routes and ports by ice during
winter. Water is also the slowest mode of transportation. However, when there are
few time constraints or when bulkiness and low unit value argue against faster, more
expensive transportation, water transport is extensively employed.
Rail transport : The shipment of products by train over railways.
Railroads : Rail transport demonstrates its comparative advantage over other
transportation modes when the freight to be hauled consists of heavy and bulky items.
These can be moved by rail over long distances at low cost. Shippers may find that unit
costs of transporting small shipments are lower if the goods are shipped by truck.
However, as shipment size increases, the economies of rail transport come to equal,
and then exceed, those of truck shipment.
Diversion in transit : Direction to a rail shipment to a destination not specified at the start of the trip.
The major disadvantages of rail shipment are that it is relatively slow and that it can be
used only where tracks are located. In addition, the industry has both a reputation for
damaging goods in transit and an unreliable delivery record. In some parts of the
country, badly maintained tracks magnify these disadvantages. Still, in recent years
some rail lines have modernized operations and have become more competitive with
other means of transportation. For example, some lines allow diversion in transit,
whereby a shipper can direct the shipment to a destination that was not specified at the
start of the trip. A fruit and vegetable shipper may send oranges from Nagpur to the
New Delhi and then, when the products are approaching that part of the country divert
them to the particular city like Kanpur, Chandigarh etc. where prices are highest or
demand greatest. Railroads have introduced this and other services and special rates
in an attempt to offset some of the advantages offered by their competitors, especially
truckers.
Pipelines : Systems of pipes through which products such as oil and natural gas are transported.
Pipelines : Pipelines are the most specialized transportation means, because they
are designed to carry only one or two products. They are used mainly to transport
natural gas and crude petroleum from wells to storage or treatment facilities. Most
pipe lines are owned by the companies that use them, such as gas and oil producers.
Pipeline shipping is generally less expensive than rail transport but more expensive than
water transportation. A big part of the expense results from construction of the pipeline
itself. Once in place, however, pipelines are a low-cost and reliable method of
transportation. Some nonliquid and nongas products are shipped via pipeline. For
example, coal may be broken up, mixed with water, and then pumped through pipelines
as a slurry.
Piggyback service : Transport of loaded truck trailers or other sealed containers by rail to destinations
from which they are then moved by truck.
Fishyback service : Transport of containers by water to destinations from which they are then
moved by truck.
Birdyback service : Transport of containers by air to destinations from which they are then moved
by truck.
Intermodal : Transportation In many instances, as intermodal service, which
combines two or more modes of transportation, provides advantages. Many intermodal
services involve transporting loaded truck trailers or other large containers to some
location from which they can be moved to local destinations by trucks. With piggyback
service, for example, railroad flat cars carry the containers to the intermediate first
location. Piggyback service combines the long-distance hauling attractions of the railroad
with the local delivery flexibility of trucks. Other intermodal transport methods are
fishyback service, whereby the loaded containers are transported on ships or barges,
and birdyback service, whereby the containers are transported on airplanes.
Warehousing
Whatever the storage place is called, the emphasis is on moving, not keeping the product.
Warehousing : All the activities necessary to hold and house goods between the time they are
produced and the time an order is shipped to the buyer.
The second major aspect of physical distribution management is warehousing.
Warehousing involves all the activities necessary to hold and house goods between
the time they are produced and the time an order is shipped to the buyer. It includes
breaking bulk, preparing product assortments for reshipping, and all the other activities
that take place from the time the goods arrive at the warehouse until the proper product
assortments are released for shipment to customers. The old, familiar term warehouse
implies a dusty place where stacks of goods lie about collecting cobwebs. But a new
term, distribution center, is taking its place. The new name reflects the changed
perception of a storage facility as a vibrant, bustling place where the emphasis is on
throughput.
Both warehouse and distribution center are used commonly today, because the newer
terminology has not fully replaced the old. But whatever the storage place is called, the
emphasis is on moving, not keeping, the product. After all, keeping products in a
warehouse is not the goal of physical distribution managers. Their goal is to get products
into the hands of buyers.
As we have already noted, many large and small tasks are included in the warehousing
function. Taken together, they comprise two primary activities : storage and breaking
bulk.
Storage : The holding and housing of goods in inventory for a certain period of time.
Storage : Storage consists of holding and housing goods in inventory for a certain
time period. It is necessary because of the almost inevitable discrepancies between
production and consumption cycles. Consider this extreme example : The materials
needed to operate midwestern steel mills are shipped across the northern Great Lakes
via ship or barge. But shipment is impossible in the winter because the lakes freeze.
Therefore, the materials must be stored at accessible locations. Such storage diminishes
the effects that an uneven production cycle, caused by a cyclical supply of raw materials,
would have on the steel business. In other cases, marketers store products because
they have purchased large quantities and thus have more goods than they can sell at
one timeanother situation in which supply and demand are discrepant. Marketers
may also store products in expectation that market prices for those products will be
higher in the future. In any number of cases, cyclical demand brings about a discontinuity
that has to be overcome by storing products. Products of a seasonal nature, such as air
conditioners, class rings, skis, and wedding gowns, can be manufactured throughout the
year. Regular schedules stabilize production and tend to minimize production costs.
Storage permits the makers of these items to operate a steady production stream and
hold the products until they are needed.
Storage does not always involve warehouses. The Magic Chef Corporation became a
leader in the marketing of soft-drink vending machines when it designed a machine that
stores three cans in a row instead of two, boosting the capacity of the machines by one-
third and cutting the frequency of restocking. The company realized the importance of
storage considerations to its customers.
Breaking Bulk : The second key function of warehousing is the physical task of
breaking bulk. Shipments of any warehoused product are likely to arrive at the point
of storage in large quantities and to leave in smaller quantities that are the appropriate
to the individual retailers or other buyers seeking them. In the HLLs warehouse, the
bulk will be broken according to the orders placed by different wholesalers located in
New Delhi and others nearby cities.
Warehousing Strategy : A fundamental warehousing decision for marketing managers
involves determining the optimal number, locations and types of warehouses needed.
The warehousing choices open to marketing managers may be demonstrated by two
strategy extremes, between which lie many combinations of strategies. At one extreme,
the manufacturer makes large shipments over short distances to high-capacity storage
warehouses located near manufacturing points. Smaller shipments are then made to
retailers or other purchasers. At the other extreme lies the strategy alternative of
making relatively large shipments over long distances to various distribution warehouses
located near the buyers rather than near the manufacturer. The function of the
warehouses then becomes serving local buyers.
If one of the other of these strikes you as obviously the better plan, remember that
each alternative has certain cost and customer service advantages over the other.
Locating warehouse facilities near buyers has a great deal of appeal but involves operating
a larger number of storage points and dealing in smaller shipments, because local
warehouses serve only local markets. On the other hand, using a few large warehouses
located near manufacturing points can yield economies of scale and other advantages
but may contribute to a reduction of service to buyers in far-off locales.
In warehouse location decisions, the consumers need for timely delivery is a major
consideration. A company may try to win customers by emphasizing how quickly
orders can be filled. For example, management may indicate that it can fill 20 percent
of orders within 24 hours and the remaining 80 percent within 72 hours, given a particular
warehouses-location network. For organizations that strive to provide quick and
dependable delivery, speed and reliability are important factors in the warehouse location
decision.
The best warehouse location is the one that maximizes customer service, gives the firm
a competitive advantage over rivals, and minimizes cost. Finding the optimal location is
difficult. Management, therefore, should turn to the organizations marketing strategy
for guidance as to the best site. If, for instance, the strategy calls for maximizing
customer service, then cost considerations may become relatively unimportant. Where
the strategy is to minimize cost and pass the resulting economies on to consumers in the
form of low prices, however, cost will become the most important variable.
In many instances, finished goods are warehoused at the factory. When this is the
case, selecting the location of the factory becomes interrelated with physical distribution
objectives. Management of production facilities clearly is not a marketing function.
However, the location of a plant can be extremely important to the marketing strategy,
and marketing personnel often provide information about market needs to top executives
responsible for determining plant sites. The marketing strategy for Campbells Fresh, a
line of chilled fresh foods without preservatives, requires that processing plants be
located within a one-day drive of stores, to guarantee product freshness. Hewlett
Packard moved its personal-computer headquarters to France because the company
believed that Europe, not the United States or Japan, would be the growth market of
the 1990s.
Inventory Control
Inventory control : Decision making related to inventory size, placement, and delivery.
Another fundamental concern of physical distribution management is control of inventory
levels. Inventory control involves decisions about how large or small inventories
should be and how overstocking of inventory can be weighed against the dangers of
costly stock-outs (which happen when the product the customer desires is not on hand).
The ideal level of inventory is one that provides adequate service to customers while
keeping suppliers costs as low as possible. The fact that these twin goals are at cross-
purposes complicates inventory decisions.
Valuable guidance on questions of inventory control can be found in sales forecasts.
Also useful is information about how much inventory was needed in past planning
periods, how much was left over at the ends of past periods, the inventory turnover
rates of the individual warehouses being used, the value of the inventories held, and the
carrying costs. A great deal has been written on the matter of inventory control. The
general approach involves reliance on data gathered in the past and on careful projections
of future demand. Any number of simple and sophisticated quantitative tools have
been developed to help marketing managers deal with this problem area.
Risk cannot be entirely removed from inventory control, but great strides have been
made in the use of computerized inventory control systems. In fact, even figures
seemingly impossible to gauge can be closely estimated. For example, the value of a
lost sale can be defined either as the selling price of the product or as the price plus
expected income from service work. The ill will of a customer who was not served
cannot be accurately quantified, however.
The following three major costs associated with holding inventory are more suited to
quantitative treatment than are many other areas of marketing management :
l Acquisition costs are the expenses incurred in obtaining inventory. For a
manufacturer, acquisition costs are the costs of production; for an intermediary,
they are the cost of goods bought plus any transportation of handling assessments.
l Holding costs are those incurred in housing inventory. Interest paid, taxes on
inventory, and any costs associated with warehousing, spoilage, and obsolescence
are included.
l Out-of-stock loses are those that occur when customers demand goods the
marketer cannot provide. In addition to the loss of a sale, stock-outs may lead to
the loss of customer goodwill or contribute to a bad reputation over the long term.
Not all of these losses can be accurately calculated.
Management can, with care, minimize total inventory costs by setting inventories at
levels that take into account the behaviors of all three sets of costs.
Computerized inventory control systems have greatly facilitated this task. For example.
Savin Corporation has a computer terminal in each of its warehouses to keep track of
every item in its inventory. The computerized inventory control system identifies the
quantity on hand, the location and movement of stock, and the status of all orders. The
system helps in planning shipments, locating single items in inventory, and locating
customer records.
Economic order quantity (E.O.Q.) : A mathematically determined purchase order size that yields
the lowest total order processing and inventory holding costs.
Economic Order Quantity (E.O.Q.) : For intermediaries, inventory control includes
ordering goods to replenish inventory levels. An organization considers several factors
in determining the order size at which total costs can be minimized. Among these are
the prices of materials, parts, and merchandise (especially the possible quantity discounts);
order-processing costs; the cost of holding inventory in stock; predicted demand for the
product; and the rate of turnover associated with the product.
The factors mentioned here can be weighed mathematically to determine the purchase
order size yielding the lowest total cost of order processing and inventory holding. This
size is the economic order quantity, or E.O.Q.
International Sourcing : Multinational marketers face the same inventory control
decisions as domestic marketers. The buyer today, when looking for a source of
supply, looks at the whole world to find where its most economical to source it. This
statement, by an executive of Ford Motor Company, indicates one of the most pronounced
trends in logistics : looking beyond the home country to solve physical distribution and
materials management problems. Todays marketing managers make choices from a
worldwide selection of supply sources and sites for manufacturing and physical
distribution.
Material Handling
Materials handling : The use of muscle power, machinery, and other methods to identify, check,
load, and unload goods in inventory.
We have referred in this chapter to moving goods from manufacturer to warehouse
and to the movement of products from one spot to another. This movement does not
occur on its own. Personnel, machinery, and equipment are used to identify, check,
load, and unload goods. These activities are fundamental to the task of material
handling, which can be defined as the physical handling and moving about of inventory.
Over the course of the 20th century, the materials-handling process became increasingly
mechanized. Workers with hand trucks and carts have been largely replaced by
operators of forklifts and other mechanical tools such as conveyor belts, elevators, and
cranes. Most recently, robots have been used to perform materials-handling tasks. In
many warehouses, orders can be assembled and packed with almost no human
involvement. Such systems have proved faster, more accurate, and, in the long run,
cheaper than systems using human workers to fill orders.
Order Processing
Order processing : A systematic procedure for filling customer orders. The process begins when
orders are received and ends when goods have been shipped and bills sent to customers.
Like materials handling, order processing has become increasingly automated.
Computerized order processing is common, because speed and accuracy are vital to
this activity. For many buyers, high-quality order-filling procedures are a primary
purchasing criterion. Because order processing is an early step in the process of getting
merchandise to customers, mistakes made in this activity can carry through the whole
process. Such mistakes result in lost time and money, as well as disgruntled customers
and costly emergency shipments. Efficient and reliable order processing not only allows
an organization to avoid these problems but also enables it to realize economies in
related physical distribution areas; for example, the organization may be able to carry
reduced inventories or to use lower-cost transportation modes, such as trucks rather
than air.
The computerized order-processing system at American Hospital Supply, a wholesaler,
gives hospitals a direct computer-to-computer link. Direct ordering lowers order-
processing costs, reduces the possibility of incorrect orders, and reduces the time between
placing an order and receiving the goods.
Many retailers have order-processing and inventory management systems that are
linked to bar-coding systems. Scanners or computerized wands at the check-out counters
read the bar codes on all merchandise being purchased and then send the information
via computer to vendors or other suppliers.
Packaging
Packaging has an important place in the field of physical distribution, because products
must be properly packaged for protection during the distribution process. Damage,
which is costly to marketers, can occur either during transportation or in storage.
Protection means guarding against breakage, spoilage, mildew, insects, dirt, and any
other significant threat. When designing packaging, marketing managers must evaluate
the containers quality, appearance, and cost. Less obvious, but just as important, are
the costs associated with repackaging products into larger or smaller quantities, such as
cartons of grosses or dozens. Packages must also be designed to minimize difficulties
in physical handling, such as stacking in piles. For some products, like machine parts
packages are color coded or in some other way marked for ease of use and facilitate
the process of filling orders. The requirements of the Interstate Commerce Commission
and other considerations specific to particular customers or products present still other
challenges in package design.
Materials Management
Vendor analysis : The rating of alternative suppliers on attributes such as product quality, reliability
of service, delivery speed, and price.
We have discussed may aspects of physical distribution, the first area of managerial
responsibility associated with logistics. The second area is materials management.
The function of materials management within this overall system is to evaluate alternative
sources of supplies and acquire the raw materials necessary to ensure uninterrupted
production at acceptable cost. Materials managers must procure materials of an
acceptable quality that meet the organizations specifications and obtain an assurance
that the materials will arrive at the manufacturing facility at the right time. As this goal
suggests, material management is concerned with materials that are inbound to the
point of production, whereas physical distribution management is focused on outbound
products. Materials management is of major importance to marketing because shortages
of any needed materials interrupt both production and distribution processes, making it
impossible to supply customers with the products they want. To ensure effective materials
management, organizations perform vendor analysis, which is the comparative rating
of alternative suppliers on attributes such as product quality, reliability of service
assistance, speed of delivery, and competitive prices. Selection of suppliers may be an
important determinant of the business strategy. For example, selecting a parts producer
in Korea or Singapore because of its low cost of production may determine the marketers
pricing strategy. Figure 12.4, lists several logistical criteria for evaluating suppliers.
Just-in-time (JIT) inventory system : A materials management system in which inventory arrives
just in time for use.
Materials managers strive to reduce inventory costs for parts and other items used in
production by scheduling them to arrive just in time for use. A just-in-time (JIT)
inventory system is a producers (or resellers) inventory control system, coordinated
with a sophisticated ordering system, designed to minimize the amount of inventory
kept on hand. For example, Japanese and American automobile manufacturers have
just-in-time inventory systems that closely coordinate shipments from suppliers with
the demand for these items so that the desired part arrives just before it is needed at the
factory.
Figure 12.4: Logistical Criteria for Evaluating a Vendor
The central idea behind a just-in-time system is to reduce the need to stockpile inventory
by receiving smaller shipments more frequently. If the just-in-time systems is to be
efficient, the materials manager must understand the flow of products in the
manufacturing (or distribution) process and carefully plan the organizations requirements
for timely and reliable delivery. Furthermore, the supplier must be flexible, shipping
inventory where and when it is needed. When demand for the final product, such as an
automobile, rises dramatically, all suppliers parts production must be sufficiently flexible
to keep up with the demand. If, for example, a transmission maker cannot increase
production, the entire just-in-time system suffers.
Delivery time
Delivery reliability
Order accuracy
Access to interactive database
(Order status, product availability, etc.)
Damage history
Ease of doing business
Facilitating services
Evaluation
General Motors has JIT system in place. Firestone, a major supplier of original equipment
tires to the auto industry, has had to alter its own policies to meet GMs JIT requirements.
Information about he automakers tire requirements is continually transmitted via an
online system to Firestones Transportation Operations Department and the tire
manufacturing plants. Each delivery to General Motors contain the number and types
of tires required by the GM assembly line for a specified 6-hour period. Firestone
switched from rail to truck transport so that smaller shipments could be delivered daily
to particular loading docks at specified times. Firestone, in turn, has initiated a JIT
system at its own plants, requiring its suppliers to deliver raw materials in small-lot sizes
via trucks that arrive at Firestone plants at specific times.
Although we have discussed just-in-time system from a materials management
perspective, it is important to note that the JIT principles are equally applicable to
inventory management by wholesalers and retailers.
Organizational Collaboration
Organizations heavily involved in distribution activities have deliberately sought ways to
cooperate with one another and to share services. It makes little sense, for example,
for every air freight company to support an entire complement of facilities and staff at
every airport in the country. Realizing this, many companies sell ground support services
to other cooperating organizations in an effort to eliminate duplicate investments.
Federal Expresss BLS system provides an excellent example of organizational
collaboration among a supplier, the suppliers customers, and a logistic service. Practices
whereby a marketing organization arranges for another organization, such as FedEx, to
manage its logistic operation and to ship to its customers are sometimes called third
party logistics.
New Information Technology
Distribution and materials managers have welcomed the use of computers, barcoding
system, laser scanners, and automation of materials handling, because they make the
jobs of distribution and supply easier and more efficient, thus contributing significantly
to the overall health of an organization. Computers provide managers with detailed
information that can be used to plan and control all types of decisionsfrom choosing
sources of raw materials to determining the cheapest way to ship merchandise to retail
dealers. Computer programs can simulate logistical problems, thus helping decision
makers to weigh the many alternatives that confront them. Programs can also analyze
the complicated cost variables so common to distribution decisions and calculate lowest-
cost inventory levels and the most profitable warehouse location patterns. Procter &
Gamble, for example, has a system called Direct Product Profitability, which provides
computer-generated output measuring the cost of an item from the time it moves from
the warehouse to the time it is sold at the retail level. Use of the system has resulted in
the redesign of many product items based on information about size, shelf life, and
purchase frequency.
Logistics management in general has become increasingly sophisticated because of the
Internet and intranets. These media allow suppliers and customers to share data, and
they make JIT system and other logistical tasks involving two or more organizations
easier to manage.
Pricing Decision and Strategies 389
All profit organizations and many non-profit organizations set prices on their products
or services. Price goes by many names:
Price is all around us. You pay rent for your apartment, tuition for your
education, and a fee to your physician or dentist. The airline, railway, taxi,
and bus companies charge you a fare; the local utilities call their price a
rate; and the local bank charges you interest for the money you borrow.
The price for driving your car Delhi-Jaipur highway is a toll, and the company
that insure your car charges you a premium. The guest lecturer charges an
honorarium to tell you about a government official who took a bribe to help
a shady character steal dues collected by a trade association. Clubs or
societies to which you belong may make a special assessment to pay unusual
expenses. Your regular lawyer may ask for a retainer to cover her services.
The price of an executive is a salary, the price of a salesperson may be a
commission, and the price of a worker is a wage. Finally, although economists
would disagree, many of us feel that income taxes are the price we pay for
the privilege of making money.
Throughout most of history, prices were set by negotiation between buyers and sellers.
Setting one price for all buyers is a relatively modern idea that arose with the development
of large-scale retailing at the end of the nineteenth century. F.W. Woolworth, Tiffany
and Co., John Wanamaker, and others advertised a strictly one-price policy, because
they carried so many items and supervised so many employees.
Now, just one hundred years later, the Internet promises to reverse the fixed pricing
trend and take us back to an era of negotiated pricing. The Internet, corporate networks,
and wireless setups are linking people, machines, and companies around the globe
and connecting sellers and buyers as never before. Web sites like Compare. Net and
Price Scan.com allow buyers to compare products and prices quickly and easily. Online
auction sites like Bazee.com and Onsale.com make it easy for buyers and sellers to
negotiate prices on thousand of itemsfrom refurbished computers to antique tin trains.
At the same time, new technologies allow sellers to collect detailed data about customers
buying habits, preferenceseven spending limitsso they can tailor their products
and prices.
Traditionally, price has operated as the major determinant of buyer choice. This is still
the case in poorer nations, among poorer groups, and with commodity-type products.
Although nonprice factors have become more important in buyer behaviour in recent
decades, price still remains one of the most important elements determining company
market share and profitability. Consumers and purchasing agents have more access to
price information and price discounters. Consumers shop carefully, forcing retailers to
Chapter 13
Pricing Decision and Strategies
lower their prices. Retailers put pressure on manufacturers to lower their prices. The
result is a marketplace characterized by heavy discounting and sales promotion.
Price is the marketing-mix element that produces revenue; the others produce costs.
Price is also one of the most flexible elements : It can be changed quickly, unlike
product features and channel commitments. At the same time, price competition is the
number-one problem facing companies. Yet many companies do not handle pricing
well. The most common mistakes are these : Pricing is too cost oriented; price is not
revised often enough to capitalize on market changes; price is set independent of the
rest of the marketing mix rather than as an intrinsic element of market-positioning
strategy; and price is not varied enough for different product items, market segments,
and purchase occasions.
Companies handle pricing in a variety of ways. In small companies, prices are often
set by the companys boss. In large companies, pricing is handled by division and
product-line managers. Even here, top management sets general pricing objectives
and policies and often approves the prices proposed by lower levels of management.
In industries where pricing is a key factor (aerospace, television, tourism) companies
will often establish a pricing department to set or assist others in determining appropriate
prices. This department reports to the marketing department, finance department, or
top management. Others who exert an influence on pricing include sales managers,
production managers, finance managers, and accountants.
Factors Affecting Pricing Decisions
Before a firm develops a pricing strategy, it should analyze the outside factors affecting
decisions. Like distribution planning, pricing depend heavily on elements external to the
firm. This contrasts with product and promotion decisions, which are more controlled
by a firm (except for publicity). Sometimes, outside elements greatly influence the
ability to set prices; in other cases, they have little impact. Fig 13.1. Outlines the major
factors, which are discussed next.
Consumers
Company personnel involved with pricing decisions must understand the relationship
between price and consumer purchases and perceptions. This relationship is explained
by two economic principlesthe law of demand and the price elasticity of demand
and by market segmentation.
The law of demand states that consumers usually purchase more units at a low price
than at a high price. The price elasticity of demand indicates the sensitivity of buyers
to price changes in terms of the quantities they will purchase. Price elasticity represents
the percentage change in the quantity demanded relative to a specific percentage change
in the price charged. This formula shows the percentage change in demand for each 1
percent change in price :
Price elasticity =
Quantity 1 Quantity 2
Quantity 1 + Quantity 2
Price 1 Price 2
Price 1 + Price 2
Because the quantity demanded usually falls as price rises, elasticity is a negative
number. However, for purposes of simplicity, elasticity calculations are usually expressed
as positive numbers.
Figure 13.1: Factors Affecting Price Decisions.
Elastic demand occurs if relatively small changes in price result in large changes in
quantity demanded. Elasticity is more than 1. Total revenue goes up when prices are
decreased and goes down when prices rise. Inelastic demand takes place if price
changes have little impact on the quantity demanded. Elasticity is less than 1. Total
revenue goes up when prices are raised and goes down when prices decline. Unitary
demand exists if price changes are exactly offset by changes in the quantity demanded,
so total sales revenue remains constant. Price elasticity is equal to 1.
Demand elasticity is based mostly on two criteria : availability of substitutes and
urgency of need. If people believe there are many similar goods or services from
which to choose or have no urgency to buy, demand is elastic and greatly influenced by
price changes. Price increases lead to purchases to substitutes or delayed purchases,
and decreases or expand sales as people are drawn from competitors or move up the
date of their purchases. For some people, the airfare for a vacation is highly elastic. If
prices go up, they may travel to a nearer location by car or postpone a trip.
If consumers believe a firms offering is unique or there is an urgency to buy, demand
is elastic and little influenced by price changes : Neither price increases nor declines
will have much impact on demand. In most locales, when heating oil prices go up or
down, demand remains relatively constant because there is often no feasible substitute
and homes and offices must be properly heated. Brand loyalty also generates inelastic
demand; consumers then feel their brands are distinctive and do not accept substitutes.
Finally, emergency conditions increase demand inelasticity. A truck driver with a flat
tire would pay more for a replacement than one with time to shop around. Figure 13.2.
illustrates elastic and inelastic demand.
Elasticity usually varies over a wide range of prices for the same good or service. At
very high prices, even revenues for essential goods and services may fall (mass-transit
ridership would drop a lot if fares rise from $1.50 to $3; driving would become a more
reasonable substitute). At very low prices, demand cannot be stimulated further;
saturation is reached and shoppers may begin to perceive quality as inferior.
Table 13.1, shows elasticity for an office-equipment repair business. There is a clear
relationship between price and demand. At the lowest price $60, daily demand is
greatest, 10 service calls. At the highest price, $120, demand is least : 5 service calls.
Demand is inelastic between $60 and $84; total service-call revenues rise as price
Consumers Costs Government
Channel
Members
Competition
Total Effects on
Price Decisions
increases. Demand is unitary between $84 and $96; total service-call revenues remain
the same ($672). Demand is elastic between $96 and $120; total service-call revenues
decline as the price rises within this range. Although a fee of either $84 or $96 yields
the highest service rate revenues $672 other criteria must be evaluate before selecting
a price. The repair firm should consider costs per call; the number of service people
required at different levels; the overall revenues generated by each service call, including
parts and added labor charges; travel time; the percentage of satisfied customers at
different prices (expressed by repeat business); and the potential for referrals.
Economy CarModel A Luxury CarModel B
The purchasers of an economy car are highly sensitive to price. The purchasers of a luxury car have
They perceive may models as interchangeable and demand little sensitivity to price. They
will suffer significantly if the car is priced too high At $10,000, perceive their model as quite distinctive
increases is $12,000 will cause demand to fall to 12,000 units and will pay a premium price for it. At
(revenues are $144 million). $40,000, 100,000 models may be sold
(revenues are $1 billion). A small
20,000 models may be sold (revenues
are $800 million).
A large increase in price, to $50,000,
will have a small
effect on demand 18,000 units
(revenues are $ 900 million).
Figure 13.2: Demand Elasticity for two models of Automobiles
Table 13.1: Price Elasticity for Service Calls by an Office-Equipment Repair Business
Service Revenues
Price of Calls from
Service Demanded Service Price Elasticity Type of
Call Per Day Calls of Demand* Demand
$ 60.00 10 $ 600.00
0. 76 Inelastic
$ 72.00 9 $ 648.00
0. 76 Inelastic
$ 84.00 8 $ 672.00
1. 00 Unitary
$96.00 7 $ 672.00
1. 31 Elastic
$108.00 6 $ 648.00
1. 73 Elastic
$ 120.00 5 $600.00
*Expressed as positive numbers.
Price sensitivity varies by market segment because all people are not equally price-
conscious. Consumers can be divided into such segments as these:
Price
$12,000
$10,000
Elastic
Demand
12,000 100,000 Quantity
(Units)
Price
$50,000
Inelastic
Demand
$40,000
18,000 20,000
Quantity
(Units)
l Price shoppersThey are interested in the best deal for a product. They will
prefer the brand which is available at lowest price in a given product category.
l Brand-loyal customersThey believe their current brands are better than others
and will pay fair prices for those products. Even if there is slight increase in the
prices, theyll continue to stick with the same brand.
l Status seekersThey buy prestigious brands and product categories and will
pay whatever prices are set; higher prices signify greater status. This is so because
everyone is not able to purchase the brand at the higher price level.
l Service/features shoppersThey place a great value on customer service and/
or product features and will pay for them. Even if the prices of comparable
products or services are slightly lower.
l Convenience shoppersThey value ease of shopping, nearby locations, long
hours by sellers, and other approaches that make shopping simple; they will pay
above-average prices.
A firm must decide which segment or segments are represented by its target market
and plan accordingly.
The consumers (market segments) perception of the price of a good or service as
being high, fair, or lowits subjective pricemay be more important than its actual
price. Thus, a consumer may feel a low price represents a good buy or inferior quality
or a high price represents status or poor value, depending on his/her perception. Such
factors as these affect a consumers (market segments) subjective price :
Purchase experience with a particular good or serviceHow much have I paid in
the past
Purchase experience with other, rather similar goods or servicesWhats fair
price for an item in the same or adjacent product category that I bought before ?
l Self-imageHow much should a person like me pay for something like this ?
l Social situationHow much do my friends expect me to pay for something like
this ?
l Context of the purchaseWhat should this cost in these circumstances ?
KB Home formerly Kaufman Broad, is a leading U.S. housing developer that strives
hard to offer prices perceived as fair by its target market. We survey 300,000 home
buyers each year to find out what they truly want and need in their homes. This means
KB Home is ready to respond to the needs of todays young buyers, who expect more,
but dont want to pay more.
Costs
The costs of raw materials, supplies, labour, transportation, and other items are commonly
beyond a firms control. Yet, they have a great impact on prices. Since the early
1980s, overall U.S. cost increases have been rather low. While the 1980 inflation rate
was 13.5 percent, the recent annual rate has been less than 4 percent. This means
better cost control and more stable prices for most firms. Nonetheless, the costs of
some goods and services have risen rapidly or fluctuated a lot in recent years. For
example,
l In 2001, the price for regular unleaded gasoline reached more than Rs. 33/- per
litre in all the cities of Indialargely due to the higher costs of crude oil resulting
from the OPEC trade groups decision to cut production.
l The U.S. minimum wage rose from $3.80 per hour in 1990 to $4.25 per hour in
1991 $4.75 in 1996, and $5.15 in 1997a 35 percent increases. This affected
fast food retailers and others using semiskilled and unskilled labor. The minimum
wage has not changed since 1997.
l The cost of prime-time TV ads have gone up dramatically. A 30-second ad on the
1996 Super Bowl telecast cost $1.3 million. In 2001, the cost was $2.1 million.
l Auto makers and PC makers have been affected by the rising cost of palladium,
a precious metal used in catalytic converters and some laptop PCs. From late
1996 to early 2001, the price of pladium rose from $115 an ounce to $1,100 an
ounce, before falling to $650 an ounce.
l Gold and silver prices have been very voltatile. Gold went from $325 per ounce in
mid-1999 to $250 per ounce in early 2001, before rebounding to $300 per ounce in
mid-2001. High gold prices adversely affect dentists and jewelers. Silver went
from $7 per ounce in 1998 to $4.50 an ounce in early 2001, before rebounding
slightly. The decline had a positive impact on the photography industry, which
uses silver as a film ingredient.
During periods of rising costs, firms can react in one or more ways : They can leave
products unchanged and pass along all of their cost increases to consumers, leave
products unchanged and pass along part of their increases and absorb part of them,
modify products to hold down costs and maintain prices (by reducing size, using lesser-
quality materials, or offering fewer options), modify products to gain consumer support
for higher prices (by increasing size, using better-quality materials, offering more options,
or upgrading customer services), and/or abandon unprofitable products. For instance,
In an effort to offset rising production costs, Frito-Lay, the worlds largest maker
of salty snack foods, has begun putting fewer chips in bags of Fritos, Chee-tos,
and other well-known brands, while keeping the price the same. A supermarket-
size sack of Lays potato chips has lost an ounce, or about 7.5 percent of its
previous weight, but still costs $2.99. A 99 cent box of Cracker Jack has shed
about 6.7 percent of its weight. And a $3.29 bag of Doritos has dropped almost 7
percent of its weight. Procter & Gamble has scaled back the number of disposable
diapers in its Lays and Pampers packages by an average of 13 percent while
cutting prices only 7 percent. Company officials say the change, which comes out
to eight fewer diapers in a jumbo Pack that previously had 56, leaves parents with
just enough diapers to get through the week, while providing Procter a price increase
for each diaper sold.
If costs decline, firms can drop prices or raise margins, as these examples, show :
Using microchips has reduced PC costs by requiring less wiring and assembly time,
improving durability, and enlarging information processing capability. PC prices have
gone down steadily, thus expanding the market. On the other hand, low sugar prices let
candy makers increase package size (and profits) without raising prices.
Sometimes, low costs can actually have a negative long run impact : Ironically cheap
petrol prices during the final years of the recent U.S. economic boom, which helped
propel sales of fuel-gobbling SUVs, pushed refineries to the wall. To make matters
worse, most distributors believed that OPEC would boost production. Betting that oil
and petrol would soon be cheaper, they neglected to build any significant reserves.
Result : inventories of gasoline, home heating oil, and other refined products have been
at a low ebb for nearly two years, leaving prices vulnerable to the slightest market
upset. Now, consumers are dealing with it in a tough economic climate.
Government
U.S. Government (federal and/or state) actions related to pricing can be divided into
the five major area shown in Figure 13.3 and discussed next.
Figure 13.3. Selected U.S. Government Actions Affecting Price Decisions.
Price Fixing
There are restrictions pertaining to horizontal and vertical price fixing. Horizontal
price fixing results from agreements among manufacturers, among wholesalers or
among retailers to set prices at a given stage in a channel of distribution. Such
agreements are illegal according to the federal Sherman Antitrust Act and the Federal
Trade Commission Act regardless of how reasonable prices are.
If there are violations, federal penalties may be severe : A firm can be fined up to $10
million, and individuals can be fined up to $350,000 each and imprisoned for upto 3
years. The Justice Department investigates and prosecutes price-fixing cases.
In 1999, it achieved convictions resulting in fines amounting to $1.1 billion. Over the
last few years, Hoffman-La Roche (of Switzerland), BASF (of Germany), Archer
Daniels Midland (of the United States), and Eisai (of Japan) have each been fined
more than $30 million for price-fixing activities.
To avoid price-fixing charges, a firm must be careful not to
l Coordinate discounts, credit terms, or conditions of sale with competitors.
l Talk about price levels, markups and costs at trade association meetings.
l Plan with competitors to issue new price list on the same date.
l Plan with competitors to rotate low bids on contracts.
Price Fixing
Regulations
Horizontal
Vertical
Price
Decisions
Price
Advertising
Guidelines
Prohibitions Against
Price Discrimination
Among Channel
Members
Unfair Sales Acts
Predatory Pricing
Loss leaders
Units Pricing
Laws
l Agree with competitors to limit production to keep high prices.
l Exchange information with competitors, even informally.
Vertical price fixing occurs when manufacturers or wholesalers seek to control the
final selling prices of their goods or services. Until 1976, the Miller-Tydings Act allowed
these firms to set and strictly enforce resale prices if they so desired. This practice
was known as fair trade. It protected small resellers and maintained brand images by
forcing all resellers within fair trade states to charge the same price for affected products.
The practice was criticized by consumer groups and many resellers and manufacturers
as being noncompetitive, keeping prices too high, and rewarding reseller inefficiency.
The Consumers Goods Pricing Act terminated all interstate use of fair trade or resale
price maintenance. Today, resellers cannot be forced to adhere to manufacturer or
wholesaler list prices. Most times, they are free to set their own prices.
Manufacturers or wholesalers may control final prices only by one of these methods :
l Manufacturer or wholesaler ownership of sales facilities.
l Consignment selling. The manufacturer or wholesaler owns items until they are
sold and assume costs normally associated with the reseller, such as advertising
and selling. Careful screening of the channel members that sell good or service A
supplier can bypass or drop distributors if they are not living up to the suppliers
performance standards, as long as there is no collusion between the supplier and
other distributors. (A firm must be careful not to threaten channel members that
do not adhere to suggested prices.).
l Suggesting realistic selling prices.
l Pre-printing prices on products.
l Establishing customary prices (such as 50 cents for a newspapers) that are accepted
by consumers.
Price Discrimination
The Robinson-Patman Act prohibits manufacturers and wholesalers from price
discrimination in dealing with different channel member purchasers of products with
like quality if the effect of such discrimination is to injure competition. Covered by
the act are prices, discounts, rebates, premiums, coupons guarantees, delivery,
warehousing and credit rates. Terms and conditions of sale must be made available to
all competing channel-member customers on a proportionately equal basis.
The Robinson-Patman Act was enacted in 1936 to protect small retailers from unfair
price competition by large chains. It was feared that small firms would be driven out of
business due to the superior bargaining power (and the resultant lower selling prices) of
chains. This act requires that the price differences charged to competing resellers be
limited to the suppliers cost savings in dealing with the different resellers. It remains a
legal restraint on pricing.
There are exceptions to the Robinson-Patman Act. Price discrimination within a channel
is allowed if each buyer purchases items with substantial physical differences, if non-
competing buyers are involved, if prices do not injure competition, if price differences
are justified by costs, if market conditions change (such as production costs rising), or
if the seller reduces prices in response to another supplier.
Discounts are permissible if a seller demonstrates that they are available to all competing
resellers on a proportionate basis, sufficiently graduated so both small and large buyers
can qualify, or cost justified. For instance, a seller must prove that discounts for cumulative
purchase (total volume during the year) or multistore purchases by chains are based on
cost savings.
Although the Robinson-Patman Act is geared toward sellers, it has specific liabilities
for purchasing firms under Section 2(F) : If shall be unlawful for any person engaged
in commerce in the course of such commerce, knowingly to induce or receive a
discrimination in price which is prohibited in this section. Accordingly, resellers should
try to get the lowest prices charged to any competitor in their class, but not bargain so
hard that their discounts cannot be explained by one of the acceptable exceptions to the
act.
Minimum Prices
A number of states have enacted unfair-sales acts (minimum price laws) to prevent
firms from selling products for less than their cost plus a fixed percentage that includes
overhead and profit. About one-half of the states have unfair-sales acts covering all
kinds of products and retail situations; two-thirds have laws involving specific products,
such as bread, dairy items, and liquor. The acts are intended to protect small firms from
predatory pricing by larger competitors and to limit the use of loss leaders by retailers.
With predatory pricing, large firms cut prices on products to below their cost in selected
geographic areas so as to eliminate small, local competitors. At the federal level, predatory
pricing is banned by the Sherman and Clayton Acts. Manufacturers, wholesalers and
retailers are all subject to these acts. However, predatory pricing is extremely difficult
to prove.
Loss leaders, items priced below cost to attract customers to a sellerusually in store
settingare also restricted by some state unfair-sales acts. Sellers use loss leader
typically well-known and heavily advertised brands, to increase their overall sales. They
assume customers drawn by loss leaders will also buy non-sale items. Because
consumers benefit, loss-leader laws are rarely enforced.
Unit Pricing
The lack of uniformity in package sizes has led to unit-pricing legislation in several
sates. Unit pricing lets consumers compare price per unit for competing brands and
for various size of the same brand.
Food stores are most affected by unit-pricing laws; they often must show price per unit
of measure, as well as total price. For example, through unit pricing, a shopper could
learn that a 12 ounce can of soda selling for 40 cents is priced at 3.3 cents per ounce,
where as a 67.6 ounce (2-liter) bottle of the same brand selling for $2.09 is priced at 3.1
cents per ounce. The larger size is cheaper than the smaller one.
Retailers unit-pricing costs include computing per-unit prices, printing shelf labels and
maintaining computer records. The costs are affected by the number of stores in
chain, the sales per store, the number of items under unit pricing, and the frequency of
price changes.
When unit-pricing laws were first enacted in the early 1970s, research found that people
generally did not use the data and that low-income consumers (for whom the laws
were most intended) were least apt to look at unit prices. Critics felt the laws were
costly without providing benefits. More recent research has shown unit pricing to be
effective and suggests that consumer learning and the subsequent behavioural changes
take time. Upscale suburban residents are still more prone to use the data than others.
Price Advertising
Price advertising guidelines have been set by the FTC and various trade associations,
such as the Better Business Bureau. The FTCs guidelines specify standards of
permissible conduct in several categories :
l A firm may not claim or imply that a price has been reduced from a former level
unless the original price was offered to the public on a regular basis during a
reasonable, recent period of time.
l A firm may not claim its pricing is lower than that of competitors or the
manufacturers list price without verifying, via price comparisons involving large
quantities of merchandise, that an items price at other companies in the same
trading area is in fact higher.
l A suggested list price or a pre-marked price cannot be advertised as a reference
point for a sale or a comparison with other products unless the advertised product
has really been sold at that price.
l Bargain offers (free, buy one, get one free, and half-price sale) are deemed
deceptive if terms are not disclosed at the beginning of a sales presentation or in
an ad, the stated regular price of an item is inflated to create an impression of
savings, or the quality or quantity of a product is lessened without
informing consumers. A firm cannot continuously advertise the same item as
being on sale.
l Bait-and-switch advertising is an illegal practice whereby customers are lured
to a seller that advertises items at very low prices and then told the items are out
of stock or of poor quality. Sales-people try to switch shoppers to more expensive
substitutes, and there is no intent to sell advertised items. Signs of bait-and-switch
are refusal to demonstrate sale items, the belittling of sale items, inadequate quantities
of sale items on hand, refusals to take orders, demonstrations of defective items,
and the use of compensation plans encouraging sales people to use the tactic.
Channel Members
Generally, each channel members seeks a major role in setting prices so as to generate
sales volume, obtain adequate profit margins, have a proper image, ensure repeat
purchases, and meet specific goals.
A manufacturer can gain greater control over prices by using an exclusive distribution
system or avoiding price-oriented resellers; pre-marking prices on products; owning
sales outlets; offering products on consignment; providing adequate margins to resellers;
and most importantly, by having strong brands to which people are brand loyal and for
such they will pay premium prices.
A wholesaler or retailer can gain better control over prices by stressing its importance
as a customer to the supplier, linking resale support to the profit margins allowed by the
supplier refusing to carry unprofitable items, stocking competing items, having strong
private brands so people are loyal to the seller and not the supplier, and purchasing
outside traditional channels.
Wholesalers and retailers may engage in selling against the brand, whereby they
stock well known brands, place high prices on them, and then sell other brands for
lower prices. This is done to increase sales of their private brands and is disliked by
manufacturers since sales of their brands decline.
Sometimes, wholesalers and retailers go outside traditional distribution channels and by
gray market goodsforeign-made products imported into countries by distributors
(suppliers) that are not authorized by the products manufacturers Personal stereos,
VCRs, car stereos, watches, and cameras are just some of the items handled in this
way. If wholesalers and retailers buy gray market goods, their purchase prices are less
than they would be otherwise and they have greater control over their own selling
prices. The result in often discounted prices for consumers, which may be upsetting to
both manufacturers and their authorised dealers.
To maximize channel-member cooperation regarding price decision, these factors should
be considered: channel-member profit margins, price guarantees, special deals, and the
impact of price increases. Wholesalers and retailers require appropriate profit margins
to cover their costs (such as shipping, storage, credit, and advertising) and earn reasonable
profits. Thus, the prices that are charged to them must take these profit margins into
account. An attempt to reduce traditional margins for channel members may lose their
cooperation and perhaps find them unwilling to carry a product.
Channel members may seek price guarantee to maintain inventory values and profit.
Such guarantees assure resellers that the prices they pay are the lowest available. Any
discount given to competitors will also given to the original purchasers. Guarantees are
most frequently requested for new firms or new products that want to gain entry into
an established channel.
Special dealsconsisting of limited time discounts and/or free productsare often
used to stimulate reseller purchases. The deals may require channel members to share
their savings with final consumers to increase the latters demand. For example, soda
bottlers normally give retailers large price discounts on new products to encourage
them to make purchases and then offer low introductory prices to consumers.
The effects of price increases on chains members behaviour must also be assessed.
When firms raise prices to resellers, these increases tend to be passed along to consumers.
The practice is more difficult for items with customary prices, such as candy, where
small cost rises may be absorbed by the resellers. In any event, cooperation depends
on an equitable distribution of costs and profit within the channel.
Competition
Another factor contributing to the degree of control a firm has over prices in the
competitive environment within which it operates. See Figure 13.4.
A market-controlled price environment is characterized by a high level of competition,
similar goods and services, and little control over prices by individual firms. Those
trying to charge much more than the going price would attract few customers because
demand for any single firm is weak enough that customers would switch to competitors.
There would similarly be little gained by selling for less because competitors would
match price cuts.
Figure 13.4: To Competitive Environment of Pricing
A company-controlled price environment is characterized by moderate competition,
well differentiated goods and services, and strong control over prices by individual
firms. Companies an succeed with above-average prices because people view their
offerings as unique. Differentiation may be based on brand image, features, associated
services, assortment or other elements. Discounts also can carve out a niche in this
environment by attracting consumers interested in low prices.
A government-controlled price environment is characterized by prices being set or
strongly influenced by some level of government. Examples are public utilities, mass
transit, insurance, and state universities. In each case, government bodies determine or
affect prices after getting input from relevant firms, institutions and/or trade associations,
as well as other parties such as consumer groups.
Companies may have to adapt to a changing competitive environment in their industries.
Firms in the insurance, telecommunications and financial industries have seen their
price environment shift from government to market-controlled, although some strong
firms in these industries have managed to develop a company-controlled price
environment.
Because price strategies are rather easy and quick to copy, competitors reactions are
predictable if the firm initiating a price change does well. Thus, marketers must view
price from both short and long-run perspectives. Excessive price competition may lead
to lengthy and costly price wars, in which various firms continually try to undercut
each others prices to draw customers. These wars often result in low profits of even
losses for the participants and in some companies being forced out of business.
In recents years, there have been price wars among some soft-drinks, airlines, detergents,
PC makers, mobile phone companies, insurance companies, and others in India. Although
price wars have been more common in United States (due to fierce competition in
some industries), they are now spread-overseasparticularly to Europe and, to a lesser
extent, to Japan. The impact of price wars can be dramatic.
The combination of a slowing economy, weaker demand, and bloated inventories has
electronics makers whacking prices faster than a slasher in a teen flick. Indeed, price
wars once limited to the mature PC industry have even spread to the recently red-hot
markets for products such as mobile handsets and digital music players. Making things
worse, many markets are new crowded with too many players. That means the industrys
Market-
controlled
Type of Pricing
Environment
Government-
Controlled
Price War
Company
Controlled
smallest and weakest are getting squeezedand a wave of industry consolidations and
bankruptcies is likely.
Setting the Price
A firm must set a price for the first time when it develops a new product, when it
introduces its regular product into a new distribution channel or geographical area, and
when it enters bids on new contract work.
The firm must decide where to position its product on quality and price. In some
markets, such as the cigarette market in India, as many is seven price points can be
found
Segment Examples (Cigarettes)
Ultimate 555, Marboro
Luxury India kings
Special Needs Classic Menthol
Middle Gold Flake
Ease/Convenience Wills
Me too, but Cheaper Four Square/Red & White
Price Alone Cavenders & exports from Bangladesh.
There can be competition between pricequality segments. Figure 13.5. shows nine
price-quality strategies. The diagonal strategies 1, 5 and 9 can all coexist in the same
market; that is, one firm offers a high-quality product at a high price, another offers an
average-quality product at an average price, and still another offers a low-quality product
at a low price. All three competitors can coexist as long as the market consists of three
groups of buyers : those who insist on quality, those who insist on price, and those who
balance the two considerations.
Strategies 2, 3 and 6 are ways to attack the diagonal positions. Strategy 2 says, Our
product has the same high quality as product 1 but we charge less. Strategy 3 says the
same thing and offers an even greater savings. If quality-sensitive customers believe
these competitors, they will sensibly buy from them and save money (unless firm 1s
product has acquired snob appeal).
Figure 13.5: Nine Price-Quality Strategies
Positioning strategies 4, 7 and 8 amount to overpricing the product in relation to its
quality. The customers will feel taken and will probably complain or spread bad word
of mouth about the company.
Price
High
High
Medium
Medium
Low
Low
1. Premium
strategy
2. High-value
strategy
3. Super-value
strategy
4. Overcharging
strategy
5. Medium-value
strategy
6. Good-value
strategy
7. Rip-off
strategy
8. False economy
strategy
9. Economy
strategy
P
r
o
d
u
c
t

Q
u
a
l
i
t
y
Promotion: Communication with a Purpose 443
Effective marketers know that the old adage Build a better mousetrap and the world
will beat a path to your door contains a basic flaw. If the world doesnt find out that
there is a better mousetrap, the manufacturer will be a very lonely person, indeed.
Having a great product is not enough. People must be made familar with the products
benefits. Some form of promotion is necessary to make consumers, and other publics
with which an organization interacts, aware of the existence of a product.
Recall that promotion is communication used by marketers to inform, remind, or persuade
potential buyers. Personal selling, advertising, publicity public relations, and sales
promotion are promotional methods that may be used to communicate a message.
Although promotion, and advertising in particular,
is often singled out as a part of the marketing mix
that society could well do without, a moments
reflection shows that this criticism is unwarranted.
The job of marketing is to identify consumer needs
and to try to satisfy those needs by developing appropriate productspriced right,
packaged for convenience, and properly distributed. The role of promotion in the marketing
function is to convey newsto tell consumer about the benefits of the product. This
communication, often termed selling the product, is an indispensable part of the
marketing function.
Promotion Informs
Even critics of advertising might feel more comfortable with the job promotion performs
in society once they realize that the essence of promotion is communication. If the
management of departmental store is planning a sale, communicating price savings to
potential customers must be part of the plan. Lowering prices will not benefit anyone
unless promotion communicates to consumers the fact that a sale is under way. The
stores promotions also provide other information, such as store hours, whether returns
will be allowed on sale merchandise, and whether customers can use credit cards.
Thus, the broad goal of promotion is to inform potential buyers.
Promotion Persuades
Marketers rarely face a situation in which simple and plain communication of information
is enough to make promotion effective. In the era of the production concept, when
many organization faced a sellers market, this may have been the case. But todays
world is full of messages and distractions of all sorts. Consumers are often faced with
many competing options. People find themselves increasingly rushed and harried. With
less time for comparative shopping, consumers turn to advertising for product information.
However pure information is not all these is to be found in marketing communications.
Marketing managers exist in a competitive environment, and as competitors they want
Chapter 14
Promotion: Communication with a Purpose
Having a great product is
not enough. People must
be made aware of the
existence of a product.
consumer to buy their brands. Thus, persuasion that encourages purchases or attitude
change is a primary goal of promotion. It is Benettons managements hope that the
information that the store is having a big sale will persuade consumers to visit Benettons
and see for themselves. In fact, a traditional definition of promotion is persuasive
communication.
Promotion Reminds
Consider the customer who shops at Benettons regularly or the consumer who always
buys Tide detergent. Do the marketers of Benettons or Tide advertise to this consumer
? Yes. Is that a waste of money ? The answer is no, for the very practical reason that
even the most loyal customers must be reminded that a store or product has served
them well over time and that it has features that make it attractive. This is especially
true when competitors are free to tempt loyal customers with their own informative
and persuasive messages. Thus, reminding customers, in addition to informing and
persuading them, may be a promotional objective. Tata salt, Bayer aspirin, and Coca-
Cola are all number one in their fields. They have achieved their goals to inform and
persuade. The major goal of their promotion is to sustain their customers preference
for their products. Attracting new customers is a secondary promotional goal for these
companies with loyal customers. Similarly, even people who buy Johnson & Johnson
dental floss and believe that it is the best floss may forget to use it as much as they
should (and so may not buy as often). They may be influenced by the message a
reminder to remember to floss.
New Communication Media are Shaping Promotion
Advertising, personal selling, and publicity are among the traditional forms of promotion.
Technical definitions of each will be provided in the following section. However, new
media have emerged because of the revoluton in digital technology. The availability of
these new media has dramatically influencd the elements of promotion how they are
defined in our information age.
The traditional 20th-century view broke media into two categories : mass media, in
which there was no interaction between the marketer and the audience, the personal
media, such as personal selling, which involved a dialougue between buyer and seller.
Today, because of computers capacity to interact with consumers, advances in digital
technology have made this distinction outdated.
For our purposes, we will use a simple threefold classification of media : mass media,
personal media, and electronic interactive media. Figure 14.1 shows the individual
promotional media in each of these classifications.
Mass Media
Mass media Advertising media,such as television, radio, newspapers, and magazines, that reach a
broad audience from many market segments and involve no personal contact or instantaneous
interaction between the marketer and the target of the message.
Mass media are means of communication that reach large audiences without personal
contact or instantaneous interaction between the marketer and the receiver of the
message. Messages in print media, such as newspapers and magazines, and broadcast
media, such as radio and television, are targeted at a general group of people rather than
at any particular individual. When people think of advertising they traditionally envision
messages in mass media, but as you will see, the nature of advertising is changing.
Personal Media
Personal media Personal forms of communication involving face-to-face interaction and person-to-
person interaction (as by telephone).
When two people have a conversation, human interaction takes place. The medium is
personal. When personal media are used for communication, the messages are directed
at a particular individual (or a small group), who has the opportunity to interact with
another human being. When they think of the traditional role of personal selling, most
people envision two people engaged in a face-to-face dialogue or a telephone
conversation.
Electronic Interactive Media
Electronic interactive media Media, such as the Internet, touch-tone telephone systems. and online
information services, that allow marketers to reach large audiences with personalized individual
messages and that provide an opportunity for immediate interaction.
Digital technology is having a profound impact on society in general and marketing in
particular. Its greatest impact is in the creation of new forms of media.
Electronic interactive media allow marketers to reach a large audience, to personalize
individual messages, and to provide the opportunity for immediate interaction. To a
large extent, electronic interactive media are controlled by the users themselves. Users
are not passive audience membersthey are actively involved in two-way
communication.
The Internet, a medium that is radically altering many organizations promotional
strategies, provides a prominent example of the new electronic interactive media.
Consumers determine what World Wide Web information they will be exposed to and
for how long. Although the Internet is the most sophisticated new medium, electronic
interactive media also include CD-ROM and DVD mateials, touch-tone telephone
systems, interactive kiosks in stores, and other forms of digital technology.
Today, a consumer can use an interactive medium to converse electronically via computer
with another consumer, an advertiser, or an information content provider.
Figure 14.1: Three General Media for Marketing Communication
Mass media
Personal media
Electronic interactive
media
Personal face-to-face
selling
Telephone selling
Internet advertising
Interactive shopping
kiosks
Television advertising
Billboards/hoardings
Newspaper advertising
The Elements of Promotion
The four main subsets of promotion are personal selling, advertising, publicity (as part
of a public relations effort), and sales promotion. It is up to the marketer to determine
which approach is best for each situation. The nature of the message and the context in
which it is to be delivered provide powerful clues about which method to choose. Few
organizational buyers would feel comfortable buying industrial equipment solely on the
basis of direct mail or telephone communication. On the other hand, few consumers
need help from a salesperson to choose a certain brand of detergent; they are content
to rely on advertising for most product information.
Personal Selling
Personal selling Person-to-person interaction between a buyer and a seller wherein the sellers
purpose to accept a point of view, to convince the buyer to take a course of action, or to develop a
customer relationship.
Personal selling is a person-to-person dialogue between buyer and seller. The purpose
of the human interaction, whether face-to-face or over the phone, is to provide information
that may persuade the buyer to accept a point of view, to convince the buyer to take a
specific course of action, or to develop a customer relationship. In many instances, the
one-to-one nature of this communication technique means that it is quite expensive to
employ. The salesperson must be properly trained. He or she may have to spend
considerable time developing and delivering a message suited to the individual customer.
Time may also be spent traveling or waiting for the opportunity to deliver the message.
These potential disadvantages are balanced by the fact that personal selling is the most
flexible means of delivering a promotional message. The salesperson can answer
questions, pause at appropriate spots to allow an idea to sink in, and tailor responses to
address particular customer objections or reluctance to complete a purchase.
Furthermore, unlike a TV or radio communication, a salesperson can focus on the best
prospectsthose most likely to buy the product being offered. Direct, and usually
immediate, feedback from customers is among the major advantages of personal selling.
In contrast, the other elements of promotion are essentially one-way communications
delivered to potential buyers. They allow little or no interpersonal activity, and the
feedback they elicit is not immediate. Reactions, in the form of buying or refusing to
buy, are slow in coming but potentially devastating to the marketing organization.
The Internet and personal selling allow for more feedback than most other media.
Advertising
Advertising An informative or persuasive message carried by a nonpersonal medium and paid for
by an identified sponsor whose organization or product is identified in some way.
Advertising includes any informative or persuasive message carried by a nonpersonal
medium and paid for by a sponsor whose product is in some way identified in the
message. Traditional mass media; such as television and magazines, are most commonly
used to transmit advertisments. However, the direct mailing of catalogs, electronic
media advertisments featuring computerized ordering, and other direct-response vehicles
are becoming increasingly popular. Thus, contemporary definitions of adverising recognize
that it can be carried via mass media or electronic interactive media.
The ability to communicate to a large number of people at once is the major benefit of
mass media advertising. In theis sense, advertising, which uses nonpersonal channels,
is a cost-efficient substitute for personal selling. Advertising, because it is indirect and
nonpersonal, has other benefits. Advertisers have a great deal of control over the content
of the promotional message. Furthermore, they can send a uniform and unvarying
message with great frequency. You may see a soft drink commercial several times as
you watch a cricket game on TV. You would never ask a salesperson to repeat a
message over and over again.
Mass media advertising is not without disadvantages. Even though the cost per person
may be low, a large absolute rupee expenditure is often required to reach the target
audience through a medium such as national television. This expense tends to restrict
all but the larger, better-financed organizations from using national advertising. Mass
media advertising, unlike personal selling, does not allow the message to be personalized
and tailored to the prospect. Immediate, direct feedback from a prospect is rare when
mass media are utilized. In contrast, when marketers advertise on electronic interactive
media, the audience has the opportunity to customize the nature of the information
they receive and to interact with the marketer through the medium.
Publicity and Public Relations
Publicity A message about a product, organization, or event carried by a nonpersonal medium but
not paid for by a sponsor. Publicity involves a third party who detemines whether the message is
newsworthy enough to transmit and what the nature of the transmitted message will be.
Public relations The activities involved in actively seeking to manage the nature of the publicity an
organizaton receives.
Advertising is a form of message delivery in which the sender pays to send the message.
Publicity is similar to advertising in that it may use the same mass media. The difference
between the two is that publicity involves a message that is not paid for and whose
content is determined by the communication medium. When information about a
company, a product, or an event is considered newsworthy, mass media may
communicate that information for free. Thus, the organization being publicized neither
pays for the message directly nor is identified as the message sponsor. The Internet is
a new medium for publicity that has, in many cases, increased the speed of message
diffusion.
Although publicity is free in the sense that mass media are not paid to communicate
the message, this does not mean that publicity should go unmanaged.
Marketers may expend considerable time and effort in getting news releases and
interview with company spokespersons placed in newspapers and on broadcasts to
promote a favorable orgnizational image. When an organization systematically plans
and distributes information in an attempt to manage the nature of the publicty it receives,
it is engaged in public relations. The purpose of public relations is to actively manage
publicity (and sometimes other promotional elements) to establish and maintain a positive
organizational image or to ensure that the public understands an organizations policies.
An important distinguishing characteristic of publicity is that it always involves a third
party, such as a newspaper reporter or editor, who has the ultimate power to determine
the nature of the message. Because the third party usually has some credibility and
because the information is generally factual rather than persuasive, publicity scores
high in believability.
Publicity can be either positive or negative. In fact, because the message is in the hands
of the media and not in the hands of the organization promoting the product, publicity
can be terrible. Sunbeam Corporation and the American Medical Associaton planned
an alliance in which the AMA would endorse and allow its seal of approval to be placed
on a line of Sunbeams health-care products, such as thermometers and heating pads.
There were many news reports about this agreement. The AMA had little influence
over what unidentified news writers, editors, and producer wrote or said about the plan.
The negative publicity was intense. The media suggested that the AMA was selling its
soul by taking money for its seal of approval The product-royalty deal was renounced
within ten days.
Similarly, negative publicity occurs whenever a recall of a popular product for repair or
replacement makes the evening news. The makers of Pepsi, Coca-Cola, and various
bottled water have spent millions of rupee to develop fine products. Bad publicity due to
presence of pesticides, however minor, can easily offset their efforts.
Sales Promotion
Sales promotion Promotional activities other than personal selling, advertising, and public relations
that are intended to stimulate buyer purchases or dealer effectiveness over a specific time period.
Marketers use the term sales promotion to categorize a variety of promotional activities
that are something other than personal selling, advertising, or public relations. Sales
promotions are usually intended to induce buyers to make purchases or to stimulate
dealer effectiveness in a specific time period. Sales promotions add value to the product
offering or provide an incentive for certain behaviour. Thus, special offers of free
goods, coupon deals, display items for store use, training programs, in-store demonstrations,
and vacation trips for top salespeople are sales promotions. With a few exceptions,
these are not routine events but special out of the ordinary occurences. Although they
typically involve programs paid for by an identified sponsor, they are distinguished from
advertising because they are temporary offers of a material reward to customer,
salespeople, or sales prospects.
Sales promotion programs amplify or bolster the adverising and personal selling messages
offered by an organizaition. More often than not, these effects occur at the point of
purchase. For instance, advertising may create an awarness of a new product like Tide
detergent powder, but the scratch and win scheme is the enticement the gets the first-
time buyer to try the the new detergent. Sales promotion is not a poor cousin of the
other elements of promotion, however, Indian marketers spend crores of rupees on
sales promotion, just as they do on advertising and personal selling. In fact, many
consumer package goods companies spend more on sales promotion efforts that they
do on advertising. (for instance bathing soap manufacturers).
The main purpose of sales promotion is to achieve short-term objectives. Free samples
or coupons encourage a first-time trial of a product. A premium offer or sweepstakes
may stimulate interest in a product and encourage off-season sales. A contest may
require that individuals visit a store or showroom to see if they have won. Whether the
sales promotion takes the form of a trade show, a consumer rebate, a point of purchase
display for retailers, or pens and calendars for wholesalers to give away, the best sales
promotions support and are coordinated with other promotional activities. The
characterstics of the four elements of promotion are summarized in Table 14.1.
Table 14.1: Characteristics of the Four Elements of Promotion
PERSONAL SALES
SELLING ADVERTISING PUBLICITY PROMOTION
Mode of communication Direct and personal Indirect and Indirect and Indirect and
personal nonpersonal nonpersonal
Regular and recurrent Yes Yes Noonly for Noshort-term
activity ? newsworthy effort
activity
Message flexibility Personalized and Typically uniform Beyond market- Uniform and
tailored to prospect and unvarying ers direct control unvarying
Direct feedback Yes Noif placed in No No
possible ? the mass media
Marketer controls Yes Yes No Yes
message content ?
Sponsor identified Yes Yes No Yes
Cost per contact High Low to moderate No direct costs Varies
Integrated Marketing CommunicationsThe Promotional Mix
Promotional mix An organizations combination of personal selling, advertising, publicity and
public relations, and sales promotion; its total promotional effort.
Intergrated marketing communications Marketing communications in which all elements of the
promotional mix are coordinated and systematically planned so as to be harmonious.
The effective marketer recognizes that each of the four elements of promotion has
certain strength. The combination of elements a marketer chooses is the marketers
promotional mix. Some organization, like the Hindustan Lever Limited emphasize
advertising and public relations efforts in their promotional mixes. Other, especially
those engaged in business to business marketing, make personal selling the main
ingredient. No matter what the pomotional mix, marketers should strive to blend the
elements effectively, integrating and uniting the appropriate elements to accomplish
their promotional objectives. The term integrated marketing communications is
used to remind managers that all elements of the promotional mix should be coordinated
and systematically planned to be in harmony with each other.
Table 14.2: Characteristics of Promotional Types
Publicity Form Personal
Factor Advertising of Public Relations Selling Sale Promotion
Audience Mass Mass Small (one-to-one) Varies
Message Uniform Unifrom Specific Varies
Cost Low per viewer None for media space and High per customer Moderate per
time; can be some costs customer
for media releases and
publicity materials
Sponsor Company No formal sponsor Company Company
(media are not paid)
Flexibility Low Low High Moderate
Control over High None (controlled High High
content and by media)
placement
Credibility Moderate High Moderate Moderate
Major goal To appeal to a To reach a mass To deal with To stimulate short-
mass audience audience with an individual run sales, to increase
at a reasonable independently consumers,to impulse purchases
cost, and create reported message resolve question,
awareness and to close sales
favorable attitudes
Example Television ad Magazine article Retail sales A Sony CD player
for a Sony CD describing the unique personnel explaining for cars exhibited
player for use features of a Sony CD how a Sony CD at trade shows
in cars player for use in cars player for cars works
Criticisms and Defenses of Promotion
For many years, industry trade groups have campaigned to improve the overall image
of promotion. As the general director of the International Advertising Association once
remarked, Theres been enough talk about the badthe clutter, the obtrusiveness, the
stuffed mail boxes. Its time that people know about the good.
Nonetheless, promotion is the most heavily criticized area of marketing. Here are a
number of criticisms and the defenses of marketers to them :
Detractors Feel
That promotion Marketing professionals Answer That
Promotion
Creates an obsession with Responds to consumer desires for material
possessions.
material possessions. In affluent societies, these items are plentiful
and paid for with discretionary earning.
Is basically dishonest. Is basically honest. The great majority of
companies abide by all laws and set strict self-
regulations. A few dishonest firms give a bad
name to all.
Raises the prices of Holds down prices. By increasing consumer
demand, promotion
goods and services enables firms to use mass production and
mass distribution and reduce per-unit costs.
Employment is higher if demand is stimulated.
Overemphasizes Differentiates goods and services by symbolic
and status appeals.
symbolism and status. Consumers desire distinctiveness and product
benefits.
Causes excessively high Keeps expectation high; it thereby sustains
consumer motivation
expectations. and worker productivity in order to satisfy
expectations.
The Communication Process
Communication The process of exchanging information with and conveying meaning to others.
Reveiver In communication theory, the one at whom a message is aimed.
Source In communication theory, the one who sends a message.
Communication is the process of exchanging information with and conveying meaning
to others. The goal of communication is a comman understanding. That is, the goal is to
have the receiver of the information understand as closely as possible the meaning
intended by the sender, or source, of the message.
One communication theorist described communication as who says what to whom
through which channels with what effect. In slightly different terms, he was saying
that to achieve the desired effect, the marketer must consider the source, the message,
the channel, and the receiver.
Figure 14.2 summarizes the communicaton process graphically. In considering the exhibit,
remember that it describes all types of communicationwords, gestures, pictures, and
so on. The model may be used to describe an advertisement, a telephone sales call, a
point-of-purchase display, or any promotional communication.
Encoding the Message
Encoding In communication theory, the process by which a sender translates an idea to be
communitcated into a symbolic message, consisting of words, pictures, numbers, gestures, or the
like, so that it can be transmitted to a receiver.
The communication source (the advertiser) wishes to communicate the notion that the
Tata Sumo is a durable, high-quality product that helps drivers enjoy driving in rugged
terrain. This ideanot an easy one to get acrossis the message of the advertisement.
The message is communicated primarily in a visual and symbolic way, though the
intriguing image of a Tata Sumo easily negotiating a gravel road in the mountains. The
senders idea has been encoded by means of this picture. Encoding is the process of
translating the idea to be communicated into a symbolic message consisting of words,
pictures, numbers, gestures, or the like. Encoding is a necessary stepthere is no way
to send an in idea from one person to another without encoding it.
Figure 14.2: A Basic Model of the Communication Process.
As in the Tata Sumo advertisement, nonverbal messages and nonrational symbolism
are essential to the encoding process, because words can be hopelessly inadequate to
express emotions. There are just no words to express the various nuances of sensation
and feeling, to express such things as mood and aesthetic impression. Try to describe
to a child how an orange tastes compared to a mango, how a rose smells, why it is
pleasurable to dance, what a pretty girl looks like. The emotional definition of a situation
or the precise meaning of human feelings may be determined almost entirely from
facial expressions; from expressions of excitement, such as weeping, blushing, or laughter;
or from and sounds, such as whistling, singing, or involuntary exclamations.
Noise
Noise
Source
Encoding
Message
Channel
Decoding
Receiver
Feedback
Transmitting the Message Through a Channel
Once the sender has created the message by encoding an idea into a transmittable
form, it must be somehow conveyed to the receiver : It must be sent through a channel
of communication, such as a magazine or other medium. Even peoples casual
conversations are sent through a channel, though the medium is the less obvious one of
vibrating vocal cords, which send sound through air.
The message arrives at the receiver via the channel of communication. But some
receivers will be more receptive than others. For example, some receivers of the
communication about the Tata Sumo will be consumers who for one reason or another
(their age, their dislike of the outdoors) have little interest in a rugged vehicle that
facilitates driving in mountains and rough terrain. It is the senders job to pick the
medium that will reach a maximum number of target receivers and a minimum number
of a nontarget receivers.
Decoding the Message
Decoding : In communication theory, the process by which the receiver of a message interpret the
messages meaning.
The message arrives and is viewed, heard, or other wise sensed by the receiver. But in
order for communicaton to occur, the receiver must decode it. Decoding is the mental
process by which the receiver interprets the meaning of the message. A difficulty
encountered at this stage of the communication process is that receivers may interpret
the message in different ways, given their particular biases, backgrounds and other
characteristics. That is, selective perception operates as the message is decoded. People
interpret messages and give them meaning based on their personal experiences and
background. An advertisement for cigarettes may be viewed differently by different
people, for example. Non smokers may pass over the message entirely; antismokers
may be angered by it; smokers satisfied with another brand may note the advertisement
only casually. Some who see the advertisement may not get it at all; for whatever
reason, the intended imagery may escape them completely.
In the Tata Sumo advertisement, if the receiver interprets the message like a rock
to mean that Tata Sumo are tough, sturdy, and long lasting, the communication has
worked.
Feedback
Feedback Communication of the receivers reaction to a message back to the source.
Often, the communication process includes feedback, communication of the receivers
reaction that goes back to the source of the message. In a personal selling situation, the
feedback may be direct and immediate, as when the customer raises questions about
the product or states why he or she will not purchase it. Indeed, as mentioned, the great
attraction of personal selling is that there can be a two-way conversation, which ensures
greater understanding between the people involved.
Feedback about advertising, sales promotions, or publicity and public relations is in most
cases slower and less direct. For instance, advertisers may conduct surveys, count
coupon redemptions, or evaluate letters and telephone calls from consumers to learn
the audiences reactions. Although advertisers can get delayed feedback about an
advertisments effectiveness, the feedback rarely provides all the desired information
about the receivers responses to message.
Perfect Communication
Ideally, in perfect communication, the message that was decoded and entered the mind
of the receiver would be exactly the same as the one the sender had in mind, encoded,
and transmitted. If the sender and the receiver share a common social background and
have similar needs, they are more likely to similarly interpret the meaning of the words
and symbols in the message. Perfect transmission, though, is never possible. In many
cases, however, the sender can develop messages that will be decoded by the target
audience to communicate approximately the message the sender had in mind.
It is likelyperhaps even inevitablethat any communication process will be interrupted
or distorted by factors that communication experts term noise. Noise is interference
or distraction, and it may disrupt any stage of the communication process. Noise may
come in the form of conflicting messages, misunderstood teminology, inadequacies in
the channel of communication, and so on. A listener might not hear a radio advertisememt
because of loud traffic noises outside the car. In a cigarette advertisement, the Surgeon
Generals warning ( a conflicting message) is noise. The sources of noise may be
external to the individual, such as traffic noises, or internal, such as daydreaming that
prevents a listener from concertrating on a sales presertation. Many advertising messages
cause people to think of a competing product. Brand Loyalties and past learning are
internal distractions that may interfere with the decoding process.
Noise In communication theory, any interference or distraction that disrupts the communication
process.
The Hierarchy of Communication Effects
Ford has extolled the virtues of its built to last theme thousands of times. McDonalds
has made hundreds of different advertisements for its burgers. Why are there so many
commercials for the same products ? Creativity aside, the main reason is that a single
communication, no matter how cleverly designed and implemented, may not be enough
to persuade a customer to change an attitude or make a purchase. Promotion, as a rule,
becomes more effective with repetition. Promotion usually seeks to change people,
and people tend to change very slowly. Habits and beliefs developed over long periods
of time will not be altered quickly by just a few messages. The presentaion of a message
may be varied, as in the McDonalds example, because the effectiveness of a promotion
wears out as the repetitive presentaiton becomes boring.
Marketers have come to expect various responses to their communicatons. To
understand the different effects that promotion may bring about, it is useful to think of
the promotion process as a staircase, or series of steps in a hierarchy.
The Promotion Staircase
Promotion can be thought of a force that moves people up a series of steps called the
hierarchy of communication effects. This promotion staircase is shown in Figure 14.3.
1. On the bottom step stand potential purchasers who are completely unaware of the
existence of the product in question. For e.g., they might not know about Tide
detergent powder.
2. Closer to purchasing, but still a long way from the cash register, are those who are
merely aware of the products existence. For e.g., these people are aware of
Tide name only.
3. Up one step are prospects who know what the product has to offer. They knew
that Tide is a detergent powder that gives vibrant colours after the wash.
4. Still closer to purchasing are those who have favorable attitudes toward the
productthose who like the product. They might have used a sample of Tide
detergent at home and are satisfied with its performance.
5. Those whose favorable attitudes have developed to the point that they prefer the
product in question over all other possibilities are up still another step. They will
prefer over Surft, Ariel, etc.
6. Even closer to purchasing are consumer who couple preference with a desire to
buy and the conviction that the purchase would be wise.
7. Finally, or course, is the top step, where consumers translate this intention into an
actual purchase. The consumer will go to the retailer and place an order for Tide.
According to this somewhat idealized portrayal, consumers may move through the
seven-step hierarchy, from total ignorance of a brands existence to purchase of that
brand. When the purchase decision leads to a reward, the result is a satisfied, or
reinforced, customer.
The hierarchy model shown in Figure 14.3 suggests that communicationmay not be a
one-step process. Marketers use promotion to induce buyers to changethat is, to
moveup the staircase. Communication may be aimed at any step, depending on the
objective of the communication. The question is What step should the marketer aim
at?
Figure14.3: Promotion Moves Customers Up the Seven Steps in the Hierarchy of
Communication Effects
Purchase
Conviction
Preference
Liking
Knowledge
Awareness
Brand
ignorance
Part of the answer comes from the nature of the product. Marketers of a totally new
product such as the Flashback electronic recordera miniature device that uses no
tape, has no moving parts, and records digitally onto a flashmemory chipface a different
set of communication problems than marketers of Tide. Tides communication need not
include an extensive discussion of the fact that the product provides fast, easy, streak-
free cleaning. Most consumers are already aware of Tides benefits. In contrast, the
seller of a near-revolutionary product may need to devote considerable effort to
explaining what the product is, how it works, and even that it works.
Whatever the product, the nature of the market is the most impotant consideration in
deciding what step to aim at. The organization seeking to create an effective promotional
message must begin with one of marketings most basic rules : identify the target market
or, in this case, the target audience.
As discussed earlier, the whole communication process must be built around the intended
receiver of the message. A key question, then, is What is the target audiences
psychological state ? If the marketing organization is attempting to influence those
who are currently on the Awareness and Knowledge steps, a primary promotional
objective will be to provide factual information. For example, according to many
petroleum companies, most citizens are totally unaware of how oil company revenues
are allocated. Thus, some of these companies spend a good portion of their advertising
budgets in an effort to inform people of the true nature of the oil business. They
demonstrate that a large portion of revenues are spent on additional exploration, on the
development of products that enhance the lives of consumers, and on protecting the
environment.
Appealing to consumers who are on the Liking and Preference steps calls for promotional
messages aimed at encouraging existing favorable feelings toward the good or service
offered. For example, advertisements for many cosmetics, fashion items, soft drinks,
and airlines emphasize the fun or sophistication associated with the products. The
target audiences in these cases already know about the brands and probably know that
the company is a respected manufacturer or service provider. Thus, the advertisements
stress emotional feelings toward the product offered.
Prospective customer who are on the Conviction step of the model are very close to
action, but they may need a little shove to get them to act. A bit of encouragement may
be all that is required. Being reminded that now is the time to buy warned that prices
may go up, or notified that a two-for-one coupon is available may motivate these
consumers to move up the staircase to the final step, the purchase.
Since the sale is not the end of the line. The marketer may continue to use promotional
message to reinforce the buyers belief that he or she made a good buy or, later on, to
remind the customer of the product and its value or effectiveness. For example,the
advertisers of frequently purchased products like energy drinks and tomato sauce often
remind buyer how satisfied they have been with the product. A promotion for an
infrequently purchased durable good might advise the buyer to tell a friend about the
purchase or to remember that the company sells other fine products. Such efforts often
reduce consumers post-purchase dissonance.
Sophisticated consumer behavior research suggest that some consumer purchasing
decisions, especially those made when consumers have low involvement with the
Advertising and Sales Promotion 459
INTRODUCTION
Advertising is one element of marketing mix. It is a paid form of mass communication
and can be traced to an identified sponsor. It is in this sense that advertising is different
from publicity, which is also a mass communication tool. Publicity is not paid for and its
sponsor is not easily identified. Over the years, advertising has grown from being just
another element in the marketing mix to a key strategic input in brand building and
image creation. Its growth in size is reflected by the gross expenditure on advertising
in a year, gross incomes of leading advertising agencies and the number of advertising
agencies. The media too has expanded and offers significant opportunities to marketers.
In terms of technology, too, the advertising industry in India has come a long way from
the early 1930s and even 1980s. Exhibit 15.1 and Figure 15.1 summarize the
developments in the advertising industry in India.
Exhibit 15.1: Advertising in India
The advertising industry has come a long way. The industry grew at a frantic pace until the 1990s,
after which the growth rate declined to 17.9 percent in 1998-99 and later to 12 percent in 2000, due
to gradual slowing down of the economy. However the dotcom boom once again saw the advertising
industry grow. But in 2001 the industry seems to be heading for a slower pace, settling down to
under 15 percent growth. The changes in the advertising industry can be attributed to the opening
of the Indian market and the emergence of middle class consumers. The industry today consists
of about 200 large, medium and small sized advertising agencies. Besides, it consists of the media,
where a major upheaval has been witnessed since 1985, and more particularly after 1991. This is
especially true of the electronic media. What happened in this country is beyond imagination. In
a quick succession, we moved from viewing programmes telecast on the state-owned television
channel, Doordarshan, to home video viewing and then to cable TV. This scenario further changed
with the introduction of satellite television which affected the viewership of Doordarshans prime
time programmes. Today, the average Indian viewer has a choice of more than 100 TV channels to
choose from. In the print media, the total number of newspapers, as of December 31, 1992, were
35,096 which includes 3,139 miscellaneous publications. The number of daily newspapers increased
from 30214 in 1991 to 44997 in 2000.
Coming back to advertising agencies, one observed that the capitalised billings of 100
agencies (who participated in the 10th Agency Survey by A & M) in 1998-99 grew to
Rs. 9,146.20 million from Rs. 7,760.47 million in 1992-93, registering a growth of 17.87
percent. In 1994-95, the agencies were expected to register a growth of about 40 per
cent over 1993-94. By 1999 the industry was poised to be a fat Rs. 10,000 crore and is
expected to double upto Rs. 20,000 crores five years down the line. However the
advertising industry growth which towered a high of 49 per cent in 1994-95 is now
setling down to about 17 per cent. This clearly shows that advertising growth rate has
reduced. This can be ascribed to the slow down in the manufacturing sector which has
registered a negative growth rate over the last few years having now settled down to
2.5 per cent growth rate.
Chapter 15
Advertising and Sales Promotion
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99
0
10
20
30
40
50
60
17.1
25.2
36.5 37.4
49.5
30.4
22.4
17.9 17.9
Growth rate
Figure 15.1. Shows these changes in the advertising industry.
Figure 15.1: Annual Advertising Growth Rate
In the last chapter we mentioned that the marketer has to choose the customers
response level to direct his or her communication. One of these levels is connative or
behavioural. Obviously all marketers want consumers to buy their brand. Firms advertise
with just this objective in mind. But, one has to remember that the final sale is dependent
on many other factors.
Advertising plays a significant role in awareness creation and attitude formation. It can
even generate a trial and purchase as long as all other elements of the marketing mix
play a contributory role. Thus, it has to be appreciated that advertising has a limited
role in marketing strategy. A marketing plan and strategy takes into account several
marketing tools to achieve marketing objectives. These are product, packaging, customer
service, pricing, sales promotion and channel relationships.
A marketing plan should be based on specific problems or opportunities uncovered by
situation analysis, done by the brand manager. The marketing mix and the allocation of
resources across different elements should reflect this perception of opportunities and
threats. In other words, the marketing budget should reflect this market reality.
Conceptually, the marketing budget should be split in such a way that the marginal
value of an extra budget increment is the same across all elements of the marketing
mix and hence money is put in that element which will produce the maximum incremental
sales. This is more so for advertising. Any increment in the advertising budget should
be carefully examined since there is no direct relationship between the firms sales or
advertising expenditure. This is in contrast to distribution and personal selling or even
customer services, where one can establish a direct relationship between any of them
and sales.
Hence the advertising role is limited to communicationawareness creation or providing
information and favourable attitude development. While its role is limited, the marketer
has to compare the costs of different elements of his or her communication mix. One
such yardstick is the cost per exposure, per thousand people. This is the lowest in
advertising. Personal selling is comparatively the most expensive route to communicating
with the target audience.
Finally, we must also bear in mind that people are generally biased against advertising
and many still believe it to be a waste of organizational resources, particularly in a
country like India.
Hence advertising is important but it is as significant as any other element in the marketing
mix.
Institutional Framework in Advertising
Before we turn to advertising decisions, let us consider the institutions involved in the
advertising function. Aaker, Batra and Myer opine that the advertisers decisions are
influenced by controlling and facilitating institutions, as also the markets and consumer
behaviour.
At the centre of an advertising campaign is the advertiser. The advertiser here refers
to the organization that is interested in communicating its ideas and changing the attitudes
of the target audience. Besides the corporate sector, which includes both public and
private sectors, the government, non-profit organizations like educational institutions,
UNICEF, cooperatives and even political parties are advertisers. The corporate sector,
the most important and the largest spender in advertising, includes manufacturing and
services firms. The latter consists of banks, the hospitality industry, airlines and
telecommunications like the Mahanagar Telephone Nigam Ltd. and BSNL, as well as
Cellphone companies like Airtel, Orange, BPL and Escotel. Over the last few years,
the government has emerged a large spender of money trying to change peoples values
and attitudes towards issues like family planning, health care, immunisation, the female
child and even national integration. The government and its agencies have been buying
prime time slots on television and space in the print media. The same holds good for
cooperative sector and invariably all other sections of the economy. The advertising
spends of these sectors of the economy which have manifold are represented by Exhibit
15.2.
Exhibit 15.2: The Major AD Spenders
Over a period of time the top advertisement spenders have been the diversified companies followed
by cosmetics and toiletries and consumer electronic companies. Tobacco products, mainly pan
masala, continued a to be major advertiser in 2000. At the micro level, or at the firm level,
Hindustan Lever continued to be the top advertising spender with an advertising spend of about Rs.
715 crore in 1999. In 1998-99 it spent Rs. 669 crore. Hindustan Lever was followed by Colgate
Palmolive in 1999 with an advertising spend of Rs. 193.98 crore. ITC, which was a major advertising
spender, as per A&Ms Tenth Annual Survey report, does not figure in the subsequent research.
This could be because of the increasing anti-smoking and anti-tobacco compaigns in the country. In
fact, in 1998-99, ITC actually slashed its advertising expenditure by 16 per cent. Hindustan Lever
has registered the maximum increase in its advertising spend. Its expenditure in 1998-99 grew by 46
per cent, followed by Colgate Palmolive with an increase of about 31 per cent and Bajaj Auto by 30
per cent. Overall one may conclude that the advertising business is getting dominated more and more
by major consumer brands like Colgate Palmolive, Amul, Dettol, Britannia, Lifebouy, Lux, Lyril,
Close Up, Surf and Titan. If one were to also look at advertising agencies that cater to these top
advertisers, one would find that the top five advertising agencies today account for 51 percent of the
industrys aggregate income. This trend has continued over a period of time and will only get further
accelerated. Indias big advertising spenders need advertising more than ever, mainly because they
are today facing competition from global and local sources. The advertising budgets of most companies
are today much larger also because of the fragmentation of media audiences and hence the need for
being present in all media vehicles.
Table 15.1: Top Advertising SpendersIndustry Segments (Source : A & M)
Rank Industry Advertising spend (Rs. crore)
1. Diversified 648.79
2. Cosmetics and toiletries 318.55
3. Consumer electronics 265.11
4. Tobacco products 233.34
5. Drugs and pharmaceuticals 159.69
6. Two and Three wheelers 131.39
7. Air conditioners and Refrigerators 117.29
8. Trading 115.27
9. Dairy products 111.81
10. Passenger cars and MUVs 93.71
Table 15.2: Top 20 Advertising Spend Hikers (Source : A & M)
Rank Company Advertising spend Rise in spend
1. Hindustan Lever 715.4 46.45
2. Colgate-Palmolive (India) 193.98 31.36
3. Bajaj Auto 90.24 30.21
4. McDowell 108.94 22.89
5. Hero Honda Motors 46.81 20.80
6. Godfrey Phillips India 85.15 20.12
7. Marico Industries 58.68 19.73
8. Mahindra & Mahindra 34.92 19.09
9. Britannia Industries 77.01 18.61
10. Ranbaxy Laboratories 40.93 18.29
Table 15.3: Top 25 Marketing Spend Hikers (Source : A & M)
Rank Company Market spend Rise in spend
1. Tata Chemicals 103.48 66.14
2. Core Healthcare 90.14 58.25
3. Asian Paints (India) 142.41 36.97
4. Ashok Leyland 154.71 33.53
5. Larsen & Toubro 69.54 25.48
6. Xerox Modicorp 35.75 23.10
7. Satyam Infoway 24.38 22.28
8. Reliance Industries 100.28 22.20
9. Ceat 70.01 21.46
10. Wipro 59.71 21.42
The advertisers role is to determine the communication objectives. These have to be in
line with the overall organizational goals and strategy. Often in determining these
objectives, industry conditions play a major role. Specifically, the intensity of inter-firm
rivalry and demand and supply conditions within the industry play a major role in
determining communication goals and strategy. For example, in the oil industry where
demand outstrips supply, the goal of any oil company is to de-market oil and this involves
educating customers on the need to conserve oil and save energy. But the same is not
true in the case of the hospitality and air travel industry which has to even out the
demand fluctuations. Hence, demand creating advertising in lean period becomes
important for these firms.
The advertisers goals and strategy are influenced by government policy. For example,
cigarette and liquor cannot be advertised in the mass media and hence companies
making them find a new media or indirectly advertise the brand. Besides playing a
regulatory role, the government may also play a facilitating role when it may decide to
give prime time on its TV channel to companies advocating social issues like campaigns
agaist AIDS, drugs or dowry. It may even sponsor news or films made by the corporate
sector on television. Hence government rules and retulations and electronic media
(TV, video, cable TV and radio) policies play a dominant role in the advertisers decision-
making.
The advertiser is facilitated by advertising agencies and the media in translating its
goals into action. Marketing research in turn assists institutions, like the advertiser,
advertising agencies and the media. Within the advertisers organization, it is the product
manager, or the brand manager (as in soft drinks and personal products) whose task it
is to co-ordinate between the advertising agencies and the organization. In fact, in
many multinationals and large Indian firms, a product manager or brand manager is a
strategist who is responsible for developing communication goals for the product or
brand and evolving a marketing plan and strategy for it. The advertising campaign,
which is a part of this overall marketing strategy, is often decided by the product manager.
Where the product management structure does not exist, it is the marketing managers
job to evolve the advertising strategy and also liase with the advertising agencies.
While all large advertisers depend on advertising agencies to develop the campaign,
smaller advertisers, have to depend on their own internal resources or take the services
of freelance advertising personnel. Again, in a large advertiser, its the marketing
personnel who are involved in the advertising campaigns development, but in smaller
firms its the owner or the entrepreneur who has to decide on it. Thus, when we refer
to an advertiser, it is necessary to understand the decision making process in these
organizations as also the controlling influence of government and competition. For, this
will affect the quality of the advertising campaign.
Lets now turn to the facilitating institutions.
ADVERTISING AGENCIES
An advertising agencys major role is purchase of media time and space. Besides it is
directly responsible for development of an advertising copy and/or the commercial. It
should be noted that in both these taskspurchase of media time and space, and copy
developmentthe advertising agency is greatly assisted by market research. Many
large advertisers like Hindustan Lever, Procter and Gamble, ITC and GTC have their
own internal marketing research departments. With increasing competition and buyer
behaviour and decision processes becoming more complex, many large industrial houses
and companies are creating their own internal marketing research departments. Even
large advertising agencies and media have their own research departments or affiliates.
For example, Mudra Communications, one of the leading advertising agencies in the
country, has an affiliate in SAMIR which does all the marketing research and provides
inputs to Mudra and client advertiser.
In areas like copy development and media buying, generally advertising agencies act
independently. In an increasing number of cases, agencies are going beyond their
traditional role to get involved in a client firms marketing planning and brand strategy
development. The growing feeling among agencies is that since advertising plays an
important role in attitude formation, they should take a strategic perspective of the
brand and hence their involvement in brand strategy. Rasnas success is largely attributed
to this strategic role of advertising agencies.
In terms of compensation, most agencies generally work on a commission and fee
basis. They get a 15 per cent commission from the media in which advertisements are
placed. On non commissionable services like brochure development and printing,
agencies usually mark-up the suppliers invoice cost. The agencies also charge fees for
creative copy development or, to put in commonly used term, the art work. A growing
area of interest in agency compensation is whether agencies could be made to commit
to a marketing goal in terms of market share or sale and then be given an incentive in
the form of a bonus once that goal has been achieved. This may help create advertising
that works.
Over the years agencies have grown in size as shown in Exhibit 15.3 with Hindustan
Thompson remaining in the lead even in 1998-99 with capitalised billings of Rs. 152.4
crore. It was followed by Lintas (Rs. 105.7 crore) and O&M. Exhibit 15.3 is based on
A&M annual survey of advertising agencies and gives details within regard to the top
10 advertising agencies in India in 1998-99.
Exhibit 15.3: How Do Advertising Agencies Rank in 1999-2000 ?
Rank Agency Gross Income 1998-99 (Rs. crore)
1. Hindustan Thompson Associates Ltd. 152.4
2. Lintas India Ltd. 105.7
3. Ogilvy & Mather Ltd. 77.2
4. Mudra Communication Ltd. 71.8
5. FCB Ulka Advertising Ltd. 58.4
6. Rediffusion DY&R Ltd. 45.1
7. RK Swamy/BBDO Advertising Ltd. 34.7
8. McCan-Erickson (India) Ltd. 33.5
9. Contract Advertising (India) Ltd. 26.7
10. MAA Bozell Communications Ltd. 25.0
Source: A&M
Note: Gross Income-the total value of billings to clients less the total of payments to media owners,
printers and other suppliers (film producers, typesetters, market research agencies, and so forth).
Another interesting development, following globalization and a free market economy, is
the increase in mergers, acquisitions and strategic alliances by leading advertising
agencies world wide. For example, Mudra has a strategic alliance with DDB Needham
and Trikaya with Grey Advertising. Some of the reasons for this megacorporation of
advertising agencies is that their clients are also on a roller coaster in the game of
mergers and acquisitions. Many of them are already operating in the world market,
some of them are even market leaders in their spheres. To service these clients world
wide, agencies also need a world wide network. Moreover, advertising agencies are
evolving into full communication agencies as they realize that advertising is just one
part of the clients communication mix. Other elements that are important and perhaps
equal, are direct marketing, sales promotion and public relations. Today there is a
growing movement in this direction. More and more agencies see their role in the total
communication strategy of their client firms.
Organizationally, agencies have three groups of people working. One is the creative
group whose job is to create advertising copies. As the title of this group suggests, it is
the creative wing of the agency. The single most important factor in agency evaluation
is its creativity. It is no wonder then that copy writers, art personnel and their like are
the blue-eyed boys and girls in the advertising industry. The other group consists of
account managers. These people are the clients product manager, brand manager or
marketing managers counterpart in the advertising agency. This group also performs
the selling task as they liase with client firms. It is their responsibility to ensure that
a particular account grows with them and also that the client remains satisfied. Over a
period of time, client servicing and account management have come to acquire a
significant position in the agencies organization structure. The third group is the media
executives. As media options increase and clients relook at the productivity of their
rupees spent in advertising, media planning is going to become a complex task. Computer
based media planning models are increasingly being used to enhance the yield of every
rupee spent in advertising, hence the role of media planners. There is a fourth group
emerging now mainly because of the changing role of advertising agencies. This is the
marketing services group whose task is to examine and recommend the use of other
communication tools to help the client achieve the brands goals.
The Media
The media is another facilitating institution. Media refes to daily newspapers, magazines,
technical journals (called the print media), hoardings, billboards, neon signs and so forth
(called outdoor media) and cinema and television, video, cable TV and radio (called the
electronic media). Media in India has come a long way, from advertising processions,
well and roof paintings and also shop paintings as is shown in Exhibit 15.4 on media
developments. The media choices have multiplied with the advent of colour television,
commercialization of Indian TV, cable TV and the launch of STAR, Zee and other
Hindi and regional language channels. Since rural markets are important to any
advertisers, rural communications form an important part of an advertising agencys
task. And this is where a rural media like video-on-wheels plays a major role.
Today the Indian TV covers almost 82.5 per cent of the Indian population and the radio
reaches to almost 95 per cent of Indians. Zee TV has the maximum reach in India
among the private channels.
Exhibit 15.4: Media Developments in India
The advertising scenario in India cannot be understood without considering the developments that
have taken place in the media. This is one area in the advertising industry that has witnessed the
maximum revolution, thus creating new challenges for the marketer. More so, a combination of
entertainment, advertising and marketing will shape the new millenium. Due to the convergence of
technologies like electronics, computer, telecom and broadcasting, newer media are bound to develop
and this will bring about qualitative changes in conventional mass media like press, radio, television
and cinema. In times to come the television will be one of the cheapest sources of entertainment.
Cable TV has already become very popular as a mass medium but in future there is scope for more
personalized and interactive services like direct broadcast satellites (DBS) and direct to home
services gaining ground. Radio, though, not as prominent as TV, will remain an important source of
information. Radio listenership is expected to grow with FM, as AIR will cover most districts in
the country by 2005 with its FM network. The press may however experience a certain stagnation
in circulation due to increased costs of production and logistics and also due to proliferating
competition. Newspapers, by 2020, are likely to play only a supporting and enforcing role. The
print media is witnessing a change due to popularity of the internet. News and information are
becoming available online with the presence of electronic magazines and digital newspapers on the
web.
While reviewing the media developments, we will look at the electronic media, print media and the
outdoor media.
Electronic Media
The developments in this media have greatly exceeded expectations, especially in India.
While television started as a state owned medium in 1959, by 1985 the scenario had
changed dramatically and by October 1992 the Doordarshan network (state owned
television) included 22 programme-producing centres and 533 transmitters. The physical
covereage of TV is 82.5 per cent of the total population in the country. It was estimated
that in 1994 there were about 33 million TV sets, of which two-thirds were in the urban
areas. The National Readership Survey IV and V has estimated that 77 per cent of the
urban population and 30 per cent of the rural population has access to TV.
Urban India will continue to have more TV sets than in rural India even though by 2020,
the share of rural viewership is expected to go up to 45-48 percent. However the TV
programmes will continue to be dictated by the preferences of urban customers. It is
anticipated that there will be a proliferation of channels to extent of 72 to 99 by 2001
and 200 by 2010.
As the number of TV sets increase, the Indian viewers appetite for entertainment has
increased dramatically and Doordarshan was not able to fulfill this appetite. In quick
succession we saw the growth and demise of home video viewing and by 1992, cable
TV emerged as the uncontested king. But it soon came under threat from satellite TV.
The Gulf war in 1991 made it possible for satellite channels to enter the Indian home
and in 1991. Star TV was launched and lapped-up by the elite upper class viewers in
major cities, particularly Mumbai. Star TV programmes reached the houses of millions
of viewers through local cable networking. Star TV has five channels including Star
Plus, Star World, Star Movies. The Hindi Channel Zee was launched in 1992, and this
was soon followed by ATN, CNN and several other channels. ATN introduced Sun
TV for Tamil and Sunga for Malayalam programmes. In 1994 Zee TV introduced two
more channels, namely EL TV and ZED Channel. EL TV is supposed to be a 100 per
cent entertainment channel, while ZED Channel is for taking education to the masses.
The number of cable TV households and the satellite TV households in some of the
major cities in India are shown in Table 15.4 below :
Table 15.4: Status of Cable TV in country
Figures in million
1995 1996 1997 1998 1999 2000 (estimate)
Total households 167 170 175 176 179 183
Total TV households 52 58 65 72 80 85
Total cable TV households 18 22 27 32 39 40
Radio : The radio was not to be left behind. In 1994 the All India Radio introduced the
FM Channel in the major cities like Mumbai and Delhi. This medium has gained popularity
today, as reflected by the decision taken in June 1995 to make this a 24 hour channel in
major cities.
Now the reach of channel has been initiated in several small cities. Times of India
channel branded Radio Mirchi has been launched in cities likes Indore, Ahmedabad
and Pune and even Mumbai. It is expected that the future competition in radio will be
among FM channels as the Government of India has allowed private players to enter
this market.
Multimedia : Research today indicates that it took almost 50 years for the radio to be
adopted by 68 percent of the Indian households. In the context of television, it took 15
years to achieve 5 per cent penetration in the Indian market but post 1985 the growth
rate was indeed far steeper. Within 5 years 15 per cent of the households had a
television but the last decade saw a much higher growth rate as it grew from 15 per
cent in 1990 to 45 per cent in 2000. Today according to statistics put up by Doordarshan
Figure 15.2: The Rate of Adoption of Radios, Broadcast Television, Cable
Television by Indian Households
and several other researchers, almost 500 million Indians, (nearly 50 percent of the
population) watch television regularly. On the other hand, cable television took much
lesser time to penetrate. It took less than 10 years for cable television to achieve 21
percent adoption by the Indian household. Internet grew at a much faster pace as it
took just 4 years to achieve a user/subscriber base of 1 million. As shown in Figure
15.2. (the graph below) the internet took the least time to get diffused, even in the
Indian economy.
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Radio
Broadcast TV
Cable TV
Year
R
a
t
e

o
f

A
d
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p
t
i
o
n

I
n

P
e
r
c
e
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a
g
e
Further, a survey by NASSCOM indicates that there were 950,000 Internet subscribers
in India as on May 31, 2000 and today this number stands at 1.8 million. The actual
number of consumers who had a ready access to the Internet in May 2000 was almost
3.4 times that of the subscriber base which was 3.25 million. NASSCOM had predicted
that by the end of march 2001 the number of Internet subscribers would go upto 1.6
million, which means about 5 million Internet users. Further, this subscriber base will go
up to 3.5 million in 2002 or 10 million users. Such massive growth and in such a short
time has never before been witnessed by any medium of communication and information
in India. In less than seven years of its introduction in India, it is expected to be used by
10 million consumers ! Table 15.5 given below indicates this growth of the Internet in
India.
Table 15.5: Growth of Internet User/Subscriber.
As on Internet Sub- YoY Growth Internet Users YoY Growth Users/
scribers (million) (million) Subscribers
15-08-95 0.002 0.01 5
31-03-96 0.05 3840% 0.025 3840% 5
31-03-97 0.09 80% 0.45 80% 5
31-03-98 0.14 56% 0.7 56% 5
31-03-99 0.28 100% 1.4 100% 5
31-03-00 0.77 175% 2.8 100% 3.64
31-03-01 1.6 108% 5 79% 3.13
31-03-02 3.5 119% 10 100% 2.86
31-03-03 6 71% 16 60% 2.67
This has particularly happened after the emergence of cyber cafes in the semi
urban areas. The net has also enabled several government initiatives to take off.
Typically an Indian Internet user is young, educated, generally a professional,
urban (mostly a metro resident), who accesses the Internet either at his/her
officer/cybercafes/or at his educational institution. Males use the Internet more than
the females. Irrespective of the sex, the Internet users generally uses the net for
accessing information.
Print Media
According to the 1993 Annual Report of the Register of Newspapers (RNI) there has
been a growth in the total circulation of dailies in 1998 over 1997. The number of
newspapers went up by 48.9 percent from 30,214 in 1991 to 44,997 in 1998 and the
circulation increased from about 5.3 crore copies in 1991 to about 10.6 crore copies in
1998, or in other words, an increase of 100 percent. The highest number of newspapers
published were in Hindi (198,29,053), followed by English (64,04,774), Marathi (32,48,909)
and Gujarati (28,52,023). The number of daily newspapers increased from 3,229 in
1991 to 4,719 in 1998. In other words an overall increase of over 46.1 percent. The
newspapers were published in as many as 96 Indian languages and dialects. The
following Table 15.6 gives the details of the press in India.
Table 15.6: Press in India at a Glance
Number of Newspapers in India Circulation of Newspapers
Dailies 4719 Dailies 4,59,14,327
Tri/Bi-weeklies 325 Tri/Bi-weeklies 5,37,554
Weeklies 14743 Weeklies 3,54,75,216
Fortnightlies 5654 Fortnightlies 85,02,140
Monthlies 11505 Monthlies 1,34,42,145
Others 4759 Others 18,36,809
Total 41705 Total 10,57,08,191
Miscellaneous publications 3292
Total on record 44997
Source: Press in India, 1998, Ministry of Information & Broadcasting.
Outdoor Media : Outdoor advertising has also changed dramatically in India. Although,
still relatively behind countries like USA, UK and Japan, this media is also drawing the
attention of industries. One of the latest forms of advertising is the three-dimension
hoarding used by firms like the Lloyds Group.
Finally, the local area advertising on cable TV is also on the growth path. It has been
reported that many cable advertising companies rake in Rs, 50,000Rs. 3,00,000 per
month, depending on their operation. Cable TV operators admit that they earn Rs.
20,000 extra every month without any extra effort. Firms like Hindustan Lever, Pioma
Industries. Parle Exports and Kwality Ice Creams have been some of the major users.
With literacy increasing and a growth in the professional classes, specialised magazines
for different market segments are now being published. Magazines like Business India,
Business World, Business Today, India Today, Society, Savvy, Femina, Readers Digest
and their like are now read by middle and higher income families.
All these developments heralds a more complex task even for the media. Today large
media houses, like the Times of India group, help advertisers buy the optional media
mix. Media marketing is going to be on the increase as the target audience gets
fragmented over multiple media choices. Figure 15.3 sums up these advertising
institutions and their relationships in advertising management.
Figure 15.3: Institutional framework for advertising
Government
Competition
Advertiser
Media
Resarch
Agencies
Advertising
Agency
Industry
(Barriers to
Entry and Exit)
The Nature of Advertising
Advertising is defined as a persuasive message carried by a non-personal medium and
paid for by an identified sponsor. This definition indicates two basic parts of advertising
: the message and the medium. The two work together to communicate the right ideas
to the right audience.
Advertising promotes goods, services and ideas in mass media, such as television, radio,
newspapers and magazines, to reach a large number of people at once. It serves as a
substitute for a salespersons talking to an individual prospect. Mass media advertising
is one-way communciation and, unlike a salesperson, cannot receive direct feedback
and immediately handle objections.
Advertisers, who must pay the mass media to present their advertisments, or
commercials, control the exact nature of the one-way message that will be communicated
to the target audience. The impersonal nature of advertising also allows marketers to
control the timing and degree of repetition. These features often provide benefits that
far outweigh the disadvantages associated with lack of feedback.
Marketers of soft drinks, cosmetics, soaps and many other products that do not require
direct and immediate feedback often rely heavily on advertising. For these marketers,
the challenge is to present messages effectively to an audience that may not be interested
in seeing or hearing them. They must contend with readers who quickly turn the
magazine page or viewers who tape-record television programs and then fast-forward
through commercials. They must cope with competitors that use advertising to compare
brands. Because of these demands, advertising is often highly creative and innovative.
Creative advertising can stimulate people to talk about products, services, and ideas.
This word-of-mouth communication may be one of the most effective means of
communicating a message to prospective customers. Advertisings power to influence
word-of-mouth communication can be a great asset to a marketer.
Advertising supports other promotional efforts. It may communicate information about
a sales promotion or announce a public relations event. Advertising helps the salesperson
get a foot in the door by preselling prospects. A salespersons job can be made much
easier if advertising informs prospects about unique product benefits or encourages
prospects to contact a salesperson. Without advertising, the salespersons efforts may
be hindered by the prospects lack of knowledge about the company or its products.
Advertising can be subdivided into many different categories. A very basic scheme
classifies advertising as product advertising or institutional advertising.
Product Advertising
Product advertisement : An advertisement promoting a specific product.
Advertisements for Liril, Home Trade, Oberoi Hotels, Colgate and many other brands
are clearly intended to persuade consumers to purchase a particular productindeed,
a particular brand. These are product advertisements. An advertisement for Maruti
Suzuki that declares Maruti Service Station near you. No matter where you go and
suggests that viewers go down to the Maruti dealership is a product advertisement
because if features a specific product.
Direct-action advertisement : An advertisement designed to stimulate immediate purchase or
encourage another direct response, also called a direct-response advertisment.
If Hero Honda advertisement goes on to recommend that viewers go to the showroom
for a test drive during an inventory reduction salethat is, if it suggests an immediate
purchaseit is also a direct-action advertisements, or direct-response advertisement.
Many television advertisements and many direct-mail efforts are of this type. Those
that include both direct-action advertising and a direct channel of distribution are a
popular form of direct marketing. For example, record companies frequently urge
consumers to order special albums by calling a toll-free number and using a credit card.
The Book-of-the-Month Club by India Today Group mails announcements of its latest
offering to club members homes and includes a return envelope so that the customer
can order the latest selections. Direct-action advertisements, in general, utilize coupons,
toll-free telephone numbers, or invitations to call collect in order to facilitate action and
encourage people to buy now. Much retail and Internet advertising emphasizes direct
action.
Indirect-action advertisement : An advertisement designed to stimulate sales over the long run.
Less assertive forms of product advertising are designed to build brand image or position
a brand for an eventual sale rather than to sell merchandise right this minute. For
example, consider an advertisement portraying the romance and adventure of Ladakh.
The advertiser knows that the consumer is not going to run directly to a travel agency
after seeing such an advertisement. The objective is to provide information so that the
next time the family is considering a vacation, Ladakh will be among the spots considered.
Such so-called indirect-action advertisements use a soft-sell approach calculated
to stimulate sales in the long run.
Institutional Advertising
Institutional advertisement : An advertisement designed to promote an organizational image,
stimulate generic demand for a product, or build goodwill for an industry.
Institutional Advertisements aim to promote an organizational image, to stimulate
generic demand for a product category, or to build goodwill or an industry. Sunday Ho
Ya Monday Roz Khao Andey is an institutional advertising slogan. So are Phillips
Lets make things better and United Artists Escape ..... to the movies. These
institutional advertising slogans do not stress a particular product, brand, or movie.
Instead, they accent the sponsoring institutions. The eggs advertisement, for example,
attempts to build demand for the eggs as a whole. The advertisements paid for by
Philips and United Artists stress how wonderful, responsible, or efficient those
companies are. Contrasting the Drink milk campaign against the advertisements for
Amul Milk or Vita Milk makes the difference between institutional advertising and
product advertising quite clear. Institutional advertising is often part of a larger public
relations effort.
Planning and Developing Advertising Campaigns
Developing an effective advertising campaign requires a stream of interconnected
decisions on such matters as budgeting and media. as well as a strong creative strategy.
The process followed in planning and developing an advertising program is shown in
Figure 15.4. The activities involved in the process are discussed in the following sections.
As youve seen throughout this book, goals and objectives must be established before
work on specific plans and actions is begun. This relationship between objectives and
plans holds true for advertising. Before developing a single advertisement, management
must ask what the advertising is expected to do.
Of course, advertising is supposed to sell the product. That statement, however, is too
broad to be truly useful to marketing planners. Advertising is, after all, only one element
of the marketing mix. It affects and is affected by the product, the price, the packaging,
the distribution, and the other elements of promotion. All these elements combine to
sell the product; advertising does not do the job alone. Regardless of the appeal and
longevity of advertising campaigns, such as those of De Beers diamonds, BMW, or
United Airlines, successful advertisements do not stand by themselves. Effective
advertising campaigns are developed as part of an overall marketing strategy and are
tightly coordinated with the other facets of the promotional mix.
Communication Goals for Advertising
Communication goals: In the context of marketing, what the marketer wants a promotional message
to accomplish; to gain attention, to be understood, to be believed, and to be remembered.
What are appropriate goals for advertising? Because advertising is a method of
communication, objectives directly related to advertising should be communication
goals. In general, advertisers want to accomplish four broad communication goals :
Advertisements are expected to generate attention, to be understood, to be believed,
and to be remembered. These goals relate to selling the product, but they are primarily
matters of communication.
Figure 15.4: Advertising Planning and Development
If these broad communication objectives are not considered and met, more specific
objectives will not be met either. For example, if no one pays attention to an advertisement,
the advertisement cannot achieve its more specific objective of, say, enhancing a brand
image. Likewise, an advertisement must be understood and believed if it is to reinforce
or change perceptions and attitudes about a brands characteristics. And if it is not
Advertising
budget
Marketing
strategy
Specific
advertising
objectives
Creative
Strategy
Media
Selection
Advertising
production
Advertising
execution and
evaluation
remembered, an advertisement will have little effect on buyer behaviour. With these
broad objectives in mind, marketers developing advertising campaigns can set more
specific objectives.
Specific Advertising Objectives
Encouraging increased consumption of a product by current users, generating more
sales leads, increasing brand awareness, increasing repeat purchases, and supporting
the personal selling effort are typical specific objectives for advertisements. As Figure
15.4. illustrates, these objectives are developed from the marketing strategy and provide
the framework for creative strategy and media selection.
Many advertisements have disappeared from the media, even though everybody liked
them, because they did not contribute to accomplishment of specific objectives. For
example, almost everyone who saw it enjoyed a unique television advertising campaign
featuring a bus in Rajasthans rural area
which was full of passengers, moves up
and down on the road and an avertisement
on the backside reads. Fevicol Ka
Majboot Jod Hai Tootega Nahin
However, some advertisements, while humorous and attention-getting, did not sell the
product. Because the ultimate objective is to sell the product, the advertisements should
be changed. A great advertisements that does not contribute to success in increasing
market share, introducing a new product, or the like is only great in the creative sense.
In the business sense, it is far from great.
Opportunities in the marketplace, competitors advertising campaigns, and prior marketing
strategy decisions, such as selection of a target market segment, all influence the
development of specific advertising objectives. An important influence is the products
stage in the life cycle.
Table 15.5: Illustrations of Specific Advertising Objectives
Type of Objective Illustrations
Demand-Oriented
Information To create target market awareness for a new brand. (Samsung launching
camera phones)
To acquaint consumers with new business or store hours (store opens
from 9 A.M. to 9 P.M.)
To reduce the time salespeople take to answer basic questions (Routine
questions answered in the advertisement).
Persuasion To gain brand preference (Palmolive Da Jawab Nahin).
To increase store traffic. (Benetton store launched buy 2 get one free on
summer wear).
To achieve brand loyalty (Regular usage of Colgate will stop tooth decay).
Reminding (retention) To stabilize sales (to ensure continuous profits and growth).
To maintain brand loyalty (Pepsi : Yeh Dil Mange More).
To sustain brand recognition and image (TATA is easily recognised
anywhere in India)
Image-Oriented
Industry To develop and maintain a favourable industry image (Intel inside on
every computer).
To generate primary demand (Roz Piyo Doodh to increase milk
consumption).
Company To develop and maintain a favourable company image. (Videocon : Bring
Home The Leader)
To generate selective demand. (Drink Amul Milk).
Advertisements are expected to
generate attention, to be understood,
to be believed, and to be remembered
Advertising Objectives and the Product Life Cycle
Advertising objectives change with environmental conditions, as do all other aspects of
marketing. Marketing is dynamic; advertising, as one of its most visible components,
must be especially reflective of change.
Figure 15.5: Objectives Change over the Product Life Cycle
Once again, the concept of the product life cycle can be used to illustrate the changes.
Figure 15.5 shows how advertising objectives change over the course of a products
life. During the introductory stage of the cycle, developing consumer brand awareness
and getting customers to try the product are normal advertising objectives. Trade
advertising, which is aimed at attracting distributors and interesting them in carrying the
product, is equally important, although less obvious, during this stage. Additional trade
advertising may be developed later, with the objective of increasing the numbers of
distributors and retail outlets.
Primary demand : Demand for a product class as a whole, without regard to brand, also known as
generic demand.
Primary demand advertising : Advertising aimed at stimulating primary demand; also known as
pioneering advertising.
At the start of the product life cycle, it may be necessary to develop primary demand
or generic demand, for the productthat is, demand for the product class as a whole.
This kind of advertising, which often must be so basic as to explain what a product is
and how it works, is called primary demand advertising. It seeks to introduce the
product rather than to make brand comparisons. Advertising of this sort is also called
pioneering advertising.
Advertising for a mature brand, such as Lifebuoy, may be aimed at regular, brand-loyal
users. Its purpose is substantially different from that of advertising used to introduce a
new product. Promotion to loyal customers requires a campaign designed to remind
them of the products image and of their satisfaction with the product; regular buyers
do not need detailed information about the product. In the case of mature products,
then, advertisers give relatively little emphasis to explaining product features. Messages
Preintroduction Introduction Growth Maturity Decline
Sales
Time
General
promotional
objective
Advertising
strategy
Primary objective
of message
Define objectives
and plan
promotional
campaign
Screen concepts,
create
advertisements,
and plan media
selection
Develop product
awareness, stimulate
generic demand,
and attract
distributors
Primary demand
advertising to get
potential purchasers
to try product; trade
advertising to
introduce product
Inform
Create product
acceptance and
brand preference if
there are competing
products
Extensive advertising
expenditures
emphasizing
advantage of
product and brand
Persuade
Maintain and enhance
brand loyalty;
convert buyers and
distributors of
competing brands
Reminder and
emotional advertising
and promotions to
promote repeat
purchases and
differentiate brands
Remind
Phase out product
Minimal advertising
expenditures
emphasizing low
price to reduce
inventory
become increasingly symbolic as the product ages. Partly, this reflect the fact that
mature products have found their niche in the marketplace. They have been positioned,
either by marketers or by the competitive forces of the market itself, to appeal to
smaller and more specialized market segments than when they were new and lacked
intense competition.
Selective demand advertising : Advertising aimed at stimulating demand for a particular brand.
An advertising campaign for a product in the maturity stage of the product life cycle
may not explain anything about the characteristics of the product. Often the
advertisements reflect the psychological or emotional dimensions of the brand or the
situations in which it is consumed. Because most products on the market are in the
maturity stage, much advertising uses psychological benefits to differentiate brands.
Such advertisements stress the reasons a brand is better than its competitors, instead of
emphasizing the newness or uniqueness of the generic product, as is done at the start of
the product life cycle. Advertising of this kind is called selective demand advertising.
The most commonly encountered advertising objectives for mature products may be
summarized as follows :
1. Increase the number of buyers
l Convert buyers of competing brands by giving them strong reason to buy.
l Appeal to new market segments by entering into foreign markets.
l Reposition the brand by identifying some new use or more usage per
occasion.
2. Increase the rate of usage among current users
l Remind customers to use the brand more often. Drink orange juice three
times a day.
l Inform regular consumers of new uses to increase the consumption. Print
new recipes on the pack to increase consumption of food products.
l Enhance brand loyalty and reduce brand switching among current customers
by making them club members or by supplying something of value to the
loyal customers.
After determining the advertising campaigns objective, marketing managers begin to
develop a creative strategy and to select advertising media. These activities are inter-
related. In fact, the inter-relationship between advertisement and medium is so strong
that it is often impossible to tell whether the selection of the medium or the development
of the advertisement comes first. For the purposes of our discussion, we will first
examine how marketers create and produce advertisements and commercials.
Creative Strategy
Creative process : In the context of advertising, the generation of ideas and the development of the
advertising message or concept.
In advertising, the generation of ideas and the development of the advertising message
or concept make up the creative process. Actually, creativity is necessary to all aspects
of the marketing mix, but the term has come to be particularly associated with the
work of the people who actually develop and construct advertisements. Whether creative
activity is based on information gathered by marketing research or on analysis by
mangement, the basic thrust of an advertising message is developed primarily by the
creative departments of advertising agencies.
Discussing creativity is a difficult task. It is possible to outline schematically the steps
involved in the creative process, as illustrated in Figure 15.6. The role played by that
elusive something called creativity, however, can only be shown as a creative spark.
Advertising objectives provide a framework for creative efforts but the creative spark
is probably what makes an advertisement persuasive.
Figure 15.6: Creativity Is an Important Aspect of the Advertising Process
Advertising copy writers, art directors, and other creative people are responsible for
the task of answering two questions : What to say ? and How to say it ? These
questions reflect the two basic parts of the creative strategy.
What to SayThe Appeal
Advertising appeal : The central theme or idea of an advertising message.
The central idea of an advertising message is referred to as the advertising appeal.
The purpose of the appeal, and of the advertisement, is to tell potential buyers what the
product offers and why the product
is or should be appealing to them.
Thinking about advertisements you
have seen will bring to mind the many
kinds of appeals advertisers employ. It may be that the product has sex appeal, is
compatible with the target customers lifestyle (or desired lifestyle), or solves some
particular problem such as morning mouth, medicine breath, or the need for healthy
gums. Commercial messages that make firm promises, like NOKIA 1100 : Made for
India shock resistant and dust resistant are not uncommon. Many advertisers believe
that specifically describing the answer to a problem in this manner is the most effective
approach. Other advertisements, such as those for cosmetics, bathing soap and motor
bikes, are built around less straightforward appeals that stress brand image.
Advertising theme : An advertising appeal used in several different advertisements to give countinuity
to an advertising campaign.
When the same advertising appeal is used in several different advertisements to provide
continuity in an advertising campaign it is referred to as an advertising theme. The
Indian Army, for example, uses the theme Do you have it in you in its advertising.
To get a feel for how creative advertising appeals vary across an industry, it is useful to
consider several brands of the same product and the advertisements developed for
each.
The
creative
spark
Advertising
execution :
What is said
How it is said
Advertising
objectives
e.g.: How to execute
Fevicol's proposition
e.g., (1) Shadow gets fixed on
a shop shutter which carries
the word Fevicol.
(2) A bus full or passengers
moves across the Rajasthan
landscape.
What to say?, and How to say
it? These questions reflect the two
basic parts of the creative strategy.
The Visa credit card is positioned and advertised as the most widely accepted card.
Advertising communicates the message that, because Visa is accepted at more places,
it is Everywhere you want to be.
MasterCard takes a diferent approach, advertising itself as a smart payment method
for almost every type of good or service. For instance, one MasterCard commercial
shows a father and a son at a base ball game. It explains that tickets cost $28 and hot
dogs, popcorn and soda cost $18, but real conversation with an 11-year-old is priceless.
The ad concludes : These are some things money cant buy. For everythibng else
theres MasterCard.
American Express reminds customers that its cards Do more It Blue Card includes
a smart card feature that stores data.
The important thing to note here is that the advertisements for these products, as well
as those for many others, feature different appeals. If every credit card company
simply said, Our credit card is more convenient than paying with cash, no brands
advertising would be unique or memorable. Creativity is responsible for this uniqueness.
But theres more to cretivity than that. Many advertising appeals, such as the appeals
for credit cards just described, are part of positioning promotional campaigns. Advertisers
create these appeals so that consumers will perceive their brand as holding a distinctive
competitive position. This strategy may be so successful that perfectly true claims
made by the producer of one brand are not believable because of the competitive
positions other brands hold in consumers minds. Creativity, then, is more than an
advertising tool. It is a competitive tool.
How to Say ItExecution of the Appeal
Even when a copy writer or artist has an important and meaningful message to relate,
its effect can be lost if it is not presented in the right way and in the right context.
Marketing research can help in this regard. For example, an advertising agencys
research indicated that many women who buy ready to cook dinners lead hectic lives
and, because of time constraints, have trouble coping with everyday problems. So far
so good. On this basis, the agency developed an advertisement for Swanson ready to
cook dinners showing a rundown woman flopping into a chair just before her family is
to arrive home demanding dinner. Suddenly realizing that she has a problem, the woman
gets the bright idea of cooking a frozen dinner.
The problem was real enough, but the appeal was wrong. The last thing harried women
want is to be reminded of how tired they are. Television viewers are fond of pointing
out that married women in commercials are almost always smart and well groomed,
even when they are doing the laundry or washing the floor. Advertisers use such
images to focus the target customers attention on the solution to a problem without
making her feel like cursing the laundry or the dirty floor. Realizing this, Swanson
changed its advertising appeal.
How to say something is as important asand sometimes more important thanwhat
to say. This is perhaps doubly true in advertising. The person delivering the message,
the emotional tone, and the situation in which the action takes place all influence the
effectiveness of the advertisement. Remember the ad for Britannias 5050 during the
cricket matches, when the third umpire has to take the decision.
Although some advertisements are simple, straightforward statements about the
characteristics of a product, creating advertisements that grab the intended audiences
attention often requires some embellishment. Advertisements must say things to people
both with and without words, and the creative spark clearly is vital to accomplishing this
goal. The Fevicols slogan Fevicol Ka Majboot Jod HaiTootega Nahin tells the
target customer something about the brands glue ability. Im stuck on Band-Aid, and
Band-Aids stuck on me is a catchy phrase. The Air Indias Maharaja is a symbol
rich in meaning; so are the Marlboro mans cowboy hat and horse. One mark of the
talent and success of creative individuals is that much of their work is so powerful that
it can be used effectively in advertisements for decades. Many slogans, pictures and
other components of advertisements can be immediately identified with particular products
by generations of consumers. Success depends on the creative persons ability to
capture a feeling or fact with just the right phrase and the right symbols. Compare
these common advertising phrases with the way they might have been written :
Bharat Ka NamakDandi Namak
Ghari Detergent : Pehle Istemaal Karen, Phir Vishwas Karen
Colgate Ka Suraksha Chakra.
Lifebuoy Hai Jahan, Tandurusti Hai Wahan
Bajaj Autos legendary Hamara Bajaj Campaign.
Creative platform : The style in which the advertising message is delivered, also known as the
execution format.
How an advertisement says something is its creative platform, or execution format.
The creative platform is influenced by the medium that is used to convey the message.
Obviously, a newspaper advertisement cannot duplicate the sound of a railroad train,
but that sound might be used effectively in a radio advertisement. Determining how to
communicate the message, then, is interrelated with selecting advertising media.
Nevertheless, advertisers can present or creatively implement a basic appeal in a number
of ways.
Looking at some of the major creative platforms used in advertisements, especially TV
commercials, helps put the creative strategies behind advertisements into perspective.
The major creative platforms include storyline, product use and problem solution, slice
of life, demonstration, testimonial and spokesperson, lifestyle, still life, association, montage
and jingle.
Storyline creative platform : An advertising creative platform that gives a history or tells a story
about a product.
Storyline : The storyline creative platform gives a history or tells a story about the
product. For example, the advertisement of Lux Soap focus on the concept of beauty
soap for the heroines, since its launch. Simiarly, certain European vacation spots are
shown in all their historical glory from the Middle Ages to the present.
In television commercials that use the storyline creative platform, an unseen announcer
(in a technique called voice-over) often narrates a story with a recognizable beginning,
middle and end. Some copy writers attempt to make the product the hero of the
story.
Product Use and Problem Solution : Straightforward discussion of a products
uses, attributes, benefits, or availability is a creative platform frequently utilized in
advertising. A unique selling proposition, is the central focus of such an advertisement.
Comparatively simple advertisements for products ranging from Colgate toothpaste to
Eureka Forbes Vaccum cleaner explain uses of the product and how the product can
solve a problem. Colgate toothpaste fights tooth decay. Eureka Forbes Vacuum cleaner
keeps your home neat and clean. A maker of exercise equipment may point out that
being fat and out of shape is a problem (your chest doesnt belong on your stomach)
and may show that its product is a solution to the problems.
Slice-of-life creative platform: An advertising creative platform that dramatizes a typical setting
wherein people use a product.
Slice of life: The slice-of-life creative platform dramatizes a typical setting wherein
people use the product being advertised. Most of these commercials center on some
personal, household, or business situationfor example, over worked husband asking
for strong teaTej Ho Chai, To Josh Aa Jaye, Kapil Dev during a net practice
claimingBoost is the secret of my energy or mother-in-law & daughter-in-law
talking about a laundry problem.
The slice-of-life commercial often begins just before a character discovers an answer
to a problem. Whether the trouble is dandruff, bad breath, or not being home for a
holiday, emotions are running high. The protagonist may know of the problem or may
be told about it by another character. The product is then introduced and recommended,
and the needy person gives it a try. Just before the end of the commercial, we are
toldand, indeed, we can see for ourselvesthat the new user of the product is now
a more satisfied, happier person. This creative platform is most common in TV
commercials, but similar real-life stories can be developed in print media through the
use of a series of pictures and in radio advertisements through the use of character
voices. The slice-of-life creative platform is essentially a dramatized variation on the
problem-solution creative platform.
Demonstration : An advertising creative platform in which a clear-cut example of product superiority
or consumer benefits is presented.
Demonstration : Certain products lend themselves to a demonstration creative
platform. For example, a Master Lock advertisement in which bullets are repeatedly
fired into a lock that does not open is suspenseful and self-explanatory. The
demonstration creative platform makes its sales pitch by showing a clear-cut example
of how the product can be used to benefit the consumer. It does this by either dramatically
illustrating product features on proving some advertised claim. The Master Lock
advertisement certainly seems to prove that products claim to toughness.
Unusual situations, occasionally bordering on the fantastic, can draw attention to product
benefits. The shadow of a walker gets pasted on a shop shutter which carries the
name Fevicol or girl fell down in a ditch when the worker removes a can of Fevicol
from the top of the television. These novel situations draw viewers attention.
Infomercial : A television commercial, usually 30 minutes long, that has the appearance of a
program.
Many demonstrations occur in infomercials. Infomercials are television commercials,
usually 30 minutes long, that have appearance of regular programs, such as cooking
shows or talk shows. The product is repeatedly demonstrated on the infomercial.
Often, a telephone number flashes on the screen so that the viewer can order the item.
Comparative advertising : A type of demonstration advertising in which the brand being advertised
is directly compared with a competing brand.
Comparative advertising, which directly contrasts one brand of a product with another,
is a form of demonstration advertising. In a comparative advertisement, the sponsors
product is shown to be superior to other brands or to Brand X in a taste test, laundry
whiteness test, toughness test, or other appropriate contest. This creative platform is
somewhat controversial on two counts.
First, some advertisers believe that calling attention to another companys brand helps
that competing product by giving it free exposure. Certainly, the comepting brand
receives some attention, but this fact itself can be advantageous. Brands that do not
have a high market share are intentionally compared with the best known poducts to
suggest that the two brands are equal. Pepsi, the challenger, thus urges comparisons
with market leader Coke. For example, in one television commercial, delivery-truck
drivers for both Coca-Cola and Pepsi-Cola order a meal at a dinner. The Coca-Cola
driver offers his competitor a sip from his Coke can. The Pepsi driver takes a sip,
returns the Coke can, and then offers the Coke driver a sip of his Pepsi. After the
Coke driver takes a single sip of Pepsi, he wants more. He refuses to return the Pepsi,
causing a commotion at the dinner.
This commercial suggests a second point of controversy : Some people do not feel that
such comparisons are fair or sporting. On the whole, however, advertisements using
the direct-comparison creative platform have been increasing in number in recent years.
The honest comparisons will help the consumer to make choices.
Testimonial : A type of advertising in which a person, usually a well-known or public figure, states
that he or she owns, uses, or supports the product being advertised.
Testimonial : Testimonials and endorsements show a person, usually a prominent
show business (Amitabh Bachchan) or sports figure (Sachin Tendulkar), making a
statement establishing that he or she owns uses, or supports the brand (Reid & Taylor
suitings or Victor motorcycle) advertised. The idea is that people who identify with the
celebrity will want to be like that person and use the same product. Alternatively, the
advertiser hopes that consumers will see the endorser as an honest person (Amitabh
Bachchan) who would not lend his or her name to a product that (ICICI) is not good.
Testimonials may also use speakers who, by virtue of their training or abilities, are seen
as experts on the products being advertised. For e.g., a Doctor recommending a
particular brand of cough syrup.
Spokesperson: A person who represents an advertiser and directly addresses the audience
members to urge them to buy the advertisers product. Using a spokesperson is a variation on the
testimonial.
A variation on the testimonial appeal is the use of a spokesperson. The spokesperson
represents the company and addresses the audience members directly, urging them to
buy the companys product. The spokesperson is often the commercials central
character, need not be a real person.
Life style creative platform: An advertising creative platform that reflects a target markets lifestyle
or hoped-for lifestyle.
Lifestyles: The lifestyle creative platform combines scenes or sequences intended to
reflect a particular target markets lifestyle. Soft-drink and fast-food advertisements,
as well as those for many other consumer goods, frequently show product users in a
sequence of daily activities. Young people might be shown enjoying some extreme
sports activitiy and topping off a perfect day with a Thums Up. Thus, the enjoyable
aspects of teenage life are shown in association with the product usage. Important to
such advertisements are the sorts of people actors portray.
Still-life creative platform : An advertising creative platform that makes the product or package its
focal point, emphasizing a visually attractive presentation and the products brand name.
Still Life : The still-life creative platform portrays the product in a visually attractive
setting. The product or package is the focal point of the advertisement. Reminder
advertising often uses a still-life creative platform because the most important purpose
of the message is to reinforce the brand name. Absolute vodka and Batas recently
launched high priced casual shoes has used this creative platform with great success.
Association creative platform : An advertising creative platform that uses an analogy or other
relationship to stimulate interest and convey information.
Association : The association creative platform concentrates on an analogy or
other relationship to convey its message. This creative strategy often borrows interest
from another, more exciting product or situation. Thrilling activities, such as skydiving
or windsurfing, and scenes of beautiful places, such as the Keralas backwaters or a
mountain wilderness of Ladakh, are associated with a product in some way. The
purpose of such analogies, which are often accompanied by music, is to create an
emotional mood. The psychological benefits of the product are communicated through
the associations drawn by the viewer. More everyday analogies are used to make a
product and its benefits easier for the consumer to understand. For example, Lysol
uses an analogy when it says, Its like having a brush in a bottle.
Fantasy creative platform : In the context of advertising, a type of association creative plateform
used to link a product with the target buyer wildest dreams and hopes.
Fantasy is a special associative creative approach. The long-lived series of
advertisements for Axe deodorant is a perfect example of the use of the fantasy
creative platform. The fantasy appeal seeks to associate the product not merely with
a glamorous setting but with the target buyers wildest dreams and hopes. This creative
platform allows audience members to fantasize about themselves in the position of the
rich, famous, or adventurous.
Jingle : A song or other short verse used in an advertisement as a memory aid.
Jingle : Hamara Kal......Hamara Aaj, Buland Bharat Ki Buland Tasveer Can you
remember the rest of this jingle ? What event do you think of when you hear Britannia
Khao, ........... Jao ? What does one have to do if one wants to Humko Binnies
Mangta ? Commercial jingles, many of them written by well-known composers, have
what is termed memory value. You literally cannot get them out of your head. You
may find yourself thinking of themor, at least, able to remember them almost word
for word once your memory is jarredyears after they have been withdrawn from the
market. People often remember product names, phone numbers, and addresses in
jingle form. Thus, jingles serve best as a memory aid; they can have a significant effect
on product recall.
Montage : An advertising creative platform that blends a number of situations, demonstrations,
and other visual effects into one commercial to emphasize the array of possibilities associated with
product usage.
Montage: The montage creative platform blends as number of situations,
demonstrations and other visual effects into one commercial. The effect may be one
of a swirl of colours or an exciting array of possibilities associated with product usage.
Typical of such a creative platform are travel advertisements for places like Kerala or
Singapore. In these TV spots, the varied sights and sounds of an island paradise are
strong together not only to show the many activities that are to be found there but also
to suggest the excitement of the place and the sense that there is so much to do that the
trip will surely be worth the investment. Several of Pepsis Generation Next
advertisements use this creative platform.
Other Creative Platforms: This short list of advertising creative platforms is far
from exhaustive. Pure information, humour, sex appeal, computer graphics, and special
effects, for example, have not been mentioned. However, the discussion should help
you to think of other advertising creative platforms and of the ways they work in an
effective marketing program.
Producing an Effective Advertisement
Advertisements can consist of verbal elements, graphic elements, and auditory elements.
The exact combination of these elements depends on the people who design the
advertisementand, as suggested, their choices are strongly influenced by the advertising
medium to be used. However, the ultimate consideration is that an advertisement must
reflect the advertising objectives. The promotional mix should be a unified whole,
employing all appropriate means of delivering a message. Thus, many TV, radio, and
print advertisements for a product advance virtually the same message or appeal, even
though each is constructed to fit the appropriate medium.
CopyThe Verbal Appeal
Copy : Any words contained in an advertisement.
The term copy refers to the words in an advertisement. The words may be printed or
they may be spoken by a character in a commercial or by an announcer. In certain
advertisements, such as radio advertisements, the copy makes the biggest contribution
to the advertisements effectiveness. Even in a visual medium, such as television, copy
is likely to retain its supremacy, because many of the claims an advertiser makes must
be supported by the comments of the announcers or the characters. For example,
advertisements for laundry detergents may show two piles of wash, but it is the copy
that assures viewers that the pile washed in Surf Excel is the whitest.
Some advertisements are loaded with copy and have few illustrations. For that type of
advertisement to succeed, many members of the target audience must be so interested
in the products possible benefits that they are willing to read long paragraphs of
information. This type advertisements are more suitable for print media for automobiles
and electronic gadgets.
ArtThe Visual Appeal
Art : Any aspect of an advertisement other than copy, including pictures, layout, and white space.
The term art is used broadly to mean all aspects of an advertisement other than its
verbal portions. Thus, drawings, photographs, computer graphics, graphs and charts,
layout (the arrangement of the graphic elements), and even white space fall in the
category of art.
The function of pictures in an advertisement is to illustrate a fact or an idea or to attract
attention. White space and layout have more subtle purposes. Layout can be used
effectively to focus the viewers attention on the picture of the product. It can also be
used to draw attention to the brand name, the price, the place where, a product is sold,
or the written portion of the ad. White space can be used in similar ways, but it is more
commonly used to suggest high quality. Notice that many newspaper and magazine
advertisements employ considerable white space to accent the product. A great deal
of white space says that the pictured item is special, probably expensive, and certainly
high quality. It implies that the product deserves the spotlight given it by a plain field
that accents its appeal. Thus, many advertisements for expensive jewellry picture the
item on a plain-coloured velvet cloth; only a few words are included so that consumers
are not distracted from the beauty and perfection of the jewellry. In contrast, a busy
advertisement featuring a jumble of words and pictures and a small amount of white
space may suggest low price and low quality. Look closely at the avertisements in your
newspaper or favourite magazines and notice how layout is used.
Copy and Art Working TogetherThe Aida Formula
AIDA : An acronym for attention, interest, desire and action. The AIDA formula is a hierarchy of
communication effects model used as a guideline in creating advertisements.
Most advertisements, with the exception of radio advertisements, feature both copy
and art. The two elements must work together to accomplish the communication
objectives set by management. To ensure that copy and art complement each other,
most advertisers follow a hierarchy of effects model known as the AIDA formula.
AIDA stands for attention, interest, desire and action.
Attention: David Ogilvy, a famous advertising executive, once said, When you
advertise fire extinguishers, open with fire. He was speaking about getting the
prospects attention. An effective
advertisement must draw the viewers or
listeners attention from the very first glance
or hearing. Whatever follows will prove of little use if the member of the target audience
has not first been influenced to pay attention to the message. Copy can be used to
accomplish this, as when radio advertisements start out sounding like soap operas or
mystery stories to draw attention. The copy can be enhanced by illustrations. Often
people representing the target customers are shown in situations that make the viewers
wonder. Whats going on here ? or What happened to these people ? For example,
to attract the attention of luggage users, the Samsonite luggage company has for years
run advertisements showing suitcases falling out of airplanes or suitacases supporting
automobiles that have flipped over on top of them. Humour is another attention-getting
device.
Interest: After the target consumers attention has been attracted arousing interest is
next. If the attention-getter is powerful enough, interest should follow fairly automatically.
However, it may be necessary to focus the viewers or listeners attention on how the
product or service being advertised actually relates to them.
Desires: Immediately following the arousal of interest is the attempt to create a desire
for the product. In a TV commercial for ChemLawn, the viewer first sees a homeowner
carrying tools and bags of lawn chemicals. One of the bags breaks, and the exhausted
When you advertise fire
extinguishers, open with fire.
do-it-yourselfer looks on helplessly. The viewer at home sees, however, that the
unfortunate fellows neighbour has a very nice-looking lawn but does not look harried
or sweaty. Certainly he has no piles of spilled lawn-care products around his property.
The viewer is interested in this story : Why is one fellow miserable while his neighbour
smilingly pities him ? The contented home-owner is a subscriber to the ChemLawn
service, of course. The viewer is treated to some scenes of the ChemLawn man
applying liquid lawn chemicals in one easy step. The ChemLawn people know what
and when to sprayanother load off the homeowners mind. Thus, interest in and
desire for the product are established in nearly simultaneous steps.
Action : Action is the last part of the AIDA formula. In the ChemLawn example, the
commercial ends with a call to action. In effect, the advertisement urges viewers to
phone their local ChemLawn dealer for an estimate of what it will take to make them
as happy as the man who has been able to get a nice lawn with no effort. Thus, the
means to act is provided. Usually, the advertiser makes the action seem as effortless
as possible by giving a phone number or closing with a note that credit cards are accepted.
How the AIDA Formula Works : The AIDA formula is based on a consumer
behaviour theory that closely parallels the hierarchy of communciation effects model.
The formula describes consumers behaviour and serves as a guideline for creating
advertising. AIDA makes good sense as an advertising tool and is widely known and
followed.
Understand that is may not be possible for every advertisement to move the reader or
viewer through the four stages to action with a single exposure. Repetition is usually
necessary so that the advertisements message can sink in. Repetition also increases
the chance that the target customer will see or hear the message at a time when there
are no distractions. Finally repetition recognizes the buyers changing environment.
An advertisement that he or she has seen before may be perceived in a different light
by the target buyer who has just been paid or has received a tax refund. Eventually, if
the advertisement is an effective one aimed at the proper people, buyers are likely to
move psychologically through the AIDA stages and then act.
As we have already seen, developing a creative strategy and developing a media selection
strategy are interrelated processes, and the planning of these activities occurs
simultaneously. We now turn our attention to the selection of media.
Media Selection
Media selection strategy : Plan for determining which media are most appropriate for an advertising
campaign.
Suppose you are about to open a retail store. You have already decided to have a
Yellow Pages advertisement but are undecided about whether to use radio, television,
or newspaper advertising as well. This choice is a matter of selecting a communication
channel for your message. In making the choice, you are determining a media selection
strategy, which must take into account the message you wish to transmit, the audience
you want to reach, the effect you want to have, and the budget you have to support this
effort.
Developing a media strategy requires answering two questions : Which media will get
the message to the desired audience efficiently ? and What scheduling of these
media will neither bore people with too-frequent repetition of the message nor let too
many people forget the message ? Before we address these questions, lets look
briefly at what the term media includes.
Which Media
The various media lend themselves to sepecific tasks. If we assume, for the moment,
that budget considerations can be set aside, certain factors become dominant in choosing
the medium to carry a sales message. If demonstration or visual comparison of one
brand with another (say Surf Excel v/s Some other brand) is the goal, television becomes
the most logical contender. If a lengthy explanation of sales points (for automobiles
etc.) is required, print advertisements (magazines and newspapers) and the Internet
come to mind. If consumers need a message to remind them of package identification
or convey a short sales idea (Newport : Economy Jeans), outdoor advertising (hoardings)
makes sense. Thus, before a marketing planner starts thinking about what medium to
use, he or she must know what is to be said. Once the marketer has decided what is to
be said, attention can turn to which medium can best say it. Ultimately, several different
media may be selected to carry the multiple messages the marketer wants to
communicate.
Several media may appear to be able to do a particular job. When this is so, the marketing
planner can narrow the choice by considering which media will hit the all important
target market. At this point, the media expert becomes a market expert. Knowing the
target market (Kids 37 yrs.)who the heaviest users (Maggie Noodles) are, what
their demographic (Urban; Middle Income Groups and above) and psychographic (Avid
watchers of cartoons) charactertistics areleads to a determination of which media
will deliver the message to these prospects. For example, a media planner in ICICI
Prudential insurance may be trying to target young males between the ages of 18 and
34; Singapore Airlines may be targeting well-educated, high-income men and women
between the ages of 25 and 49; the primary customers for a sun-screen cream may be
youthful, fashion conscious urban women with family income Rs. 10,000 + per month.
What media will reach each of these targets most effectively ?
Mass Media
Most products can be related to a demographic profile. Data pertaining to mass media
are geared to that same profile information. Thus, if the target audience includes men
and women and it has been decided that television will do the best job and that the
media budget permits such an expensive choice, the media planner may go for prime-
time televisionfrom 8 p.m. to 11 p.m. or 7 p.m. to 10 p.m. depending on the time
zone. The next question is Which television shows have audiences whose profiles
must clearly match those of the target customers ?
Careful analysis of any organizations marketing communication efforts might show
that what appears to be the most appropriate advertising medium is, in fact inappropriate.
Electonic Interactive Media
It has been said that Computing is not about computers anymore. It is about living,
This observation certainly holds true with respect to the media people use to gather
information and entertain themselves. This discussion of electronic interactive media
will focus on advertising on the Internet, but the same principles apply to other media.
Interactive media allow an individual to seek information, ask questions, and get answers
without the direct assistance of a human being. We will focus our attention on Web
sites.
A company Web site is one of the most common forms of Internet advertising. For
instance, The Lakme Web site offers online consultations about skin type and the type
of cream that is suitable. Consumers can find answers to frequently asked questions
about colour and makeup and get tips on such topics as sun protection. As the consumer
interactively learns about skin care, she, of course, also learns which Lakme cosmetic
products are appropriate for her situation. A company Web site is an ideal way to
reach consumers who want details about specific products, as interactive media can
provide large amounts of information.
Of course, just because a company creates a Web site does not mean people will visit
the site. When a content provider, such as India Today magazine, which also publishes
on the Web, it faces three challenges; how to get viewers to the Web site, how to get
viewers to stay long enough to view the content, and how to get viewers to return to the
site. (If a Web site has the ability to retain visitors, it is said to be sticky).
One way to get people to visit a Web site is to advertise on another Web site. Advertising
banners, another form of Internet advertising, are much like mass media advertising in
the sense that a company purchases space on a search engine or on the commercial
Web site of an information provider. A typical objective for a banner ad is to increase
brand name recognition. However, banners can go beyond achieving brand awareness,
because they are hypertext links to the advertisers Web site. For example, a marketer
of furniture or fabrics might work out an arrangement with the Yahoo ! search engine
company to display its bannerwhich consists of a small flag-like rectangleat the
top of the result page whenever a user enters the word furniture or fabrics as a search
term. The advantage of this type of Interest advertising is that the audience has self-
selected the topic, so the marketers message reaches an involved, highly targeted
market.
Pop-up boxes are windows, a refined version of banner advertising. A visitor to the
Fortune magazine Web site, for example, might find that a window providing subscription
information pops up after the Web page loads. The viewer typically has to close the
window or enter a response to the advertisement.
Streaming media : Multimedia content, such as audio or video, that can be accessed on the Internet
without being downloaded first.
Streaming Media : Certain software, such as Real Networks Real Player and
Apples Quick Time, allows Internet users to access multimedia content such as audio
or video without downloading it first. When visitors to a site use such software to view
a program or an advertisement, they are said to be viewing streaming media.
Streaming ads may eventually prove to be more effective than current ad banners.
One study co-sponsored by Intel and Excite@Home found that streaming-media
advertisements provided 22 per cent higher recall and 35 per cent more chick-throughs
(to the advertisers Web site) than banner ads.
Today, three-dimensional computer-generated video can create photo-realistic results,
which users can either watch linearly or interact with. Interactive animated environments
will take advertising on the Internet to a whole new level. However, it will be some
time before all Internet users have access to these technologies. Streaming-media ads
are pexted to become more prevalent as broad-band technology with increased bandwidth
become more available. (Broadband refers to technology that allows for the transfer
of data over media such as the Internet at high speeds.)
Using Smart Agent Software to Reach Highly Targeted Audiences : Information
technology can be used to deliver personalized content to a viewers desktop. Computer
shoftware programs known as smart agents, or intelligent agents, find information
without the users having to do any searching; they then store that information
sometimes entire Web sites, complete with images and linkson the users computer
for later viewing. Smart agent software that learns a users preferences and searches
out information is making advertising on the Internet and other interactive media more
targeted and effective. Advertisers can have certain banners delivered to some target
audiences, while other banners are served upto other users. An ad will appear only
when someone with the appropriate demographics and entertainment preferences uses
the service.
DIRECT MARKETING WITH DATABASES
Direct-marketing media, such as direct mail, can be very selective and can reach a
clearly defined market, such as all families within a certain Pin Code area or all holders
American Express cards or all the customers of Airtel. But direct mail can also end up
in the wastepaper basket.
Direct mail has been in existence for more than a century; however, advances in digital
technology have changed the nature of direct marketing in recent years. In particular,
modern computer technology has improved the selectivity of this medium. Now
computers can access databases to customize materials sent to different market segments
and to personalize the message any individual consumer or household receives. For
example, a personalized greeting may appear on a letter that, in addition to conveying
an advertising message, indicates the name of a local retailer that sells the brand being
advertised. If the database records the ages of the children in households, an advertiser
using direct marketing can send coupons only to those households with, say, children in
diapers. Furthermore, if the database also indicates the brand of diapers a consumer
regularly purchases, an advertiser like Huggies can limit the mailing list to consumers
who are loyal to Pampers or other competing brands.
E-MAIL AS AN ADVERTISING MEDIUM
The use of e-mail advertising as a promotional medium is growing because it has the
advantages of speed, personalization, and interactivity. Advertising via e-mail has many
things in common with traditional direct-mail campaigns : Database management and
data mining are extremely important, as they allow marketers to create customer profiles
and tailor messages and products to them. In addition, use of e-mail permits an advertiser
to determine whether the customer responds to the communication and thus measure
the effectiveness of a particular ad.
A major disadvantage of e-mail advertising is that the receiver of the message may not
read it because he or she considers it spam, which is the term for unsolicited and
unwanted e-mail. Furthermore, if a company sends too many e-mails to a customer, it
may actually drive the customer away. Effective marketers send e-mail only to customers
who ask for it. Some have called this approach permission marketing. because the
consumer consents to receive e-mail from the marketer. An executive at Williams-
Sonoma explained the logic of permission marketing this way : Our catalog can cost
us a dollar. E-mail doesnt cost us anything, but it can cost us the relationship if we mail
customers too much.
The general rule is to let the customer control what he or she receives. This means
that, in addition to asking for permission to send e-mail advertising, marketers should
provide an easy way for customers to opt out if they no longer wish to receive e-mail.
Each Medium has Advantages and Disadvantages
Newspapers have the advantages of mass appeal within selected geographical markets,
a general respect in the community, and a short lead time (that is, newspaper
advertisements can be inserted, withdrawn, or altered quickly). Magazines have relatively
long lead times but offer the advantages of selectivity of audience and far better
reproduction of print and pictures than can be found in newspapers. Radio provides
geographic and demographic selectivity because the programming of different stations
attracts different sorts of listeners. Its lead time is short, and its usefulness in exposing
listeners to frequent messages is obvious.
Television reaches the mass audience. However, specialization by type of show is
possible. For example, the World Wrestling Federation appeals to boys and young men;
serials like is Kusum, KSBKBT Friends appeals to a range of young to middle aged
adults. Television allows advertisers to show and tell because television ads can
involve sight, sound, movement, cartoons, actors and announcers. The strengths of
television may be out-weighed by its expensiveness. Cable television, with advertising
rates lower than network televisions, can be a good alternative for many products
because it offers the advantage of greater psychographic selectivity. Even when the
advertising rates for a particular program or station are relatively low, however, the
costs to develop and produce a commercial keep many potential users away from TV.
Media Schedule
Media schedule : A document identifying the exact media to be used and the dates on which
advertisements are to appear; also known as the media plan.
The media schedule is a time schedule identifying the exact media to be used and the
dates on which advertisements are to appear. Media planners select not only the
general media catagory (such as magazines and cable television) but also the specific
media vehicles (such as Business Today and Z-Movies). Selecting the specific media
vehicles requires advertisers to consider reach, frequency, and timing.
Reach : The number of people exposed to an advertisement carried by a given medium.
Reachthat is, the percentage of people likely to be exposed to an advertisement in a
given mediumis an important factor in determining which media to use. Obviously,
the advertiser wishing to reach the largest number of people in the target audience
must take costs into consideration. A major aspect of the media selection job is making
cost comparisonsevaluating whether, for example, Frontline has a lower cost per
thousand readers than India Today.
Frequency : The number of times an advertisement is repeated in a given medium within a given
time period, usually 4 weeks.
Another factor with cost implications is the repetition, or frequency, of the advertising
message in a given medium within a given time period, typically 4 weeks. Frequency
reflects the average number of times an average individual is expected to be exposed
to an advertisers message. An advertiser may decide to trade off reach for frequency.
Placing two advertisements in Frontline, for example, may be more cost-effective than
placing a single advertisement in India Today.
Although cost is an important issue, strategy considerations may be equally important in
choosing between reach and frequency. For example, frequency may be more important
than reach when repetition will help the audience learn something new. If the advertising
objective for a new brand is to establish awareness or to communicate a new product
feature, the benefits of high frequency may outweigh the benefits of wide reach. Because
the trade-off between reach and frequency is a complex issue, marketing managers
often use marketing research to help them choose the best media schedule.
The timing of advertisements is another complex issue. Should advertising be spaced
steadily throughout the year, concentrated in a particular season, or pulsed at regular
or irregular intervals so that the company spends heavily during one period and then
withdraws for a time ? These are important questions, and they require a great deal of
research and analysis by media planners.
Advantages and Disadvantages of selected Advertising media
Medium Advantages Disadvantages
Newspapers Geographic market selectivity Lack of permanence of advertising message
Flexibilityeasy to insert and change ads Poor print/production quality
Editorial support (newspapers may write Limited demographic orientation
stories about paying advertisers)
Magazines Demographic/psychographic selectivity Lack of flexibilitydifficult to make last-
Possibility of long life for ad minute changes
Good print/product quality Expensive, especially for colour ads.
Editorial support
Radio Geographic and demographic market Lack of permanence of advertising message
selectivity Cluttermessage may become lost in
Flexibilityeasy to change a group of several ads
Relatively inexpensive Lack of visual support
Limited impactradio is a background medium
Television Advertiser can show and telldemonstration Lack of permanence of advertising message
is possible Expensive for national audience on major
Geographic market selectivity network
Good market penetration because of Clutter
large viewing audience Consumer videotape and skip ads
Direct mail/Catalogs Highly selective Expensive, especially on a cost-per-
Easy to measure result person basis
Lengthy copy possible Little or no editorial support
Reader governs exposure Limited reader interest
Internet/e-mail Easy to measure audience/response Not everyone has internet accesscannot
Lengthy copy possible reach consumers who do not
Readers read and interact with what Difficult to gain advance knowledge of
interests them audience
Readers can request additional information Unsolicited e-mail may be considered spam.
Inexpensive, especially on a cost-per-person basis
Point-of-purchase Promotes impulse buying Difficult to obtain desired placements
materials Sells in nonpersonal selling environment Clutter
Ties together product and ads Limited creative possibilities
Directory (the Permanence of ad Limited customer usage
yellow pages) High reach and frequency potential Market coverage limited to phone customers
Outdoor High reach and frequency potential Message must be brief
(hoardings) Market selectivity Image of hoardings is poor in some
High impact because of size markets
Inexpensive Location choices may be limited.
In summary, the characteristics of advertising media vary greatly, and these variations
play an important role in the marketing managers choice of media. Most important of
all, however, are the advertising objectives the marketer determined at the start of the
advertising planning process. These objectives dictate which media will have the optimal
impact. Then the choices regarding reach, frequency, and timing must be evaluated in
terms of the realities of the budget. Cost is always a consideration in any organizational
decision. However, careful and effective marketing planning can yield a communications
effort that is both creative and successful.
Measuring the Effectiveness of Advertising
An advertiser about to commit more than Rs. 3,00,000 for a 30-second television
commercial to be aired during the one day cricket match or for the development of a
series of advertisements created especially for the Diwali season will want some way
to measure the effectiveness of those advertisements. Measuring the effectiveness of
advertisements in terms of the sales rupees generated is difficult. Despite that fact,
several approaches to measuring effectiveness have been developed. These research
techniques do not provide exact measures of effectiveness, but they do provide a
systematic way of developing and testing advertisements to determine whether they
are accomplishing the intended objectives. Advertising research may be divided into
two phases : (1) the pretesting stage of developing and refining advertising and (2) the
posttesting stage of evaluating its effectiveness.
Developing Messages and Pretesting Advertisement
Pretesting : In the context of advertising, research carried out beforehand on the effectiveness of an
advertisement. It begins at the earliest stages of development and continues until the advertisement
is ready for use.
Effective marketers are reluctant to spend large sums of money running advertisements
that have not been carefully pretested. Before advertisements are put on TV or in
magazines, they may have gone through several stages of testing. The purpose of
pretesting is to limitor, even better, to eliminatemistakes associated with concept,
positioning or body copy.
Pretesting may be conducted in the earliest stage of the development of an advertisement,
and it may continue virtually until the advertisement is printed or broadcast. First, the
basic appeal of an advertisement or of the concept around which it will be built may be
tested. Then a headline, picture, or slogan may be tested. A rough version of the
advertisement, featuring still photos in the case of a television or print commercial or a
story acted out by nonprofessional actors in the case of a television commercial or a
story acted out by nonprofessional actors in the case of a radio advertisements, can be
assembled rather inexpen-sively and shown to a sample audience to measure appeal
and believability. It does no good to create a funny, clever, sci-fictional, fantasy or
dramatic advertisement unless the impact of the advertisement comes through to the
people it is supposed to affect.
Many of the marketing research tools are widely used to pretest advertisements. Focus
groups, discussions with consumers in shopping malls, experiments and other techniques
can all be helpful.
Rough or finished versions of television commercials may be shown in consumers
homes (in-home projector tests) or in specially equipped buses or trailers parked in
shopping malls (trailer tests). After showing a commercial, advertisers use survey
questionnaries or personal interviews to obtain viewers reactions. No matter which
method is used, pretesting attempts to evaluate the effectiveness of an advertisement
before that advertisement is placed in the mass media.
Post Testing Advertisements
Posttesting : In the context of advertising, testing that takes place after an advertisement has been
run, to determine whether it has met the objectives set for it by management.
Once an advertisement has been developed and has run in the chosen media, post-
testing should be used to determine if it has met the objectives set by management.
There are many different objectives for posttesting and hence many kinds of posttests.
To determine whether objectives have been met, posttests usually measure brand
awareness, changes in attitudes toward the brand, or the number of inquiries generated
about the product.
Measuring Recognition and Recall : Because advertisers must gain the attention
of buyers and get them to remember the names of brands or the stores in which the
brands can be found, many posttests are designed to evaluate recognition or recall.
This is important even to advertisers of well-known brands, because advertisements
for such products are intended to reinforce previously established good images. At the
very least, a test showing that consumers remember particular advertisements gives
advertisers a feeling that the money devoted to the campaign had some impact in the
marketplace.
Recall Test : In the context of advertising, a research tool used to determine how much people
remember about an advertisement.
Recall tests can take many forms. For example, a telephone survey may be conducted
during the 24 hour period following the airing of a television commercial to measure
day-after recall. In such studies, the telephone interviewer first poses a question :
Did you watch the serial Kusum last night ?
It the answer is positive, the next question might be
Do you recall whether there was a commerical on that program for a washing
machine?
If the answer is again positive, the interviewer might ask.
What brand of washing machine was it ?
Unaided recall Test : In the context of advertising, a test of consumers memories of an advertisement,
in which no clues are provided as to the specific material to be remembered.
To this point, what has been measured is unaided recall. The interviewer gives no
clue as to the brand of washing machine advertised.
Aided recall Test : In the context of advertising, a test of consumers memories of an advertisement,
in which clues about the specific material to be remembered are provided.
In an aided recall test, the questions might be phrased differently, as in these examples:
Do you recall the brand of washing machine advertised ? Was it an Indian washing
machine ?
Im going to read you a list of washing machine brand names. Can you pick out the
name of the washing machine that was advertised on the program ?
Aided recall is not as strong a test of attention and memory as unaided recall, but it still
provides valuable information. After all, remembering the brand when you see it on the
supermarket shelf may be all that is necessary.
Related recall Test : In the context of advertising, a test of consumers memories of an advertisement,
in which recall of specific messages or images is required.
Advertisers are also interested in related recallthe ability of a person who has seen
an advertisement and can repeat, specific sales messages or images. Some advertisers
set up booths in shopping malls and ask target customers to view one or more
advertisements and then comment on or describe the advertisements. Researchers are
thus able to determine which advertisements or portions thereof were most memorable
to these subjects. This type of posttest allows researchers to determine if the
advertisements accomplished their goals.
Another way to measure recognition involves showing an advertisement to a respondent
and simply asking whether the respondent remembers having seen it before. If the
answer is yes, the respondent is asked questions about particular portions of the
advertisement. The Starch Advertisement Readership Service is a syndicated supplier
of this type of information. It classifies readers into three types :
l Noted reader : a person who remembers having seen the advertisement in the
magazine issue being studied.
l Associated reader : a person who not only noted the advertisement but also
saw or read some part of it that clearly indicated the brand or advertiser.
l Read most reader : a person who read at least one-half of the written material
in the advertisement.
Certainly, tests such as these are not perfect measures of recall and recognition.
However, when they are conducted carefully, they provide marketing managers with
helpful information.
Measuring Changes in Attitude about a Product : Effective advertisements can
contribute to changing consumers attitudes toward a brand. To measure and evaluate
attitude change, researchers must record buyers attitudes before and after they are
exposed to the relevant advertisement. Thus, a two-part before and after study must
be undertaken.
Suppose a new Nivea advertisement states the Nivea hand cream has great powers to
heal badly irritated skin on hands and feet. The effectiveness of Niveas new
advertisement can be measured by before-and-after surveys among target buyers.
Suppose the results of the first survey show that few consumers know the product
heals hands and feet. The new advertisement is now shown to a sample of these target
buyers. A second survey is conducted after the advertisement has run. If the results
of this survey show increased recognition of the products healing properties, some
measure of success in affecting attitude change is credited to the advertisement.
Measuring inquiries about the Product : In certain situations, such as evaluation
of one direct-mail piece versus another or evaluation of alternative Web pages, the
generation of inquiries is a good measure of an advertisements effectiveness. Advertisers
of organizational products frequently compare the numbers of inquiries generated by
different magazine advertisements to measure advertising effectiveness. Suppliers of
such products often advertise in trade magazines that reach precisely those people and
organizations most likely to be interested in their products. Many advertisements include
a phone number readers can call or a coupon they can return for additional information.
Certainly, the number of calls or coupons the advertiser receives suggests how effective
the advertisement was.
Inquiries usually come primarily from persons who are actually interested in the products
being offered. Therefore, they are of particular use to marketing organizations whose
promotional mixes include personal selling. Such organizations can use these inquiries
to focus their sales forces efforts on the customers most likely to buy. Thus, the
number of inquiries provides a measure of an advertisements pulling power, and the
inquiries themselves are leads for the sales force.
Sales as a Measure of Advertising Effectiveness
After seeing some of the ways in which marketers try to measure the effectiveness of
their advertising, you might ask, Why not just use sales figures ? Unfortunately, this is
easier said than done. Advertisers other than direct marketers have difficulty using
sales as a direct measure of advertising effectiveness because many factors other than
advertising influence sales. It is nearly impossible to separate the effects of the economy,
the price, wholesaler and dealer activity, and so on from the effects of advertisements.
Nevertheless, most marketers ultimately do use this measure, even if sales changes are
not scientifically proven to result from advertising. Many popular and memorable
advertising campaigns were removed from circulation when they did not positively
affect sales.
Test marketing research and laboratory experiments designed to simulate sales behaviour
are the most sophisticated research tools available to evaluate advertising effectiveness
when sales volume is the primary criterion. However, because advertising effect on
sales may not be immediate even the most elaborate research may not establish a
relationship between advertising and sales. Advertising researchers are constantly
trying to improve techniques in this area because sales remain the bottom line for all
advertisements. However only in special cases, or when sales result from coupon or
toll free-number offers, will sales be a reasonably accurate measure of advertising
effectiveness. Marketers must recall that research techniques intended to measure
advertisings effects should be used carefully and with the understanding that they are
usually very far from perfect.
Sales Promotion
Sales promotion is a key ingredient in marketing campaigns. We define it as follows :
l Sales promotion consists of a diverse collection of incentive tools, mostly short
term, designed to stimulate quicker or greater purchase of particular products or
services by consumers or the trade.
Whereas advertising offers a reason to buy, sales promotion offers an incentive to
buy. Sales promotion includes tools for consumer promotion (samples, coupons, cash
refund offers, prices off, premiums, prizes, patronage rewards, free trials, warranties,
tie-in promotions, cross-promotions, point-of-purchase displays, and demonstrations);
trade promotion (prices off, advertising and display allowances, and free goods); and
business- and sales force promotion (trade shows and conventions, contests for sales
representatives and specialty advertising).
Sales-promotion tools are used by most organizations, including manufacturers, distributors,
retailers, trade associations, and nonprofit organizations.
A decade ago, the advertising-to-sales-promotion ratio was about 60 : 40. Today, in
many consumer-packaged-goods companies, sales promotion accounts for 65 to 75 per
cent of the combined budget. Sales-promotion expenditures have been increasing as a
percentage of budget expenditure annually for the last two decades mainly because of
intense competition between products and services.
Several factors contribute to the rapid growth of sales promotion, particularly in consumer
markets. Internal factors include the following : Promotion is now more accepted by
top management as an effective sales tool; more product managers are qualified to use
sales-promotion tools; and product managers are under greater pressure to increase
current sales. External factors include the following : The number of brands has
increased; competitors use promotions frequently; many brands are seen as similar;
consumers are more price-oriented; the trade has demanded more deals from
manufacturers; and advertising efficiency has declined because of rising costs, media
clutter, and legal restraints.
The rapid growth of sales-promotion media has created a situation of promotion clutter
similar to advertising clutter. Consumers might start tuning out, in which case coupons
and other promotion media will weaken in their ability to trigger purchase. Manufacturers
will have to find ways to rise above the clutterfor instance, by offering larger coupon-
redemption values or using more dramatic point-of-purchase displays or demonstrations.
Purpose of Sales Promotion
Sales-promotion tools vary in their specific objectives. A free sample stimulates
consumer trial, whereas a free management-advisory service aims at cementing a
long-term relationship with a retailer.
Sellers use incentive-type promotions to attract new triers, to reward loyal customers,
and to increase the repurchase rates of occasional users. New triers are of three
typesusers of another brand in the same category, users in other categories, and
frequent brand switchers. Sales promotions often attract the brand switchers, because
users to other brands and categories do not always notice or act on a promotion. Brand
switchers are primarily looking for low price, good value, or premiums. Sales promotions
are unlikely to turn them into loyal users. Sales promotions used in markets of high
brand similarity produce a high sales response in the short run but little permanent gain
in market share. In markets of high brand dissimilarity, sales promotions can alter
market shares permanently because customers might feel more satisfied with the brand
under sales promotion.
Today, many marketing managers first estimate what they need to spend in trade
promotion, then what they need to spend in consumer promotion. Whatever is left they
will budget for advertising. There is a danger, however, in letting advertising take a
back seat to sales promotion because advertising typically acts to build brand loyalty.
But the question of whether or not sales promotion weakens brand loyalty is subject to
different interpretations. Sales promotion, with its incessant prices off, coupons, deals,
premiums, and blaring quality may devalue the product offering in the buyers, minds.
Buyers learn that the list price is largely a fictions. But before jumping to any conclusion,
we need to distinguish between price promotions and added-value promotions. These
examples show how certain types of sales promotion can actually enhance brand image:
l Akai, a Japanese manufacturer of stereo equipment and TV sets, managed to
become a TV set market leader in India by running value-added sales promotions.
It offered good trade-in value on black-and-white TV sets at the purchase of a
new colour TV set. At other times, it would offer a free watch, or calculator or
radio, along with the purchase of a new TV set. This steady promotion made
Akai a very popular brand in India, and competitors such as Sony were not free to
compete in the same way. But in the long run Akai was not able to maintain its
position in the Indian market, subsequently marketing rights were bought by
Videocon.
But usually, when a brand is price promoted too often, the consumer begins to devalue
it and buy it mainly when it goes on sale. So there is risk in putting a well-known brand
leader on promotion over 30 per cent of the time. Dominant brands offer deals less
frequently, because most deals only subsidize current users. Browns study of 2,500
instant coffee buyers concluded that :
l Sales promotions yield faster and more measurable responses in sales than
advertising does.
l Sales promotions do not tend to yield new, long-term buyers in mature markets
because they attract mainly deal-prone consumers who switch among brands as
deals become available on the different brands.
l Loyal brand buyers tend not to change their buying patterns as a result of competitive
promotion because they are highly satisfied with their current brands or due to
buying inertia.
l Advertising appears to be capable of deepening brand loaylty by consistently sending
the message to their target audience.
There is also evidence that price promotions do not build permanent total category
volume as the new customers are likely to shift toward other brands when they go on
sales promotion.
Small-share competitors find it advantageous to use sales promotion, because they
cannot afford to match the market leaders large advertising budgets. Nor can they
obtain shelf space without offering trade allowances or stimulate consumer trial without
offering incentives. Price competition is often used by a small brand seeking to enlarge
its share, but it is less effective for a category leader whose growth lies in expanding
the entire category.
The upshot is that many consumer-packaged-goods compnies feel they are forced to
use more sales promotion than they wish. Kellogg, Kraft, and other market leaders are
trying to return to pull marketing by increasing their advertising budgets. They blame
the heavy use of sales promotion for decreasing brand loyalty, increasing consumer
price sensitivity, brand-quality-image dilution, and a focus on short-run marketing planning.
Farris and Quelch, however, dispute this conclusion. They counter that sales promotion
provides a number of benefits that are important to manufacturers as well as consumers.
Sales promotions enable manufacturers to adjust to short-term variations in supply and
demand. They enable manufacturers to test how high a list price they can charge,
because they can always discount it. They induce consumers to try new products
instead of never straying from current ones. They lead to more varied retail formats,
such as the everyday-low-price store and the promotional-pricing store. They promote
greater consumer awareness of prices. They permit manufacturers to sell more than
they would normally sell at the list price. They help the manufacturer adapt programs
to different consumer segments. Consumers themselves enjoy some satisfaction from
being smart shoppers when they take advantage of price specials.
Major Decisions in Sales Promotion
In using sales promotion, a company must establish its objectives, select the tools, develop
the program. pretest the programe, implement and control it, and evaluate the results.
Establishing Objectives
Sales-promotion objectives are derived from broader promotion objectives, which are
derived from more basic marketing objectives developed for the product. The specific
objectives for sales promotion vary with the target market. For consumers, objectives
include encouraging purchase of larger-size units, building trial among nonusers, and
attracting switchers away from competitors brand. For retailers, objectives include
persuading retailers to carry new items and higher levels of inventory, encouraging off-
seasons buying, encouraging stocking of related items, offsetting competitive promotions,
building brand loyalty, and gaining entry into new retail outlets. For the sales force,
objectives include encouraging support of a new product or model, encouraging more
prospecting and stimulating off-season sales.
Selecting Consumer-Promotion Tools
The promotion planner should take into account the type of market, sales-promotion
objectives, competitive conditions, and each tools cost effectiveness.
The main consumer-promotion tools are summarized in Table 15.5. We can distinguish
between manufacturer promotions and retailer promotions. The former are illustrated
by the soap industrys frequent use of additional units free, to motivate trials and
purchases. The latter include price cuts or buy two get one free offers (especially by
garment retailers). We can also distinguish between sales-promotion tools that are
consumer-franchise building, which reinforce the consumers brand understanding,
and those that are not. The former impart a selling message along with the deal, as in
the case of free samples, coupons when they include a selling message, and premiums
when they are related to the product. Sales-promotion tools that are not consumer-
franchise building include price-off packs, consumer premiums not related to a product,
contests, consumer refund offers, and trade allowances.
Sales promotion seems most effective when used together with advertising. In one
study, a price promotion alone produced only a 15 per cent increase in sales volume.
When combined with feature advertising, sales volume increased 19 per cent; when
combined with feature advertising and a point-of-purchase display, sales volume increased
24 per cent.
Many large companies have a sales-promotion manager whose job is to help brand
managers choose the right promotional tool. The following example shows how one
firm determined the appropriate tool :
A firm launched a new product and achieved a 20 per cent market share within
six months. Its penetration rate (the percentage of the target market that purcahsed
the brand at least once) is 40 per cent. Its repurchase rate (the percentage of
first-time triers who repurchased the brand one or more times) is 10 per cent.
This firm needs to create more loyal users. An in-pack coupon would be appropriate
to build repeat purchase. But if the repurchase rate has been high, say 50 per cent,
then the company should try to attract more new triers. Here a mailed coupon
might be appropriate.
Table 15.5: Major Consumer-Promotion Tools
Samples : Offer of a free amount of a product or service delivered door to door, sent in the mail,
picked up in a store, attached to another product, or featured in an advertising offer. For example a
new brand of detergent or tea will offer free samples to induce trials.
Coupons : Certificates entitling the bearer to a stated saving on the purchase of a specific product
mailed, enclosed in other products or attached to them, or inserted in magazine and newspaper ads.
Redemption rate varies with mode of distribution. Coupons can be effective in stimulating sales of
a mature brand and inducing early trial of a new brand. Example : A water park offered 20% off to
those customers who bought newspaper advertisement or information brochure.
Cash Refund Offers (rebates) : Provide a price reduction after purchase rather than at the retail
shop; consumer sends a specified proof of purchase to the manufacturer who refunds part of
the purchase price by mail. Example : Toro ran a clever preseason promotion on specific snowblower
models, offering a rebate if the snowfall in the buyers market area was below average.
Price Packs (rupees-off deals) : Offers to consumers of savings off the regular price of a product,
flagged on the label or package. A reduced-price pack is a single package sold at a reduced price
(such as three for the price of two). A banded pack is two related products banded together (such
as a toothbrush and toothpaste) Example : Cadburys pack different choclates in a single big packet
and offer it at discounted price.
Premiums (gifts) : Merchandise offered at a relatively low cost or free as an incentive to purchase
a particular product. A with-pack premium accompanies the product inside or on the package. The
package itself can serve as a premium. A free in-the-mail premium is mailed to consumers who send
in a proof of purchase, such as a box top or package. A self-liquidating premium is sold below its
normal retail price to consumers who request it. Example : Henko offered scratch and win cards in
its 1 kg pack offering discounts from Rs. 3/- to Rs. 1 lac.
Prizes (contests, sweepstakes, games) : Prizes are offers of the chance to win cash, trips, or
merchandise as a result of purchasing something. A contest calls for consumers to submit an entry
to be examined by a panel of judges who will select the best entries. A sweepstake asks consumers
to submit their names in a drawing. A game presents consumers with something every time they
buybingo numbers, missing letterswhich might help them win a prize. Example : A number
companies run contest in which 2 or 3 questions were asked and the customer has to complete the
slogan.
Patronage Awards : Values in cash or in other forms that are proportional to patronage of a certain
vender or group of vendors. Example : Most airlines offer frequent flier plans which awards points
on the basis of distance covered and the customers can get discount or other prizes on the basis of
points scored.
Free Trials : Inviting prospective purchasers to try the product without cost in the hope that they
will buy the product. Example : Motorcycle dealers encourage free test-drives to stimulate
purchase interest; America Online offers free trials of its software.
Product Warranties : Explicit or implicit promises by sellers that the poduct will perform as
specified or that the seller will fix it or refund the customers money during a specified period.
Contd...
Example : Panasonic offers 7 year warranty on its television. Exides offer of a lifetime warranty
on its auto batteries Freedom certainly screams quality to the buyers.
Tie-in Promotions : Two or more brands or companies team up on coupons, refunds, and contests
to increase pulling power. Multiple sales forces push these promotions to retailers, giving them a
better shot at extra display and ad space. Example : Gillette offered shaving cream and Mach 3
Razor at reduced priced pack to attract customers.
Cross-Promotions : Using one brand to advertise another non-competing brand.
Example : Computer brands are promoted with Intel Inside and offer discounts on the add-ons.
Point-of-Purchase (POP) Displays and Demonstrations : POP displays and demonstrations
take place at the point of purchase or sale. Many retailers do not like to handle the hundreds of
displays, signs and posters they receive from manufacturers. Manufacturers are creating better
POP materials, tying them in with television or print messages and offering to set them up.
Example: The Gillette products are displayed in special racks in the retail shops.
Selecting Trade-Promotion Tools
Manufacturers use a number of trade-promotion tools (Table 15.6). Surprisingly, a
higher proportion of the promotion pie is devoted to trade-promotion tools (46.9 per
cent) than to consumer promotion (27.9 per cent), with media advertising capturing the
remaining 25.2 per cent. Manufacturers award money to the trade for four reasons :
1. To persuade the retailer or wholesaler to carry the brand : Shelf space is so
scarce that manufacturers often have to offer prices off, allowances, buyback
guarantees, free goods, or outright payments (called slotting allowances) to get
on the shelf, and once there, to stay on the shelf.
2. To persuade the retailer or wholesaler to carry more units than the normal
amount : Manufacturers will offer volume discount to get the trade to carry
more in warehouses and stores. Manufacturers believe the trade will work harder
when they are loaded with the manufacturers product.
3. To induce retailers to promote the brand by featuring, display, and price
reductions : Manufacturers might seek an end-of-aisle display, increased shelf
facings, or price reduction stickers and obtain them by offering the retailers
allowances paid on proof performance.
4. To stimulate retailers and their sales clerks to push the product : Manufactures
compete for retailer sales effort by offering push money, sales aids, recognition
programs, premiums, and sales contests.
Manufacturers spend more on trade promotion than they want to spend. The growing
power of large retailers has increased their ability to demand trade promotion at the
expense of consumer promotion and advertising. These retailers depend on promotion
money from the manufacturers. No manufacturer could unilaterally stop offering trade
allowances without losing retailer support.
The companys sales force and its brand managers are often at odds over trade promotion.
The sales force says that the local retailers will not keep the companys products on the
shelf unless they receive more trade-promotion money, whereas the brand managers
want to spend the limited funds on consumer promotion and advertising. Because the
sales force knows the local market better than do the brand managers sitting at
headquarters, companies have given substantial funds to the sales force to handle the
trade promotion.
Manufacturers face several challenges in managing trade promotions. First, they often
find it difficult to police retailers to make sure they are doing what they agreed to do.
Manufacturers are increasingly insisting on proof of performance before paying any
allowances. Second, more retailers are doing forward buyingthat is, buying a greater
quantity during the deal period than they can sell during the deal period. Retailers might
respond to a 10 per cent off-case allowance by buying a 12-week or longer supply.
The manufacturer has to schedule more production than planned and bear the costs of
extra work shifts and overtime. Third, retailers are doing more diverting, buying more
cases than needed in a region in which the manufacturer offered a deal and shipping
the surplus to their stores to non-deal regions. Manufacturers are trying to handle
forward buying and diverting by limiting the amount they will sell at a discount, or
producing and delivering less than the full order in an effort to smooth production.
All said, manufacturers feel that trade promotion has become a nightmare. It contains
layers of deals, is complex to administer, and often leads to lost revenues.
Table 15.6: Major Trade-Promotion Tools
Price-Off (off-invoice or off-list) : A straight discount off the list price on each unit/pack
purchased during a stated time period. The offer encourages dealers to buy a quantity or carry a
new item that they might not ordinarily buy. The dealers can use the buying allowance for
immediate profit, advertising, or price reductions.
Allowance : An amount offered in return for the retailers agreeing to feature the manufacturers
products in some way. An advertising allowance compensates retailers for advertising the
manufacturers product at the local level. A display allowance compensates them for carrying a
special product display in the shop.
Free Goods : Offers of extra units or packs of merchandise to intermediaries who buy a certain
quantity or who feature a certain flavour or size. Manufacturers might offer push money or free
specialty advertising items to retailers that carry the companys name. Example : Four square
provided Pens, Key rings and lighters to its retailers who distribute them to loyal Four Square
users.
Selecting Business- and Sales Force Promotion Tools
Companies spend billions of dollars on business- and sales force promotion tools (Table
15.7). These tools are used to gather business leads, impress and reward customers,
and motivate the sales force to greater effort. Companies typically develop budgets for
each business-promotion tool that remain fairly constant from year to year.
Table 15.7: Major Business- and Sales-Force Promotion Tools
Trade Shows and Conventions : Industry associations organize annual trade shows and
conventions. Firms selling products and services to the particular industry buy space and set up
booths and displays to demonstrate their products. Over thousands trade shows take place every
year, drawing million of attendees. Trade show attendance can range from a few thousand people
to over 70,000 for large shows held by International Trade Fair. Participating vendors expect
several benefits, including generating new sales leads, maintaining customer contacts, introducing
new products, meeting new customers, selling more to present customers, and educating customers
with publications, videos and other audio visual materials.
Business marketers may spend as much as 35 percent of their annual promotion budget on trade
shows. They face a number of decisions, including which trade shows to participate in, how much
to spend on each trade show, how to build dramatic exhibits that attract attention, and how to
follow up effectively on sales leads.
Contd...
Sales Contests : A sales contest aims at inducing the sales force or dealers to increase their sales
results over a stated period, with prizes going to those who succeed. A majority of companies
sponsor annual or more frequent sales contests for their sales force; top performers may receive
trips, cash prizes, gifts or points, which the receiver can turn into a variety of prizes. Incentives
work best when they are tied to measurable and achievable sales objectives (such as finding new
accounts or reviving old account) where employees feel they have an equal chance.
Specialty Advertising : Specialty advertising consists of useful, low-cost items bearing the
companys name and address, and sometimes an advertising message that sales people give to
prospects and customers. Common items are ballpoint pens, calendars, and memopads. Specialty
items are most common in pharmaceutical industry.
Developing the Program
In planning sales-promotion programs, marketers are increasingly blending several media
into a total campaign concept.
In deciding to use a particular incentive, marketers have several factors to consider.
First, they must determine the size of the incentive. A certain minimum is necessary if
the promotion is to succeed. A higher incentive level will produce more sales response
but at a diminishing rate.
Second, the marketing manager must establish conditions for participation. Incentives
might be offered to everyone or to select groups. A premium might be offered only to
those who turn in proof-of-purchase seals or packages. Sweepstakes might not be
offered in certain states or to families of company personnel or to persons under a
certain age.
Third, the marketer has to decide on the duration of promotion. If the period is too
short, many prospects will not be able to take advantage of it. If the promotion runs too
long, the deal will lose some of its act now force. According to one researcher, the
optimal frequency is about three weeks per quarter, and optimal duration is the length
of the average purchase cycle. Of course, the optimal promotion cycle varies by
product category and even by specific product.
Fourth, the marketer must choose a distribution vehicle. A 10 peercent off coupon
can be distributed in the package, in stores, by mail, or in advertising. Each distribution
method involves a different level of reach, cost, and impact.
Fifth, the marketing manager must establish the timing of promotion. For example,
brand managers develop calendar dates for annual promotions. These dates are used
by the production, sales and distribution departments.
Finally, the marketer must determine the total sales-promotion budget. The budget
can be built from the ground up, with the marketer choosing the individual promotions
and estimating their total cost. The cost of a particular promotion consists of the
administrative cost (printing, mailing, and promoting the deal) and the incentive cost
(cost of premium or rupee-off, including redemption costs), multiplied by the expected
number of units that will be sold on the deal. In the case of a coupon deal, the cost
would take into account the fact that only a fraction of the consumers will redeem the
coupons. For an in-pack premium, the deal cost must include the procurement cost and
packaging of the premium, offset by any price increase on the package.
The more common way to develop the budget is to use a conventional percentage of
the total promotion budget. For example, toothpaste might get a sales-promotion budget
of 30 per cent of the total promotion budget, whereas shampoo might get 50 per cent.
These percentages vary for different brands in different markets and are influenced by
stage of the product life cycle and competitive expenditures on promotion.
Pretesting the Program
Although most sales-promotion programs are designed on the basis of experience, pretests
should be conducted to determine if the tools are appropriate, the incentive size optimal
and the presentation method efficient. String maintains that promotions usually can be
tested quickly and inexpensively and that large companies should test alternative
strategies in selected market areas with each national promotion. Consumers can be
asked to rate or rank different possible deals, or trial tests can be run in limited geographic
areas.
Implementing and Controlling the Program
Marketing managers must prepare implementation and control plans for each individual
promotions. Implementation planning must cover lead time and sell-in time. Lead time
is the time necessary to prepare the program prior to launching it : initial planning,
design, and approval of package modifications or material to be mailed or distributed;
preparation of advertising and point-of-sale materials; notification of field sales personnel;
establishment of allocations for individual distributors; purchasing and printing of special
premiums or packaging materials; production of advance inventories in preparation for
release at a specific date; and, finally, the distribution to the retailer.
Sell-in time begins with the promotional launch and ends when approximately 95 per
cent of the deal merchandise is in the hands of customers.
Evaluating Results
Manufacturers can use three methods to measure sales-promotion effectiveness : sales
data, consumer surveys, and experiments.
The first method involves using scanner sales data, which are available from wholesalers,
retailers or research companies. Marketers can analyze the types of people who took
advantage of the promotion, what they bought before the promotion, and how consumers
behaved later toward the brand and other brands. Suppose a company has a 6 per cent
market share in the prepromotion period. The share jumps to 10 per cent during the
promotion, falls to 5 per cent immediately after the promotion, and rises to 7 per cent in
the postpromotion period. The promotion evidently attracted new triers and also
stimulated more purchasing by existing customers. After the promotion, sales fell as
consumers worked down their inventories. The long-run rise to 7 per cent indicates
that the company gained some new users.
In general, sales promotions work best when they attract competitors customers to try
a superior product and these customers switch as a result. If the companys product is
not superior, the brands share is likely to return to its pre-promotion level. The promotion
may have covered its costs, but more likely did not. One study of more than 1,000
promotions concluded that only 16 per cent paid off.
If more information is needed, consumer surveys can be conducted to learn how many
recall the promotion, what they thought to it, how many took advantage of it, and show
the promotion affected subsequent brand-choice behaviour. Sales promotions can also
be evaluated through experiments that vary such attributes as incentive value, duration,
and distribution media. For example, coupons can be sent to half of the households in
a consumer panel. Scanner data can be used to track whether the coupons led more
people to buy the product immediately and in the future. This information can then be
used to calculate the increase in revenues that stemmed from the promotion.
Beyond the cost of specific promotions, management must recognize additional costs.
First, promotions might decrease long-run brand loyalty by making more consumers
deal prone rather than advertising prone. Second, promotions can be more expensive
than they appear. Some are inevitably distributed to the wrong consumers. Third,
there are the costs of special production runs, extra sales force effort, and handling
requirements. Finally, certain promotions irritate retailers, who may demand extra trade
allowances or refuse to cooperate.
Personal Selling, Publicity and Public Relations 503
Personal Selling Defined
Personal selling is a person-to-person dialogue between the prospective buyer and the
seller. Thus, it consists of human contact and direct communication rather than impersonal
mass communication. Personal selling involves developing customer relationships,
discovering and communicating customer needs, matching the appropriate products
with these needs, and communicating benefits.
The salespersons job may be to remind, to inform, or to persuade. In general the
salespersons responsibility is to keep existing customers abreast of information about
the companys products and services and to convey a persuasive sales message to
potential customers. Salespeople are also expected to be aware of changes in the
markets they serve and to report important information to their home offices.
Professional sales personnel are vitally important as a direct link to the companys
customers. Salespeople communicate a companys offer and show prospective buyers
how their problems can be solved by the product. They finalize the sale by writing
orders.
Many different businessesfarms, factories, retailers, banks, transportation companies,
hotels, and other enterprisesuse personal selling. Each business faces personal selling
tasks that are unique. Various methods of personal selling may be used to accomplish
these tasks.
We are all familiar with retail sellingselling to ultimate consumers. In business-to-
business transactions field selling telemarketing, and inside selling are the three basic
methods of personal selling. Field selling is performed by an outside salesperson, who
usually travels to the prospective accounts place of business. Telemarketing involves
using the telephone as the primary means of communicating with prospective customers.
Inside selling is similar to retail selling by store clerks : a salesperson using this approach
sells in the companys place of business and deals with customers face to face. For
example, the typical hardware wholesaler employs inside sales personnel to assist
customersplumberswho travel to the wholesalers place of business to obtain
fixtures, tools, or parts.
Retail selling Selling to ultimate consumers.
Field selling Business-to-business selling that takes place outside the employers place of business,
usually in the prospective customers place of business.
Telemarketing Using the telephone as the primary means of communicating with prospective
customers. Telemarketers often use computers for order taking.
Inside selling Business-to-business selling in the salespersons place of business.
The Importance of Personal Selling
Personal selling is the means most widely used by organizations to communicate with
their customers. In other words, it is the most commonly used promotional tool.
Chapter 16
Personal Selling, Publicity and Public Relations
It is possible to find for-profit and non-profit organizations that make no use whatsoever
of advertising. For example, small local level companies did not advertise. Certainly,
there are companies so obscure that they get no publicity at all. It is , however, difficult
to imagine any organization making no personal contact with its clients. Even the one
person machine shop deals with clients through some kind of personal contact and
sales effort. And although you may not have thought of them in this way, accountants,
stockbrokers, dentists, lawyers, and other professionals are personal salespeople in that
they deal with clients and sell a service. For example, when hard-working accountants
(who generally were not marketing majors) get promoted to partnerships in accounting
firms, many find they spend more time trying to generate new business than working
out accounting problems. Robert Louis Stevenson was not far from the mark when he
said, Everyone lives by selling something.
In terms of rupees spent, personal selling is again the foremost promotional tool. Money
spent on personal selling far exceeds money spent on advertising, despite advertisings
costs and visibility. This becomes clear if you consider the number of people engaged in
selling and the costs of training, compensation and deployment of sales forces.
Personal selling is also the most significant promotional tool in terms of the number of
people employed. It is estimated that at least 12 million people, or 10 per cent of the
U.S. work force, are engaged in sales. In
contrast, fewer than 200,000 people work in
advertising. As impressive as these statistics are,
they underestimate the importance of personal
selling in the economy and in other aspects of
social life. Professional selling is an activity of
many individuals whose job titles may obscure this fact. For example, company
presidents, advertising executives and marketing researchers are frequently engaged
in personal selling.
Why is personal selling so important in the economy ? The answer is that the salesperson
is the catalyst that makes the economy function. The adage nothing happens until a
sale is made reflects the importance of personal selling in all aspects of business. Few
of us have ever purchased a car from a plant engineer or a financial manager : we buy
cars from salespeople; build and maintain relationships that stimulate economic activity
and produce revenue for the organisation. They keep the economy going.
Advertising Dominates when Personal Selling Dominates when
l The market is large and dispersed,
and final consumers are
involved.
l The budget is large enough to cover
regular promotion in mass media.
l Products are simple and
inexpensive, and differential
advantages are clear.
l Competitors stress it in their
promotion mixes.
l A wide range of media are available.
l Customers are Satisfied with self-
service in stores or shop through
the mail or the internet.
Figure 16.1: Contrasting Promotion Mixes
Why is personal selling so
important in the economy? The
answer is that the salesperson
is the catalyst that makes the
economy function.
l The market is small and
concentrated and organizational
consumers are involved.
l The budget is limited or tailored to
the needs of specific customers.
l Products are complex and expensive,
and differential advantages are not
obvious.
l Competitors stress it in their
promotion mixes.
l Media are unavailable or inefficient.
l Customers expect sales assistance
and service in stores.
Consumer
Budget
Products
Competition
Media
Place of
Purchase
The Characteristics of Personal Selling
Two basic characteristics that contribute to the importance of personal selling are its
flexibility in adapting to the prospects needs and its value in building relationships. We
will look more closely at these characteristics before discussing the disadvantages of
personal selling.
Personal Selling is Flexible
The key to personal sellings advantage over other means of promotion is its flexibility.
Personal selling is flexible because it allows the carrier of an organizations message to
discover new sales prospects and concentrate on the best ones. In contrast, a television
advertisement might be seen by just about anyone, including many people who will
never be interested in the product offered for sale. This waste circulation, as marketers
call it, can be reduced or even eliminated by effective personal sellers. Salespeople can
visit or call on large-volume buyers frequently. Personal selling allows efforts to be
concentrated on the profitable accounts because it is a selective medium.
Another aspect of its flexibility is the salespersons ability to adapt a sales presentation
to a specific situation. When a sales prospect has a particular problem or unique series
of problems to solve, the professional salesperson can adjust the presentation to show
how the good or service offered can solve these problems and satisfy the individual
needs of the potential customer. Similarly, the salesperson can answer questions and
overcome objections that may arise. The salesperson can even read the customer.
Sensing that the client agrees with a certain aspect of the presentation or is not interested
in a given point, for example, the salesperson can shift gears and move to another
benefit or adjust the sales talk in some other way.
All this is possible because personal selling entails a two-way flow of communication.
Listening is important. Direct and immediate feedback is elicited. Consider the following
examples of how feedback allows the salesperson to gather information as well as to
impart it.
l The salesperson discovers in casual conversation that potential buyers have specific
problems that no products on the market can solve.
l A customer suggests how existing products can be modified to better suit customer
needs.
l A customer provides the salesperson with new sales leads by mentioning other
firms or friends that could use the salespersons merchandise.
l The salesperson obtains a customers view of the competitions sales message
and uses it to good advantage.
Personal Selling Builds Relationships
The relationship between marketer and buyer does not end when the sale is made.
Long-term success often depends on the sales forces ability to build a lasting relationship
with the buyer. This is especially true in business-to-business marketing. For many
business-to-business marketers, the relationship intensifies after the sale is made. How
well the market manages the relationship becomes the critical factor in the buying
decision the customer makes the next time around.
Relationship management The sales function of managing the account relaionship and ensuring
that buyers receive appropriate services.
In the context of personal selling, relationship management is often called relationship
selling. We prefer the term relationship management because it has a broader application,
Relationship management refers to managing the account relationship and ensuring
that buyers receive the appropriate services. The goal of relationship management is
for the marketer to help customers expand their own organizational resources and
capacities through the relationship. The salesperson is the key in relationship management,
for it is the salesperson who makes sure the product solves the customers problems
and contributes to the success of the customers organization. When a salesperson
understands and solves a customers business problem, the relationship will deepen.
Some Limitations of Personal Selling
Our emphasis on the advantages of personal selling as an effective communication tool
should not overshadow its major limitations. Personal selling cannot reach a mass audience
economically and therefore cannot be used efficiently in all marketing situations. For
example, bathing soaps, such as Lux and Liril, may be used by tens of millions of
people; millions more are potential users. Reaching these target customers by personal
selling would be too expensive. Advertising via mass media is the appropriate tool in
cases like this because it can reach a mass audience economically. (Personal selling
does, however, play a role in marketing such products when sales representatives call
on the major retailers and wholesalers that distribute them.)
Personal selling is expensive because it involves one-on-one communication. The cost
per thousand viewers and cost per sale for a high-priced TV advertisement are quite
small because the ad is seen by a vast audience. In contrast, the average cost per call
for personal selling exceeds Rs. 1000/- for many organizational products. The high
costs results from the fact that recruiting, training, and paying salespeople costs the
marketer a great deal. Each salesperson, because of the nature of the job, talks to only
one or a few people at a time. Furthermore, a great deal of time may be spent just
driving to and from appointments and waiting in reception rooms. Because numerous
sales calls may be needed to generate a single sale, you can see that the cost per sale
can be tremendously large. The many advantages of personal selling, however, often
offset the high cost per sale. In some cases, as in selling machinery that must be
custom-made for the buyer, personal selling is the only way a sale can be made.
Fortunately, fax machines, e-mail, company Web pages, and other advances in
information technology are helping to counter the cost of in-person sales calls.
The Types of Personal Selling Tasks
The importance of personal selling varies considerably across organizations. Some
organizations rely almost entirely on their sales forces to generate sales; others use
them to support a pull strategy based on advertising. Some organizations employ
salespeople who do little professional selling, such as store clerks others employ engineers
and scientists as technical sales representatives. Clearly, these two types of sales
representatives are not comparable.
Because of this diversity, it is useful to differentiate among selling tasks. The marketing
manager must do this, for example, in deciding which selling skills and job descriptions
are appropriate to the sales objectives to be accomplished. To assign a highly skilled
salesperson to a task that could be accomplished as efficiently by a less skilled individual
or an interactive data-based marketing system is a waste of an important resource. Here,
we discuss three kinds of selling tasks : order taking, order getting, and sales support.
Order Taking
Millions of people are employed in routine sales jobs. These people, who do very little
creative selling, are called order takers. They write up orders, check invoices for accuracy,
and assure timely order processing. The term order taking is appropriate here, because
the customer decides what products are to be purchased and then tells the salesperson
what the order is to be. The order takers job is to be pleasant and helpful and to ensure
that the order truly satisfies the customers needs. Further, the order taker should spend
adequate time with the customer and go out of his or her way to solidify the long-term
relationships between the company and the customer.
The order taker may engage in suggestive selling by suggesting that the customer
purchase an additional item (Would you like French fries with your hamburger ?).
Suggestive selling is important. However, the typical order takers primary task is to
keep selling existing products to well-established accounts.
In general, order-taking salespeople are divided into the inside sales group and the
outside, or field sales group. Inside order takers are exemplified by auto parts
salespeople. The customer for auto parts comes to the shop seeking the part; the
salesperson does not seek out the customer. The inside salesperson may provide some
advice on product quality or installation and may even suggest that additional parts or
tools would make the job easier or that the customer might as well change the oil filter
while handling the other repairs. However, the order taker typically does not extensively
modify the basic order presented by the customer.
Order taker A salesperosn who is primarily responsible for writing up orders, checking invoices,
and assuring prompt processing of orders.
Suggestive selling Suggesting to a customer who is making a purchase that an additional item or
service be purchased.
Telemarketing is becoming a major activity of many inside order-taking sales
representatives. Telemarketing involves the use of telephone selling in conjunction with
computers for taking orders. Of course, all salespeople telephone prospects and
customers, and telephone selling is an important part of many order-getting sales jobs.
However, here the term telemarketing means using the telephone as the primary means
of communication. For e.g., a telemarketing executive may try to persuade a prospect
to open an account in ICICI Bank.
Outside, or field salespeople may also be order takers. Manufacturer or wholesaler
representatives selling such well-known products as Maggie Noodles find themselves
in this position. The question they ask their customer is essentially How much do you
want ? Because nearly every general store stocks Maggie Noodles there is little need
for aggressive selling. Some sales representatives in sales positions of this sort do a
better job than others in enlarging order size, tying the product to special promotional
opportunities, and so on. Such efforts are likely to be rewarded with a promotion or a
bonus. Overall, however, taking orders requires less persuasive skill than selling expensive
computer systems to corporate executives or new airplanes to the transportation industry.
Thus, order takers in general make less money than order getters.
In recent years a number of order taking tasks have been automated. Interactive Web
sites often have order-taking software that performs this task more quickly than a
salesperson and at a reduced cost to the organization.
Order Getting
In order gettingalso called creative sellingthe sales job is not routine. Order getters
must seek out customers, analyse their problems, discover how the products for sale
might solve those problems, and then bring these solutions to the customers attention.
Creative selling calls for the ability to explain the product and its auxiliary dimensions in
terms of benefits and advantages to the prospective buyer and to persuade and motivate
the prospect to purchase products of the appropriate quality and in the appropriate
volume. Whereas the order takers job is to keep the sale, the order getters job is to
make the sale. Put another way, the primary function of the creative salesperson is to
generate a sale that might not occur without his or her efforts.
Creative salespeople generally invest far more time and effort in making a sale than do
order takers. And although it is possible to engage in creative selling in either an inside
or a field environment, it is far more common for creative salespeople to go to the
customers place of business to evaluate the needs to be addressed. This process can
take a very long time. A salesperson for Being/McDonnell Douglas, attempting to
demonstrate that a particular airplane is the best available to meet the needs of an
airline, can literally spend years preparing to make a sale. This is because apart from
the satellite and rocket, air plane is the most expensive product.
Order getters may specialize in certain types of selling. For example, some organizations
have sales personnel, often called pioneers, who concentrate their efforts on selling to
new prospects or selling new products. Selling an established product or service for the
first time to a new customer or selling an innovative product new to the market to an
existing customer generates new business for the organization. In contrast, account
managers concentrate on maintaining ongoing relationships with existing customers
and actively seek additional business for reorders or orders for other items in the product
line. Although pioneering and account management activities may be carried out by
separate salespeople in some organization. In many instances the creative salesperson
is involved in both. Organizations that segment their markets based on account size
often make a distinction between major accounts and smaller accounts. For major
accounts, a field salesperson may spend a considerable amount of time at the clients
headquarters. For small accounts, telemarketing is often the primary means of selling.
For example, most private sector banks use telemarketing to obtain new accounts. The
sales representatives for these accounts never see customers. To monitor customers
use of the companys service, they use a database that shows sales and telephone
activity levels. Based on this information, they telephone clients with suggestions : Heres
a better may to do it, heres a less expensive way to do it.
An order-getting salespersons primary responsibility is of course, selling. However,
order getters especially account managers may spend a great deal of time engaged in
other activities. Table classifies the job activities of order getters.
Order getting An adaptive selling process that tailors sales efforts and product offerings to specific
customer needs; also known as creative selling. An order getter is primarily responsible for developing
business for the firm. Order getters seek out customers and creatively make sales.
Pioneer A salesperson who concentrates on selling to new prospects or on selling new products.
Account manager A salesperson who concentrates on maintaining an ongoing relationship with
existing customers.
Table 16.1: Activities of Order Getting Salespeople
GENERAL ACTIVITY SPECIFIC ACTIVITIES
Selling Prospect for and qualify leads; prepare sales
presentations, make sales calls, overcome objections.
Working with orders Enter orders; expedite orders; handle shipping
problems.
Servicing the product Test equipment; teach safety guidelines; supervise
installations; minor maintenance
Information management Receive feedback from clients; provide feedback to
superiors
Servicing the account Perform inventory control; set up point-of-purchase
displays; stock shelves
Conferences/meetings Attend sales conferences; set up exhibitions, trade
shows
Recruiting/training Recruit new sales representatives; train new sales
representatives
Entertaining Take clients to lunch, sporting events, golfing,
tennis, etc.
Travelling Visit prospects in other cities, regions
Working with distributors Establish relations with distributors; extend credit;
collect past-due accounts.
Sales Support and Cross Functional Teams
Many salespeople hold jobs whose titles suggest that they are involved in special selling
situations. One salesperson of this sort is the so-called missionary. Pharmaceutical
manufacturers, for example, employ missionaries, called detailers, to call on doctors
and provide them with information on the latest prescription and non-prescription products.
Detailers do not take orders; sales occur only when the doctor prescribes medication
for patients. Missionary sales personnel in fact rarely take or actively seek orders; their
primary responsibility is to build goodwill by distributing information to customers and
prospective customers and by checking in to be sure that buyers are receiving
satisfactory service from company representatives and other relevant channel members
such as wholesalers.
Even missionary salespeople working for consumer goods companies and calling on
retailers do not sell anything directly. If a retailer insisted on placing an order, the
missionary would not refuse to accept it but would simply pass it on to the salesperson
who regularly handles the retailers account. Missionaries are, in effect, employed by
the manufacturer to perform a public relations function. In some industries, scientists
and engineers serve as specialized sales support people : these technical specialists
support the regular field sales force. The credentials and expertise of these sales
engineers, applications programmers, and other technical support personnel are often
helpful in concluding sales of complicated products such as nuclear reactors, computer
installations, and advanced jet engines.
Some firms, especially those whose customers may require a little extra push at some
point in the selling process, have master salespeople or sales experts on their selling
staffs. These salespeople are held in reserve until less senior or less capable salespeople
need help. Real estate sellers frequently find a sales expert helpful when, for example,
a customer on the verge of buying a new house gets cold feet because of financing
worries. At that point, the salesperson may call on the owner of the agency to clinch
the sale by working through contacts at the bank or simply lending a hand in moving the
customer to the purchase point. Car dealers and retailers of major appliances also use
this approach at the consumer level. Suppliers of organizational goods adapt the technique
to their selling situations.
[Missionary A salesperson who visits prospective customers, distributes information to them, and
handles questions and complaints but does not routinely take orders. Missionaries really serve as
customer relations representatives.]
Cross-functional sales team The sales representative and those who support his or her efforts in
making sales and servicing accounts. Support personnel may include technical specialists and
missionary salespeople.
In many organizations, the salesperson in contact with the customer is supported by a
cross-functional sales team. A creative salesperson who is trying to close a deal may
call on a technical specialist in engineering or logistics or a master salesperson for aid.
Or, the path to a successful sale may have been made easier by a missionary salesperson.
After the sale, the missionary may play a further role in keeping the buyer content and
certain that he or she made the best choice. Order takers, whether in the field or at the
home office, may see to it that orders are handled promptly and without error. The
customer may be provided with the name and phone number of an account service
representative, someone at company headquarters who can answer questions about
delivery, post-sale service, installation, and repair parts when the salesperson is away
from the home office. The company may also have a toll-free number for customers to
use.
The effective cross-functional sales team is a good illustration of the marketing concept
in action. It reflects an effort to satisfy customers, not just sell products. Many people
in the organization, from accountants to engineers, engage in a unified effort to build
relationships.
Account service representative A sales employee at company headquarters or at a branch office who
corresponds with clients and provides customer service to established accounts; sometimes called
a sales correspondent.
The Creative Selling Process
Creative selling process The six-step process by which creative selling is carried out : (1) locating
and qualifying prospects, (2) approaching the prospect, (3) making the sales presentation (4)
handling objections, (5) closing the sale, and (6) following up.
As you have seen, some salespeople do little true selling. Perhaps the least creative
selling situation involves the canned presentation. The salesperson memorizes a
descriptive or persuasive speech and is directed to give that speech without any variation
to all potential customers. Such an approach is common in many door-to-door and
telemarketing selling situations. Although such a strategy may have little appeal for
most customers, telemarketers and door-to-door sales organizations frequently devote
much time and effort to developing what is thought to be the best sales talk. These
organizations obviously believe that the methods likelihood of success justifies the lack
of individual selling creativity.
Except perhaps for the person whose job is to deliver a canned sales talk, all salespeople
can benefit from knowledge of the
creative selling process. These series
of steps provides guidelines to help the
salesperson satisfy the prospects needs.
It suggests that professional selling is an
adaptive process that begins with the
identification of specific potential
customers and tailors the sales dialogue
and product offering to each prospects
needs. The salesperson sells a solution to
the customers problem. The ultimate goal
is customer satisfaction.
The creative selling process includes the following steps : (1) identifying and qualifying
prospects, (2) approaching the prospect, (3) making the sales presentation, (4) handling
objections, (5) closing the sale, and (6) following up. These steps are portrayed in
Figure 16.2. Again, the steps represent guidelines to help salespeople think about the
tasks that face them. Unlike the canned sales presentation, they are not to be followed
slavishly.
Step One : Identifying and Qualifying Prospects
Identifying Prospects Identifying prospects is called prospecting. Lists of previous
customers, referrals, trade association lists, advertising inquiries from postcards or
coupons, records of visitors to company Web sites, and other sources may provide the
names of prospects. While each industry or line of business has its traditional means of
generating leads, such as membership lists published by trade associations, good
salespeople are prepared to dig harder for prospects. Government publications providing
breakdowns of business patterns in particular states and counties can be used, and
perhaps even cross-referenced with other sources, to develop lists of likely buyers.
Some salespeople spend considerable time on the telephone screening possible clients.
Others talk with organization that supply or buy from firms that seem like possible
customers. The number of prospecting tools is nearly unlimited.
Established sales representatives may rely on regular customers for most of their
business, but a successful salesperson is not content to service only existing accounts.
Sales calls to regular customers are only part of the sales job. New customers or new
accounts must be sought. However, making a sales persentation to someone who has
no need for the product, who cannot pay for it, or who is not empowered to purchase it
is not an efficient use of time unless the person being addressed may become a customer
at some time in the future. The salesperson must thus identify likely customers, or
prospects.
Prospecting Identifying likely customers. In prospecting, the salesperson may search lists of previous
customers, trade association lists, government publications, and many other sources.
Qualifying Evaluating a prospects potential. Key questions are whether the prospect needs the
product, can pay for it, and has the authority to makeor at least contribute to a decision to buy.
Professional selling is an adaptive
process that begins with the
identification of specific potential
customers and tailors the sales
dialogue and product offering to
each prospect' s needs. The
salesperson sells a solution to the
customer's problem.
Qualifying Prospects. Identifying prospects is only the beginning. Prospects must
need the product, must be able to pay for it, and must be in a position to makeor at
least contribute tothe buying decision. Determining that a prospect meets these
conditions is called qualifying the prospect. Another part of the qualifying process is
determining whether the prospective buyers order will be of sufficient sizethat is,
whether the account has an adequate sales potential. On the basis of the qualification
process, a potential customer may be assigned to a qualified group, a nonqualified
group, or a group falling somewhere in between. Thus, careful consideration of a prospect
may lead a salesperson to conclude either that the prospect has insufficient potential
and should receive no further attention, that the prospect is worthy of close attention
and a series of sales calls and presentation or that the prospect is worth a phone call or
two but not a full presentation. Care must be taken to assure that a highly qualified
prospect is not relegated to the wrong category because of inadequate investigation.
Figure 16.2: The Creative Selling Process.
Another important fact to be learned through qualifying is what member of an
organization should be contacted. Who has the authority to make the purchase decision
? Who else strongly influences the purchase decision ? A plant superintendent may be
a boss, but calling on only the superintendent is the wrong tactic if the vice president
makes all the buying decisions.
The process of qualifying is difficult and may require considerable tact and effort.
Qualifying is sometimes called the preapproach, because the information gained in this
step, especially information about the prospects requirements, lays the foundation for
planning the other steps in the selling process, including the next step, the approach
itself.
Step Two: Approaching the Prospect
Approach The step in the creative selling process wherein the salesperson makes initial contact and
establishes rapport with a prospect.
The approach involves making an initial contact and establishing rapport with the
prospect. If the prospect is already familiar with the salesperson and the company, the
approach may be as simple as making a telephone call to request an appointment or
knocking on the prospects door with a friendly greeting. In other situations, the
salesperson may have to be more creative to obtain an appointment with the prospect
or get past the prospects secretary.
Identifying
and qualifying
prospects
Identifying
and qualifying
prospects
Identifying
and qualifying
prospects
Approaching
the prospect
Making the
sales
presentation
Handling
Objections
Closing
the sale
Following up
The salesperson may approach the prospect by mentioning an offer that can benefit the
prospect. What better way to persuade a prospect to grant time for a sales presentation
than to offer a benefit that will save the prospect money, make the companys products
more attractive, or add prestige to the customers good name ?
The approach is intended to make a good impression and to solidify the prospects
willingness to listen to the sales presentation. Effective sales personnel recognize the
importance of making a good impression during the first few seconds of the approach.
Experience is a great asset in this matter, but research and caution can serve the seller
well too. For example, smoking a cigar or cigarette in a nonsmokers office may doom
a sale before the presentation has even begun. Not wearing a hard hat in a location
where protective gear is required may undermine the salespersons credibility. If the
salesperson is so unfamiliar with the situation, how is he or she going to solve the clients
problem ? The importance of making a good impression should not be underestimated.
The best way for a salesperson to build a creative sales approach is to do some homework
on the prospect, gathering specific information about the prospects needs for the products
being offered. Once these needs have been identified, they can provide the basis for
effective personal communication by phone, letter, or direct personal contact.
Salespeople engaged in international sales must be aware of cultural differences in the
way prospects are approached. For example, customs concerning the exchange of
business cards vary around the world. Although the exchange itself may seem of trivial
importance, observing a countrys customs for card giving is a key part of business
protocol. In Japan, the Western practice of taking a business card and pocketing it at
once is considered rude. The proper approach is to look at the card carefully after
accepting it, observe persons title and organization, acknowledge with a nod that the
information has been understood, and perhaps make a relevant comment or ask a polite
question.
Step Three: Making the Sales Presentation
Sales presentation: The step in the creative selling process wherein the salesperson
attempts to persuasively communicate the products benefits and to explain appropriate courses of
action.
The sales presentation is the salespersons attempt to persuasively communicate the
products benefits and to explain appropriate courses of action to the potential buyer.
Typically, effective presentations tell the products story.
The presentation begins by focusing the prospects attention on the story. Some
salespeople do this by producing a physical objectthe product itself (if it is both portable
and eye-catching), a model of the product or something that relates to the product in an
interesting or even humorous way. It is more common, however to use an opening
statement designed to attract attention. Thus, salespeople often begin with opening
lines such as Im here to show you how we can save Rs. 20,000/- a week in your
factory or Ive got a computer networking system that everyone in your organization
will consider user-friendly.
After focusing the prospects attention, the salesperson must generate interest in the
product being offered. An opening comment that the salesperson can save the client a
great deal of money in income taxes may gain attention, but it must be followed by
development of interest in the product that is designed to save the money. Describing
the products benefits in an interesting way, explaining how it works and demonstrating
its use can all be part of an effective presentation.
Arousing interest in the product itself is still not enough to make a sale. A desire to
purchase the product must also be generated. A scale model of an executive jet plane
may be interesting, but it is of little use if it does not help bring about a desire to own the
plane itself.
In formulating an effective sales presentation, the salesperson may find visual ads such
as Power Point graphics and video recording helpful in illustrating a products benefits.
In recent years many salespeople have come to rely on computers in their presentations.
They may use laptop units to illustrate some aspect of the product or offer computer-
generated data to answer the customers what if questions. For example, a
representative of an industrial rebates firm may bring a laptop computer into the
prospects office; ask for information such as production schedules, delivery requirements,
and so on; and enter that information into the computer. Within minutes, the computer
can yield output that shows exactly how the salespersons product will affect the
prospects business operations.
Note that some of the communication in the sales presentation may not be verbal.
Many successful salespeople use body language, seating arrangements, and clothing
colours to communicate important non-verbal messages to their clients.
Step Four : Handling Objections
Most sales presentations do not involve the salespersons making a one-way presentation
while the customer passively listens. The customer, no matter how friendly or interested
in the product, may have reservations about committing money or other resources in a
purchase agreement. Questions or strong objections are likely to arise. Because
objections explain reasons for resisting or postponing a purchase, the salesperson should
listen and learn from them.
Indeed, the sales call should be a dialogue or conversation in which objections are
expected to arise. It is undesirable to have the prospect sit quietly until the end of the
talk and then say No without any explanation. Effective salespeople encourage
prospects to voice their reasons for resisting the purchases. Even though the well-
prepared sales presentation covers such topics as the quality of the product, the reputation
of the seller, post-sale services, and the like, objections or questions tell the salesperson
which points are most important to the customer.
Occasionally, an objection comes as a surprise to the salesperson. For example, a
representative of a pest-control company may launch into a lengthy discourse on his
companys reputation and demonstrate the product by poisoning a bug right before the
prospects eyes. It may take an objection for him to discover that the prospect is quite
willing to buy the exterminators services but is concerned that neighbours will see the
pest-killers truck parked in front of the house or place of business. In such a case, the
salesperson might promise to have a nonuniformed exterminator drive to the clients
location in an unmarked truck. Such a response is a means of handling objections.
There are many ways to handle objections. When an objection indicates that the prospect
has failed to fully understand some point that was made, the salesperson can explain
the area of uncertainty. A question about a product characteristic may mean that the
prospect has not grasped how the product works or seen the benefits it can provide. A
salesperson who encounters an objection of this type can provide additional persuasive
information, clarify the sales presentation, or offer the basic argument for the product
in a different manner.
Objections can also be turned into counter arguments by experienced sales
representatives. A stockbroker might say, youre right, Dr. Johnson. The price of this
stock has dropped one-third in the last six months. That is exactly why I am
recommending it to you. At this low price, it is now under priced and is an excellent
investment opportunity, in the opinion of our analysis.
One tactic for handling objections, then, is to agree with the prospect, accepting the
objection but with reservation. This is consistent with the marketing concepts prescription
to sell the product from the customers point of view. The salespersons counter
arguments is intended to refute the objection : Yes, that is true, but this is also the
case. The purpose of this method of dealing with objections is to avoid getting into an
argument with the prospect. If the customer says the price is high and the salesperson
says it is low, the discussion goes nowhere fast. But if the salesperson responds, Yes,
it is priced higher than many, but our products quality is higher than our competitors,
so you get more for your money, the salesperson has agreed and counterargued at the
same time. More importantly, the seller has given a reason for the higher price.
The prospects questions, objections, and other comments may reveal how close the
prospect is to making a purchase decision. Good sales people use such clues to determine
whether they should attempt to enter the closing stage of the sales presentation.
Handling objections The step in the creative selling process wherein the salesperson responds to
questions or reservation expressed by the prospect.
Closing The step in the creative selling process wherein the salesperson attempts to obtain a
prospects commitment to buy.
Closing signals Signs from the prospect revealing that he or she is ready to buy.
Trial close A personal selling tactic intended to elicit from a prospect a signal indicating whether he
or she is ready to buy.
Step Five : Closing the Sale
Ultimately, a salesperson must make the sale. In selling, the term closing indicates that
the sale is being brought to a finish. The main advantage of personal selling over other
forms of promotion is that the salesperson is in a position to conclude negotiations by
actually asking for an order. Unfortunately, many salespeople are knowledgeable and
convincing when making sales presentations, but they never get around to asking for
the order. Sometimes this failure is due to the presenters genuine belief in the product
being offereda belief so strong that he or she can barely stop talking about it. In other
cases, worry about receiving a negative answer or misreading the clients willingness
to deal may be the cause. (Experienced salespeople know that they will hear the word
no most of the timeor at least more than they hear yes. Rejection is never a source
of enjoyment, but there are many times when the sales representative is better off
accepting a negative response gracefully and moving on to prospects who may be
more likely to buy.) In any case, there comes a point when the salesperson must draw
the presentation to its logical conclusion. Because closing the sale is so vital, experienced
sales personnel constantly try to read prospects reactions to the presentation for signs
that a conclusion is in order. Signs revealing that prospects are ready to buy are called
closing signals. For example, a comment such as These new machines should reduce
the number of breakdowns weve been having may indicate a readiness to purchase.
Should the prospect offer a signal like this, the sales representative should quickly
respond and ask for the prospects signature on the order. When the prospects
willingness to close is not clearly revealed, the salesperson may utilize what is called
the trial close. A trial close is a tactic intended to draw from the prospect information
that signal whether a sale is imminent. For example the salesperson may attempt to
focus the conversation on closing the sale by asking which model the customer prefers.
If the customer indicates a preference in a positive way, a the sale may almost be
made. If the customer is unable to decide or if he or she asks for another comparison of
the two models more information is necessary. Closing techniques include the following:
1. Narrowing the alternatives to a choice. The salesperson asks,Do you want the
deluxe model or the standard model ?
2. The direct, straight forward approach, The salesperson requests the order.
3. The assumptive closing technique. The salesperson takes out the order forms or
in some other way implies that an agreement has been reached, saying something
like Lets see here, youll need 20 units by the first of the month.
4. The standing room only closing technique. The sales representative indicates
that time is an important factor and perhaps that supply is limited. Typical phrases
used are Weve been selling a lot of these lately, and I want to make sure that
you get what you need and This offer will be withdrawn soon, and then its back
to the old higher prices.
5. The summative approach. The salesperson summarizes, usually on paper, the
benefits of buying the product, perhaps mentioning some disadvantages that are
outweighed by the advantages. When the products benefits have been summarized,
the salesperson asks for the order.
Step Six : Following Up
Follow-up The final step in the creative selling process, wherein the salesperson, after the sale has
been made, contacts the buyers to make sure every aspect of the sale was handled properly.
Organizations that have truly adopted the marketing concept do not view getting an
order as the end of the selling process. It can in fact, be seen as a beginning. Satisfied
customers will return to the sales organization if they need to repurchase the same
product at some time in the future or need a related item. A happy customer may even
recommend the sales representative to new sales prospects. The professional
salesperson, knowing these things, does not neglect the follow-up.
During the follow-up, salespeople make sure that everything was handled as promised
and that the order was shipped promptly and received on schedule. Few things are
worse than promising a delivery date and having the goods arrive week or months late.
Sales personnel should also check with the customer to determine whether there were
any problems such as missing parts or damage to the merchandise during shipping. The
customer, once in possession of the product, may need additional help in integrating it
into company operations. Post-sale services such as repairs or returns may also be
necessary.
In a sense, how well the follow-up is performed differentiates between a simple selling
job and marketing. After all, if customer satisfaction is not achieved or if the organization
appears not to even try to achieve it, the company is unlikely to enjoy anything more
than a one-shot sale. When the possibility of repeat purchase or expanded business
seems strong, a single follow-up call after the transaction may not be enough. In many
situations, the salesperson, with the help of others in the organization, must initiate a
relationship emphasizing ongoing follow-up. Buyersespecially buyers of technically
complex productsmay expect salespeople and their companies to offer continuous,
long-term help in solving problems and contributing to organizational success. If a
marketer does not meet a buyers expectations with excellent service, the buyer may
terminate its relationship with the seller. And in many situations, if an account is lost, it
is lost for good.
There are many ways a salesperson can foster an ongoing relationship : showing
appreciation for an order, expediting delivery, and resolving complaints are but a few.
Publicity
Publicity when properly managed by a public relations department, can serve many
purposes. Marketers often hope to attract the publics attention or maintain public visibility.
Many organizations wish to provide consumer or public interest groups with useful
information. Others use public relations to change attitudes or to combat negative publicity
from another source. Here are some examples :
l Nissan Motor Company, a company that recently developed a fuel-efficient engine
system combining an electric motor with a gasoline engine, may use publicity to
attention to its hybrid electric engine system, which cuts exhaust emissions
dramatically.
l Political candidates and social activists routinely use photo opportunities to
maintain visibility among general public.
l The well known doctors uses publicity to inform the public about the dangers of
smoking and drinking.
In general, no matter what the marketers purpose, the information offered must be
timely and interestingthat is newsworthyif it is to result in publicity for the marketer.
Usually, the more engrossing and captivating the material, the more likely it is to be
publicized. Celebrities like Aishwarya Rai are often asked asked to work with charity
organizations (Eye Donate Campaign) because their fame and personalities help get
the much-needed free publicity. Information offered by public relations departments
often takes the form of news release and press conferences.
News release A brief written statement sent to the press or others describing a new product, a
product improvement, a price change, or some other development of interests. The release is
intended to be newsworthy.
News Releases : Marketers may spend considerable time and effort in getting news
releases and interviews with company spokespersons placed in newspapers and on
television news broadcast, to promote a favourable corporate organizational image.
Well-executed news release are written in a form that a news paper, magazine, or
broadcast editor can easily incorporate into a news story. Photographs, films, and
videotapes of company operations and interviews with company spokespersons are
often distributed to television broadcasters. Organizations often post their press releases
on their Web site after the releases have been distributed to the media.
Press conference A meeting called by an organization to announce a newsworthy event to the press.
Press conferences The press conference is another form of publicity that can create
goodwill and positive relations between an organization and the public. When an
organization wishes to make a specific announcement, it may schedule a press
conference so that company officials can make a statement and reporters can ask
questions. For example, Pepsi and Coca-Cola when hit by the newspaper reports
commenting on the presence of pesticides in their soft drinks. They immediately called
a press conference in which they explained the steps taken by them to minimize the
amount of pesticides in their raw materials, water.
Appearances : Talk shows are known for inviting guests who promote their books,
CDs, and concerts. The entertainment business is one of the most extensive users of
public relations. Performers appearances are often part of wellplanned marketing
strategies. For example, HMV brings out exclusive albums of singers and music directors
of yester years to provide high quality audio casettes to the music lovers and to attract
the young generation by carefully organising the events. All the actors and creative
persons associated with a particular film are present when the music of that movie is
released.
Sports figures, politicians, environmentalists, and activists for social causes use their
guest appearances on television programs to promote their agendas. Personal marketing
is a term sometimes used to describe marketing when the product is a person. If Cricket
star Yuvraj Singh wishes to promote his image, appearances are a very cost-effective
medium. Further, viewers do not perceive his appearance on a television show as an
advertisement.
Company Web Sites Many organizations provide considerable company product,
and service information on company Web sites. Internet visitors may find information
about the organizational mission, company history, investor relations, financial statements,
and other company news. A company Web site is a perfect repository for recent, and
even old, articles and press releases about the company. Customer service and e-mail
features may also be incorporated into the company site. The company Web site provides
a golden opportunity for public relations.
Public Relations
Not only must the company relate constructively to customers, suppliers, and dealers,
but it must also relate to a large number of interested public. We define a public as
follows :
A public is any group that has an actual or potential interest in or impact on a
companys ability to achieve its objectives. Public relations (PR) involves a variety
of programs designed to promote or protect companys image or its individual
products.
A public can facilitate or impede a companys ability to achieve its objectives. PR has
often been treated as a marketing stepchild, an afterthought to more serious promotion
planning. But the wise company takes concrete steps to manage successful relations
with its key public. Most companies operate a public-relations department. The PR
department monitors the attitudes of the organizations public and distributes information
and communications to build goodwill. When negative publicity happens, the PR
department acts as a troubleshooter. The best PR departments spend time counselling
top management to adopt positive programs and to eliminate questionable practices so
that negative publicity does not arise in the first place. They perform the following five
functions :
1. Press relations : Presenting news and information about the organization policies,
products/services and social activities in the most positive light.
2. Product publicity : Sponsoring efforts to publicize specific products which are
entirely new or modified or altered to deliver more value to the customers.
3. Corporate communication : Promoting understanding of the organization through
internal and external communications, so that the general public knows about the
role of organization in their daily lives.
4. Lobbying : Dealing with legislators and government officials to promote or defeat
legislation and regulation related to their specific industry. For e.g., Tax Department
is planning to levy taxes on foreign companies who are out sourcing the services
from India, so all the BPO firms will join hand and resist the proposal.
5. Counselling : Advising management about public issues and company positions
and image. This includes advising in the event of a product mishap. For e.g.,
reports on the presence of pesticides in the soft drinks compelled Pepsi and Coke
to quickly initiate damage control excercise.
Marketing Public Relations
Marketing managers and PR specialists do not always talk the same language. Marketing
managers are much more bottom-line oriented, whereas PR practitioners see their job
as preparing and disseminating communications. But these differences are disappearing.
Many companies are turning to marketing public relations (M P R) to directly support
corporate or product promotion and image making. Thus M P R, like financial PR and
community PR, serves a special constituency, namely the marketing department.
The old name for MPR was publicity, which was seen as the task of securing editorial
spaceas opposed to paid spacein print and broadcast media to promote or hype
a product, service, idea, place, person, or organization. But MPR goes beyond simple
publicity and plays an important role in the following tasks :
l Assisting in the launch of new products : The amazing commercial success of
gave such as Nintendo owes a great deal to clever publicity.
l Assisting in repositioning a mature product : New York City had extremely
bad press in the 1970s until the I Love New York campaign began.
l Building interest in a product category : Companies and trade associations
have used MPR to rebuild interest in declining commodities such as eggs & milk
and to expand consumption of such products as natural/organic products and orange
juice.
l Influencing specific target groups : A number of MNCs and big Indian companies
are taking community welfare projects like helping in rain-harvesting, developing
sewage disposal system, recharging water levels etc. in various areas to build
goodwill.
l Defending products that have encountered public problems : Cadvburys
masterly use of MPR was a major factor in saving its choclate brands from poor
performance following (a few) incidents in which insect infested choclates were
found.
l Building the corporate image in a way that reflects favourably on its products.
As the power of mass advertising weakens, marketing managers are turning more to
MPR. In a survey of 286 U.S. marketing managers, three-fourths reported that their
companies used MPR. They found it particularly effective in building awareness and
brand knowledge, for both new and established product. MPR is also effective in
blanketing local communities and reaching specific ethnic and other groups. In several
cases, MPR proved more cost effective than advertising. Nevertheless, it must be
planned jointly with advertising. MPR needs a large budget, and the money might have
to come from advertising. In addition, marketing managers need to acquire more skill in
using PR resources. Gillette is a trendsetter here : Each brand manger is required to
have a budget line for MPR and to justify not using it.
Clearly, creative public relations can affect public awareness at a fraction of the cost of
advertising. The company does not pay for the space or time obtained in the media. It
pays only for a staff to develop and circulate the stories and manage certain events. If
the company develops an interesting story, it could be picked up by the news media and
be worth millions of dollars in equivalent advertising. The Body Shop, for example, has
spent very little money on advertising; its success has been almost entirely due to
publicity. MPR carries more credibility than advertising. Some experts say that
consumers are five times more likely to be influenced by editorial copy than by advertising.
Here are two examples of the creative use of MPR :
l Intel and the Pentium Chip : When users of Intels Pentium computer chip
began to notice a problem with it in 1994, the company refused to replace the chip
unless the computer users could prove they needed their computers for complex
mathematical operations (the only operations affected by the flaw). Following an
uproar of consumer dissatisfaction, Intels MPR people came to the rescue by
using a one-two punch, following up intense one-on-one marketing to corporate
and retail Pentium users with the introduction of a worldwide network of Pentium-
replacement service centers (offering free replacements on request). Intel tried
to reach customers one-on-one, whether they were large customers or individual
users. The company did this by mobilizing huge numbers of people inside the
company, putting them on phone lines to talk to anybody concerned, and by flying
marketing teams all over the country to visit corporate accounts and replace
Pentium chips. To reach individual consumers, Intel even placed its own employees
inside retail stores in the weeks before Christmas of 1994. As a result of the
intense MPR campaign, Intel was able to rescue its reputation, which had been
seriously jeopardized just a few weeks earlier.
l Microsoft and Windows 95 : Microsofts campaign launching Windows 95
was an MPR success story. No paid ads for Windows 95 had appeared by August
24, 1995, the launch day. Yet everyone knew about it! The Wall Street Journal
estimated that 3,000 headlines, 6,852 stories, and over 3 million words were
dedicated to Windows 95 from July 1 to August 24. Microsoft teams around the
world executed attention-grabbing publicity. Microsoft hung, a 600-foot Windows
95 banner from Torontos CN Tower. The Empire State Building in New York
was bathed in the red, yellow, and green colours of the Windows 95 logo. Microsoft
paid The London Times to distribute free its entire daily run of 1.5 million copies to
the public. By the end of the first week, U.S. sales alone were $108 million, not
bad for a $90 product. The lesson is clear : Good advance PR can be much more
effective and millions of dollars spent on advertising.
Major Decisions in Marketing PR
In considering when and how to use MPR, management must establish the marketing
objectives, choose the PR messages and vehicles, implement the plan carefully, and
evaluate the results. The main tools of MPR are described in Table 16.2.
Establishing the Marketing Objectives
MPR can contribute to the following objectives :
l Build awareness : MPR can place news worthy stories in the media to bring
attention to a product, service, person, organization, or idea.
l Build credibility : MPR can add credibility by communicating the message in an
editorial context which has more believability than advertising.
l Stimulate the sales force and dealers : MPR can help boost sales force and
dealer enthusiasm. Stories about a new product before it is launched will help the
sales force sell it to retailers and the retailers in turn can sell it effortlessly to the
customers.
Table 16.2: Major Tools in Marketing PR
Publications : Companies rely extensively on published materials to reach and influence their
target markets. These include reports, brochures, articles, company newsletters and magazines,
and audiovisual materials which describe the performance and recent activities under taken by the
company.
Events : Companies can draw attention to new products or other company activities by arranging
special events like news conferences, seminars, outings, exhibits, contests and competitions,
anniversaries, and sport and cultural sponsorship that will reach the target public in a given
geographical area.
News : One of the major tasks of PR professionals is to find or create favourable news about the
company its products, and its people. News generation requires skill in developing a story
concept, researching it, and writing a press release. But the PR persons skill must go beyond
preparing news stories. Getting the media to accept press releases and attend press conferences
calls for marketing and interpersonal skills.
Speeches : Speeches are other tool for creating product and company publicity. Lee Iacoccas
charismatic talks before large audiences helped Chysler sell its cars. Increasingly, company executives
must field questions from the media or give talks at trade associations or sales meetings, and these
appearances can build the companys image.
Public-Service Activities : Companies can build goodwill by contributing money and time to
good causes. Large companies typically ask executives to support community affairs. In other
instances, companies will donate an amount of money to a specified cause. Such cause-related
marketing is used by a growing number of companies to build public goodwill and it pays back in
handsome manner. The general public gets the impression that the company not only care for its
profits but also for them.
Identity Media : In a society marked by sensory overload, companies compete for attention.
They need visual identity that the public immediately recognizes. The visual identity is carried by
company logos, stationery, brochures, signs, business forms, business cards, buildings, uniforms, and
dress codes. Whenever the public see a visual identity they can instantly relate it to the company.
l Hold down promotion costs : MPR costs less than direct mail and media
advertising. The smaller the companys promotion budget, the stronger the case
for using PR to gain share of mind.
Specific objectives should be set for every MPR campaign :
Whereas PR practitioners will continue to reach their target public through the mass
media, MPR is increasingly borrowing the techniques and technology of direct response
marketing to reach target audience members one to one. PR expert Thomas L. Harris
offers suggestions for how PR and direct-response marketing can work together to
achieve specific marketing objectives :
l Build marketplace excitement before media advertising breaks : For example
the announcement of a new product offers a unique opportunity for obtaining
publicity and for dramatizing the product. The more the talk about the product in
the media, the more will be the chances of great success, provided that the product
meets the requirements of the customers.
l Build a core consumer base : Marketers are increasingly recognizing the value
of maintaining consumer loyalty, because it costs far less to keep a consumer than
to get a new one. Research suggest that it cost five times more to attract a new
customer than to retain one.
l Build a one-to-one relationship with consumers : Marketers can use telephone
hot lines and toll-free numbers, plus the Internet, to build and maintain relationships
with individual consumers. The company can easily get the complaints and
suggestions about their products or services.
l Turn satisfied customers into advocates : Customer database and profiles can
yield satisfied customer who can become role models and spokespeople for the
product and they will have more believability than any other promotional tool.
l Influence the influentials : The influencer may be an authority figure like a
teacher, doctor, or pharmacist, but it can also be someone who has a different kind
of one-to-one relationship with consumer, such as a hair stylist or personal trainer.
These people can help in influencing the purchase decision of the customers.
Choosing Messages and Vehicles
The manager must identify or develop interesting stories to tell about the product. Suppose
a relatively unknown college wants more visibility. The MPR practitioner will search
for possible stories. Do any faculty members have unusual backgrounds, or are any
working on unusual projects ? Are any new and unusual courses being taught ? Are
any interesting events taking place on campus ?
If the number of interesting stories is insufficient, the MPR practitioner should propose
newsworthy events the college could sponsor. Here the challenge is to create news.
PR ideas include hosting major academic conventions, (seminar/conference) inviting
expert or celebrity speakers (press will love to cover it), and developing news conferences.
Each event is an opportunity to develop a multitude of stories directed at different
audiences.
Event creation is a particularly important skill in publicizing fund-raising drives for non-
profit organizations. Fund-raisers have developed a large repertoire of special events,
including anniversary celebrations, art exhibits, auctions, benefit evenings, book sales,
contests, dances, dinners, fairs, fashion shows, parties in unusual places, tours etc. No
sooner is one type of event created, such as a movie awards, than competitors spawn
new versions.
For-profit organizations also use events to call attention to their products and services.
Manikchand sponsor film fare awards, Gladrags organise mega-model contest, Grasim
organise Grasim Mr. International contest to gain free space in the media.
Implementing the Plan
Implementing public relations requires care. Consider placing stories in the media : A
great story is easy to place, but most stories are less than great and might not get past
busy editors. One of the chief assets of publicists is their personal relationship with
media editors. PR people look at media editors as a market to satisfy so that these
editors will continue to use their stories.
Evaluating Results
MPRs contribution to the bottom line is difficult to measure because it is used along
with the promotional tools. If it is used before the other tools come into action, its
contribution is easier to evaluate. The three most commonly used measures of MPR
effectiveness are number of exposures; awareness, comprehension, or attitude change;
and contribution to sales and profits.
The easiest measure of MPR effectiveness is the number of exposures carried by the
media. Publicists supply the client with a clippings book showing all the media that
carried news about the product and a summary statement such as the following ;
Media coverage included 3,500 column inches of news and photographs in 350
publications with a combined circulation of 79.4 million; 2,500 minutes of air time of 290
radio stations and an estimated audience of 65 million; and 660 minutes of air time on
160 television stations with an estimated audience of 91 million. If this time and space
had been purchased at advertising rates, it would have amounted to Rs. 3 crore 50 lacs.
The exposure measure is not very satisfying because it contains no indication of how
many people actually read, heard, or recalled the message and what they thought
afterward. Nor does it contain information on the net audience reached because
publications overlap in readership. Because publicitys goal is reach, not frequency, it
would be more useful to know the number of unduplicated exposures.
A better measure is the change in product awareness, comprehension, or attitude
resulting from the MPR campaign (after allowing for the effect of others promotional
tools). For example, how many people recall hearing the news item ? How many told
others about it (a measure of word of mouth) ? How many changed their minds after
bearing it ? In a Potato Board campaign, the board found that the number of people
who agreed with the statement Potatoes are rich in vitamins and minerals went from
36 per cent before the campaign to 67 per cent after the campaign, a significant
improvement in product comprehension.
Sales and profit impact is the most satisfactory measure, if obtainable. For example, A
companys sales had increased 43 per cent by the end of the PR campaign. However,
advertising and sales promotion had also been stepped up, and their contribution has to
be allowed for. Suppose total sales have increased $1,500,000, and management
estimates that MPR contributed 15 per cent of the total sales increase. Then the return
on MPR investment is calculated as follows :
Total sales increase $1,500,000
Estimated sales increase due to PR (15 percent) 225,000
Contribution margin on product sales (10 percent) 22,500
Total direct cost of MPR program 10,000
Contribution margin added by PR investment $ 12,500
Return on MPR investment ($12,500/$10,000) 125%
In the years ahead, we can expect marketing public relations to play a larger role in the
companys communication efforts.
Table 16.3: Public Relations-Related Situations and How a Firm
Could Respond to Them
Situation Poor Response Good Response
Fire breaks out in a
company plant
New product intro-duced
News story about product
defects
Competitor introdu-ces
new product
High profits repor-ted
Overall view of public
relations
Request for information by media
are ignored.
Advertising is used without
publicity.
Media requests for information are
ignored, blanket denials are issued,
and there is hostility to reporters.
A demand-oriented advertising
campaign is stepped up.
Profits are justified and positive
effects on the economy are cited.
There is an infrequent need for public
relations; crisis fighting is used when
bad reports are circulated.
Company spokesperson explains
the fires causes and the precautions
to avoid it, and answers questions.
Pre-introduction news releases,
product samples, and testimonials
are used.
Company spokesperson says tests
are being done, describes the
procedure for handling defects, and
takes questions.
Extensive news releases, statistics,
and spokespeople are made
available to media to present firms
competitive features.
Profits are explained, comparative
data are provided, and profit uses
are noted: research and community
development.
There is an ongoing need for public
relations, strong planning, and plans
to counter bad reports.
Marketing Research 525
What is Marketing Research ?
Any discussion of the importance of information to the marketer must include a discussion
of marketing research. Marketing research allows managers to make decisions based
on objective data, gathered systematically, rather than on intuition.
What is the distinction between marketing research and other forms of marketing
information ? Even without a formal research program, a manager will have some
information about what is going on in the world. Simply by reading the newspaper or
watching TV, he or she may discover that a competitor has announced a new produced,
that the inflation rate is stabilizing, or that a new highway will be built and a
shopping mall erected north of town. All of these things may affect the marketer's
business, and this information is certainly handy to have, but is it the result of marketing
research ?
The answer to this question is no. Marketing research is the systematic and objective
process of generating information for use in making marketing decision. This process
includes defining the problem and identifying what information is required to solve the
problem, designing a method for collecting information, managing and implementing the
collection of data, analyzing the result, and communicating the findings and their
implications.
Marketing research : The systematic and objective process of generating information for use in
marketing decision making.
This definition suggests that marketing research is a special effort rather than a haphazard
attempt at gathering information. Thus, glancing at a news magazine on an airplane or
overhearing a rumor is not conducting marketing research. Even if a rumor or a fact
casually overheard becomes the foundation of a marketing strategy, that strategy is not
a product of marketing research because it was not based on information that was
systematically and objectively gathered and recorded. The term marketing research
suggests a specific, serious effort to generate new information. The term research
suggests a patient, objective, and accurate search.
Although marketing managers may perform the research task themselves, they often
seek the help of specialists known as marketing researchers. The researcher's role
requires detachment from the question under study. If researchers cannot remain
impartial, they may try to prove something rather than to generate objective data. If
bias of any type enters into the investigative process, the value of the findings must be
questioned. Yet this sort of thing can happen relatively easily. For example, a developer
who owned a large parcel of land on which she wanted to build a high-price, high-
prestige shopping center conducted a survey of customers' buying habits to demonstrate
to prospective mall occupants that there was an attractive market for such a center.
Chapter 17
Marketing Research
By conducting the survey only in elite neighbourhoods, she generated proof that
areas residents wanted a high-prestige shopping center.
Misleading research of this kind must be avoided. Unfortunately, business people
with no knowledge of proper marketing research methods may inadvertently conduct
poorly designed, biased studies or may be sold such work by marketing research firms.
All business people should understand marketing research well enough to avoid these
mistakes.
Scope of Marketing Research
The scope of marketing research is very wide and it provides useful information about
all the aspects of marketing, for instance :
1. Product or service features desired by the customers : This information
can be collected from the customers through a well defined research instrument.
Furthermore the relative importance of various features can also be obtained.
2. Pricing : The information regarding the prices charged by the competitors for
the same and nearly same products or services can be obtained by market survey.
3. Consumer Behaviour : The research can be conducted to know about buying
habits of the consumers. Information can be obtained regarding why consumers
buy something; when do they buy it; from where they buy; how much do they
buy; who accompanies them during the shopping etc. Information to these key
question will help the marketer in improving his offering.
4. Distribution : The information can be obtained about the effectiveness of
channel member their motivation level and what needs to be done to improve
their motivation level, in identifying the training needs etc.
5. Promotion : Vital information can be obtained regarding the media habits of
consumers which can provide vital inputs for the media planning. Advertising
effectiveness can also be measured by pre and post testing techniques which
can help in identifying the best advertisement and its impact on the consumers.
The consumers response both qualitative and quantitative can help in identifying
the best sales promotion technique for ones product or service.
The Stages in the Research Process
Marketing to not an exact science like physics, but that does not mean that marketers
and marketing researchers should not try to approach their jobs in a scientific manner.
Marketing research is a systematic inquiry into the characteristics of the marketplace,
just as astronomy is a systematic investigation of the stars and planets. Both use step-
by-step approaches to gain knowledge.
The steps in the research process are highly interrelated and one step leads to the next.
Moreover, the stages in the research process often overlap. Disappointments
encountered at one stage may necessitate returning to previous stages or even starting
all over again. Thus, it is something of an oversimplification to present marketing
research as a neatly ordered sequence of activities. Still, marketing research often
follows a generalized pattern of seven stages. These stages are (1) defining the problem,
(2) planning the research design, (3) selecting a sample, (4) collecting data, (5) analyzing
data, (6) drawing conclusions and preparing a report, and (7) following up.
Again, these stages overlap and affect one another. For example, the research objectives
outlined as part of the problem definition stage will have an impact on sample selection
and data collection. In some cases, the later stages may be completed before the
early ones. A decision to sample people of low educational levels (stage 3) will
affect the wording of the questions posed to these people (stage 2). The research
process, in fact, often becomes cyclical and ongoing, with the conclusions of one study
generating new ideas and suggesting problems requiring further investigation. Within
each stage of the research process, the researcher faces a number of alternative methods,
or paths, from which to choose. In this regard, the research process can be compared
to a journey. On any map, some paths are more clearly charted than others. Some
roads are direct; others are roundabout. Some paths are free; others require the traveler
to pay a toll. The point to remember is that there is no right or best path. The road
taken depends on where the traveler wants to go and the amounts of time, money,
ability and other resources available for the trip.
Although there is no right path, the researcher must choose an appropriate onethat
is, one that addresses the problem at hand. In some situations, where time is short, the
quickest path is best. In other circumstances, where money, time, and personnel are
plentiful, the chosen path may be long and demanding.
Exploring the various paths marketing researchers encounter is the main purpose of
this section, which describes the seven stage of the research process. Figure 17.1.
illustrates some choice researchers face at each stage.
Figure 17.1: The Marketing Research Process
Develop collection
method
Pretest method
Collect data
Exploratory
research
(optional)
Situation
analysis
Solid line indicates the path
the research takes when
problem definition requires
exploratory research.
Edit collected data
code data
Analyze data
Quantitative
Qualitative
G
G
Present method and
findings in appropriate
form
Detailed report
Summary report
G
G
Determine use of report
How report might have
been more useful
Management's evaluation
of report
Identity population to sampled
Determine appropriate sample size
Select sample units
Probability methods
Nonprobability methods
G
G
Secondary data study
Primary data study
Surveys
Observation
Experiments
G
G
G
Detect symptom
Define problem
State research objectives
Stage 1 : Defining the Problem Stage 2 : Planning the Research Design Stage 3 : Selecting a Sample
Stage 7 : Following Up
Stage 6 : Preparing a Report
Stage 5 : Analyzing the Data
Stage 4 : Collecting the Data
Solid line indicates the path
the research takes when
problem definition requires
exploratory research.
Detection of symptoms
Analysis of the situation
Definition of the problem
Statement of research objectives
Conduct
exploratory
research
(optional)
Stage 1 : Defining The Problem
The idea that problem definition is central to the marketing research process is so
obvious that its importance is easily overlooked. Albert Einstein noted that The
formulation of a problem is often more essential than its solution. This is valuable
advice for marketing managers and researchers who, in their haste to find the right
answer, may fail to ask the right question. Too often, data are collected before the
nature of the problem has been carefully established. Except in cases of coincidence
or good luck, such data will not help resolve the marketer's difficulties. Researchers
are well advised to remember the adage a problem well defined is a problem half
solved.
Problem definition : The crucial first stage in the marketing research processdetermining the
problem to be solved and the objectives of the research.
Problems Can Be Opportunities : On many occasions, the research process is
focused not on a problem but on an opportunity. For example, a toy maker who has
developed a fabulous new item might face the problem of determining what age
groups will most likely want the toy or which advertising media are the best to use. In
this happy circumstance, the problem definition stage of the research might well be
called the opportunity definition stage. The point is that the problems addressed by
marketing research are frequently good problems and not disasters.
Don't Confuse Symptoms with the Real Problem : There is a difference between
a problem and the symptoms of that problem. Pain, for example, is the symptom of a
problem. The cause of the pain, perhaps a broken leg, is the problem. In marketing,
falling sales are a symptoms that some aspect of the marketing mix is not working
properly. Sales may be falling because price competition has intensified or because
buyer preferences have changed. Defining the general nature of the problem provides
a direction for the research.
Figure 17.2: Stage 1. Defining the problem. Results in Clear-Cut
Research Objectives
As Figure 17.2. shows, defining the problem begins with the detection of symptoms. If
managers are uncertain about the exact nature of the problem, they may spend time
analyzing and learning about the situation. For example, they may discuss the situation
with others, such as sales representatives, who are close to the customers. They may
conduct exploratory research to shed more light on the situation and reveal more details
about the problem. Exploratory research is optional and is not used in all research
projects.
Finally, as Figure 17.2. shows, the problem is defined, and a series of research objectives
related to the problem are stated. No decisions about the remaining stages of the
marketing research process should be made until managers and researchers clearly
understand the objectives of the research about to be undertaken.
Exploratory research : Research to clarify the nature of a marketing problem.
Exploratory Research : Exploratory research is sometimes needed to clarify the
nature of a marketing problem. Management may know, from noting a symptom such
as declining sales, that some kind of problem is out there and may undertake exploratory
research to try to identify the problem. Or, management may know what the problem
is but not how big or how far-reaching it is. Here too, managers may need research to
help them analyze the situation.
Providing conclusions is not the purpose of exploratory research. Its purpose is simply
to investigate and explore. Usually, exploratory research is undertaken with the
expectation that other types of research will follow and that the subsequent research
will be directed at finding possible solutions.
In any research situation, it is generally best to check available secondary data before
beginning extensive data collection. Some work at a library, on the Internet, or with an
internal database may save time and money. However, there isn't any set formula that
outlines exactly how to analyze a situation.
Sometimes checking secondary sources may not be the appropriate first step. Instead,
a short series of interviews with a few customers may be in order. Exploratory research
in this case could serve to identify problem areas or points to a need for additional
information.
Although there are many techniques for exploratory research, our discussion will highlight
one popular methodthe focus group interviewto illustrate the nature of exploratory
techniques.
Focus group interview : A loosely structured interview in which a group of 6 to 10 people discusses
a product or focuses on some aspect of buying behaviour.
Focus group interviews are loosely structured interviews with groups of 6 to 10
people who focus on a product or some aspect of buying behaviour. During a group
session, individuals are asked to comment on and react to new product ideas or explain
why they buy (or do not buy) certain products. Researchers later analyze those comments
for useful ideas, such as that a product is too high priced or looks like it would break
easily. Focus group research is extremely flexible and may be used for many purposes
for example, to learn what problems consumers have with products. During one of
Rubbermaid Inc.'s focus groups on housewares, a woman accused the industry of
sexism. Why do companies continue to treat brooms and mops like they were women's
tools ? she complained. They're poorly designed and second class to hammers and
saws, which are balanced and molded to fit men's hands. Brooms and mops make
houseworks more miserable, not easier. At the time, Rubbermaid did not make cleaning
products, but the woman's remarks eventually convinced the company that an opportunity
awaited. After five years of research and development, Rubbermaid introduced a line
of about 50 cleaning products and brushes designed to make cleaning easier, with handles
that fit comfortably in consumers hands and bristles angled to reach tight spaces.
What is Good Research Objectives ? Marketers contemplating a research project
must decide exactly what they are looking for. The end of Stage 1 of the research
process must be a formal statement of the problem(s) and the research objetive(s).
These provide the framework for the study.
Hypothesis : An unproven proposition that can be supported or refuted by market research.
Research objectives are often stated as hypotheses.
The best way to express a research objective is as a well-constructed, testable hypothesis.
A hypothesis is an unproven proposition or a possible solution to a problem, a statement
that can be supported or refuted by empirical data. In its simplest form, it is a guess. In
times of inflation or economic recession, an auto manufacturer might hypothesize that
lower-income families were cutting back on car purchases more than wealthy families
were. This is a hypothesis that can be tested.
STAGE 2 : PLANNING THE RESEARCH DESIGN
After researchers have clearly identified the research problem and formulated a
hypothesis, the next step is to develop a formal research design. The research design
is master plan that identifies the specific techniques and procedures that will be used to
collect and analyze data about a problem. The research design must be carefully
compared to the objectives developed in Stage I to assure that the sources of data, the
data collected, the scheduling and costs involved, and so on are consistent with the
researchers goals.
At the outset, the researchers should determine if the data they need have already been
generated by others or if primary research is required. In other words, as Figure 17.3.
suggest, researchers planning a researcher design must first choose between using
secondary data and using primary data.
Research design : A master plan that specifically identifies what techniques and procedures will be
used to collect and analyze data about a problem.
Research Design Using Secondary Data : As we have mentioned, data already in
the researcher's decision support system or in the library may provide an adequate
basis for a formal research effort. For example, a marketer of mobile phones might
know that sales of this products showing regular increase in the numbers. A comparison
of past sales record will verify it. In this case, the research design involves the analysis
of secondary data only.
Meaningful secondary data may come from internal sources, such as company databases,
or external sources, such as government agencies, trade associations, and companies
that specialize in supplying specific types of data Figure 17.3. shows some examples of
the types of secondary data that are available.
The biggest advantages of secondary data are that (1) they are always less expensive
to collect than primary data and (2) they can be obtained rapidly.
Secondary sources must be used with care however as they have certain
disadvantages:
l Secondary data are old and possibly outdated, so the prediction for the future on
the basis of past rather than present can turn out to be off the mark.
l Some data are collected only periodically. For examples, the population census is
taken only once a decade. Comparatively up-to-data estimates if available in
such cases must be used to predict the consumption of child related products.
l Data may not have been collected in the form preferred. Sales figures may be
available for a country but not for a particular town within that country. Similarly
total sales data may be available but the product or brand wise sales data may not
be available.
l Users of secondary data may not be able to assess the data's accuracy. For
example, previous researchers may have bent the data to prove some point or
theory. So there will be in-built error in the research that used the secondary data.
In general, a basic disadvantage of secondary data is that they were not collected
specifically to meet the researcher's needs. The manager's task is to determine if the
secondary data are pertinent and accurate.
The Internet as a Source of Secondary Data : The Internet is a worldwide network
of computers that gives users access to information and documents from distant sources.
Many managers see the Internet as the world's largest public library, because both
noncommercial and commercial organizations post secondary data there. A wealth of
data from reliable sources is available. For example, most of the companies provide
complete details about their products and services which are accurate.
The Internet is very user-friendly; information can be viewed using a mouse and menu-
based software system called a Web browser. Netscape and Microsoft Explorer are
two popular Web browsers that allow the user to enter a uniform resource locator, or
URL.
A search engine is a computerized directory that allows users to search the Internet for
information indexed in a particular way. Most portals, such a Yahoo!, Rediff, Google
etc. contain comprehensive and accurate Internet search engine. All a researcher has
to do is type the search term in plain English or click on key words and phrases.
External sources
Government sources
(e.g., Human Resource Development
Report)
Trade association statistics
(e.g., RBI Bulletin)
Commercial sources
(e.g., Marketing Research Agencies,
ORG-MARG)
G
G
G
Secondary data study
Internal sources
Customer records
Financial statements
Inventory records
Research reports
G
G
G
G
Figure 17.3: Secondary Data Sources
Anyone can access most Web sites without previous approval. However, many
commercial sites require that the user have a valid accounts and password to access a
site. For example, the Dalal Street Journal Interactive is a valuable resource; however,
only subscribes who pay a fee can read it via the Internet.
Research Design Using Primary Data : Researchers who find that no appropriate
secondary data are available can choose from three basic techniques for collecting
primary data; surveys, observation, and experiments.
Survey : Any research effort in which data are gathered systematically from a sample of people by
means of a questionnaire. Surveys are conducted through face to-face interviews, telephone interviews,
and mailed questionnairs.
Survey : Primary data are commonly generated by survey research. Survey results
on one topic or another are reported almost daily by the news media. Most adult Indian
have been stopped by interviewers at shopping centers or voting places or have received
mailings or phone calls from survey takers. In general, a survey is any research effort
in which data are gathered systematically from a sample of people by means of a
questionnaire. Researchers using surveys may collect data by means of telephone
interviews, mailed questionnaires, personal interviews (either door-to-door or in shopping
malls or some other public place), or some other communication method such as fax or
the Internet.
Survey research has several advantages. For one thing, surveys involve direct
communication. How better to provide buyers with what they want is to first ask them
what they want ? For example, U.S. automobile makers operate style research clinics
to appraise consumer reactions to car designs. First, mock-ups of proposed designs
are constructed; then consumers, or respondents, are recruited through short telephone
interviews. These respondents are brought in to a showrooms and shown a carbon
mock-up along with competing autos from around the world. As the buyers look
over the cars, professional interviewers ask for their reactions to virtually every detail.
The survey results are then given to designers.
Systematic bias : A research shortcoming caused by flaws in the design or execution of a research
study.
When surveys are properly planned and executed, they are quick, efficient, and accurate
means of gathering data. Survey research can involve problems, however. Careless
researchers may design or conduct surveys improperly and thus produce incorrect and
worthless resultsthat is results marked by systematic bias. The survey questions
might be poorly worded, respondents might be reluctant to provide truthful answers, the
sample may not be representative, or mistakes might be made entering data into the
computer.
Tables 17.1, summarizes the advantages and disadvantages of the most popular types
of surveys. You can see from this exhibit that choosing one method over another
involves trade-offs. For instance, a low-cost mail survey takes more time and is less
versatile than a highest-cost personal interview at the consumer's doorstep.
How does the researchers choose the appropriate survey technique ? The marketing
problem itself generally suggests which technique is most appropriate. A manufacturer
of industrial equipment might choose a mail survey because the executives it wishes to
question are hard to reach by phone. A political party might prefer to employ a door-to-
door personal survey so that voters can formulate and voice their opinions on current
issues. In these examples, the cost, time, and perhaps accuracy involved vary. It is the
researcher's job to weigh the advantages and disadvantages of each method and find
the most appropriate way to collect he needed data.
Table 17.1: Characteristics of Survey Methods.
PERSONAL INTERVIEW
Door-to Shopping Mail-In Telephone Internet
Door Mall Questionnaire Interview Survey
Speed of data Moderate to Fast Researcher has Very fast Instantaneous
collection fast no control over
return of
questionnaire.
Respondent Good Moderate Moderate Good Varies depending
cooperation poorly designed on Web site
questionnaire
will have low
response rate
Flexibility of Very flexible Very flexible Highly Moderately Extremely flexible
questioning standardized flexible
format is very
inflexible
Questionnaire Long Moderate to Varies depending Moderate Modest
length long on purpose
Possibility for Low Low Highestno Moderate High
respondent mis- interviewer to
understanding clarify questions
Influence of High High None Moderate None
interviewer on
answers
Cost Highest Moderate to Low Low to Lowest
high moderate
Wording survey questions appropriately is a skill that must be learned. The questionnaire
writer's goals are to avoid complexity and use simple, accurate, conversational language
that does not confuse or bias the respondent. The wording of questions should be
simple and unambiguous so that the questions are readily understandable to all
respondents.
Consider, for example, the following question :
Should The Limited continue its excellent gift-wrapping program ?
l Yes
l No
The gift-wrapping program may not be excellent at all. By answering yes, a respondent
is implying that things are just fine as they are. But by answering no, she implies that
The Limited should discontinue the gift wrapping. Question should be worded so that
the respondent is not put in this sort of bind.
Many respondents are susceptible to leading questions, such as You do agree that
U.S. automobiles are a better value than Japanese automobiles, don't you ? Leading
questions should be avoided.
Sometimes rating scales are used to measures consumers attitudes. Two of the most
common attitude scales are the Likert scale and the semantic differential. A Likert
scale asks respondents to indicate the degree of agreement with a statement, as in the
following example :
Timberland boots are expensive.
Strongly agree Agree Undecided Disagree
Strongly disagree
A semantic differential identifies a company, store, brand, or the like and asks the
respondent to place a check work on a bipolar rating scale as in the following example:
Timberland boots
Expensive__:__:__:__:__:__:__Inexpensive
Observation research : The systematic recording of behvior, objects, or events as they are witnessed.
Observation : If the purpose of a research effort is to note actions that are mechanically
or visually recordable, observation techniques can form the basis of that effort.
Observation research involves the systematic recording of behaviour, objects, or events
as they are witnessed. Companies that sell space on outdoor hoardings are interested
in traffic patternsspecifically, the numbers of cars and people passing the hoarding
installations each day. Mass transit organizations may want to know how many people
ride each bus and where most of them get on or off. In both cases, the information
could be recorded either by human observers or by mechanized counters.
Observation can be more complicated than these simple head-counting examples might
suggest. For example, Fisher-Price's Play Laboratory is a well-stocked day-care center
where toy designers and marketing researchers sit behind a one way mirrors to observe
children who are trying out new toys. They observe how long children play with various
toys and evaluate whether prototype toys catch children's interest.
Mystery shoppers can be used to check on salespeople's courtesy or product
knowledge. Researchers disguised as customers, store employees, or product
demonstrators might subtly observe consumer reactions to prices, products, package
designs, or display cases, leaving the consumers unaware that their behaviour was
being observed.
The greatest strength of observation is that it permits the recording of what actually
occurs in a particular situation. It biggest weakness is that the observer cannot be sure
why the observed behaviour occurred. Still, in some cases, it is enough to know that
something happened.
Experiment : A research method in which the researcher changes one variable and observes the
effects of that change on another variable.
Experiment : Experiments have long been used by scientists attempting to discover
cause-and-effect relationships. Almost every day, you can read news stories about
experimental groups of white mice that were exposed to some substance and then
developed more cancers than mice in groups not exposed. The assumption, of course,
is that the substance involved increased the chance of developing cancer. A properly
run experiment allows an investigator to change one variable, such as price, and then
observe the effects of the change on another variable, such as sales. Ideally, the
experimenter holds all factors steady except the one being manipulated, thus showing
that changes are caused by the factor being studied.
Marketing researchers use experimental techniques both in the marketplace (in the
field) and in controlled, or laboratory, situations. For example, McDonald's conducted
experiments in the marketplace to determine if it should add a single-slice McPizza to
its menu. The company sold the product in test marketscities where a test products
is sold just as it would be if it were marketed nationwide. Test markets provide a trial
run to determine consumers reaction and actual sales volume. For McDonald's, sales
of the pizza slices were disappointing, and the company discontinued its plans to market
pizza to adults. The company test marketed pizza in children's Happy Meals, finding
the response favourable, it was introduced nationwide.
In contrast, advertisers often use laboratory settings to test advertising copy. One
group of subjects is shown a television program that includes one version of an
advertisement. A second group views the same program with a different version of
advertisement. Researchers compare the group responses. Research like this is
conducted in a controlled setting, rather than a natural setting, to increase researchers
control of environmental variables. Such an experiment is known as laboratory
experiment.
Laboratory experiment : An experiment in a highly controlled environment.
Selecting the Research Design : After considering research alternatives, a marketing
researcher must pick one. Because there are many ways to tackle a problem, there is
no one best research design. Certain techniques are simply more appropriate than
others.
For example, what technique should the Gwaliors Museum of Royal Scindia family
use to determine which of its exhibits is the most popular ? A survey ? (Could you
really expect visitors to remember and rate all the museum's exhibits ?) Experimentation?
(Would you close off the exhibits one at a time and count the complaints associated
with each closing ?) Secondary data ? (That might tell you what exhibits are most
popular at other museums.) The Gwalior Museum's researcher actually suggested the
simple and inexpensive observation technique of keeping track of how frequently the
wooden floor tile had to be replaced in front of each exhibitindicating which exhibit
drew the heaviest traffic. Of course, had the museum been in a hurry for information,
another method would have been more appropriate, but the wooden floor tile approach
gave museum operators a good measurement over time at a low cost.
Stage 3 : Selecting a Sample
Once a researcher has determined which research design to use, the next step is to
select a sample of people, organization, or whatever is of interest. The methods for
selecting the sample are important for the accuracy of the study.
Sampling : Any procedure in which a small part of the whole is used as the basis for conclusions
regarding the whole.
Sample : A portion or subset of a larger population.
Though sampling is a highly developed statistical science, we all apply its basic concepts
in daily life. For example, the first taste (or sample) of a bowl of vegetable may
indicate that the vegetable needs salt, is too salty, or is just right. Sampling, then, is
any procedure in which a small part of the whole is used as the basis for conclusions
regarding the whole.
Population in marketing research, any complete group of people or entities sharing some common
set of characteristics the group from which a sample is taken.
A sample is simply a portion, or subset, of a larger population. It makes sense that a
sample can provide a good representation of the whole. A well-chosen sample of
lawyers in New Delhi should be representative of all New Delhi lawyers making
surveying all of them unnecessary. A survey of all the members of a group is called a
census. For a small groupsay, a group comprising the Vice Chancellors of all
universities in Indiasampling is not needed. All the VCs can easily be identified and
contacted.
Census : A survey of all the members of a group (an entire population).
Target population : The population of interest in a marketing research study; the population from
which samples are to be drawn.
Sampling essentially requires answering these three questions :
1. Who is to be sampled ? Specifying the target population, or the total group of
interest, is the first aspect of sampling. The manager must make sure the population
to be sampled accurately reflects the population of interest. Suppose a Maruti
Service Station manager wants to analyze the service stations image among the
Maruti car owners collects information about the customers from the dealer and
vehicle registration office or insurance companies. Next step is to, identify who
will be surveyed ? All the owners of Maruti cars or those customers who gets
their cars serviced at his service station or the customers who get their cars
serviced at other service stations.
Lists of customers, telephone directories, membership lists, and lists of automobile
registrations are a few of the many population lists from which a sample may be
taken. Selecting a list from which to draw a sample is a crucial aspect of sampling.
If the list is inaccurate, the sample may not be representative of the larger population
of interest
2. How big should the sample be ? The traditional tongue-in-check response to
this questionbig enoughsuggests the true answer. The sample must be big
enough to properly portray the characteristics of the target population. In general,
bigger samples are better than smaller samples. Nevertheless, if appropriate
sampling techniques are used a small proportional of the total population will give
a reliable measure of the whole. For instance the Nielsen TV ratings survey,
which appears to be highly accurate involves only a few thousands of the 103
million U.S. households. The keys here are that most families TV viewing habits
are similar and that the Nielsen families are selected with meticulous care to
assure the representativeness of the sample.
Pre-poll and post-poll surveys conducted by different media groups often go wrong
in correctly predicting the outcomes even though the surveys were spread over
around 20 states 150 cities and thousands of respondents. This is because these
surveys are not representative of rural population. Data is collected only from the
cities and the predictions were made on the basis of urban respondents responses.
3. How should the sample be selected ? The way sampling units are selected is a
major determinant of the accuracy of marketing research. There are two major
sampling methods ; probability sampling and nonprobability sampling.
Probability sample : A sample selected by statistical means in such a way that all members of the
sampled population had a known, nonzero chance of being selected.
When the sampling procedures are such that the laws of probability influence the
selection of the sample, the result is a probability sample. A simple random sample
consists of individual names drawn according to chance selection procedures from a
complete list of all people in a population. All these people have the same chance of
being selected. The procedure is called simple because there is only one stage in the
sampling process.
Nonprobability sample : A sample chosen on the basis of convenience or personal judgment.
When sample units are selected on the basis of convenience or personal judgment (for
example, if New Delhi is selected as a sample city because it appears to be representative
of Indian population), the result is a nonprobability sample. In one type of
nonprobability sample, a convenience sample, data are collected from the people who
are most conveniently available. A professor or graduate student who administers a
questionnaire to a class is using a convenience sample. It is easy and economical to
collect sample data this way; but unfortunately, this type of sampling often produces
unrepresentative samples. Another nonprobability sample, the quota sample, is often
utilized by interviewers who intercept consumers at shopping malls. Within this type of
sampling, people are chosen because they appear to the interviewers to be of the
appropriate age, sex, race, or the like.
Stage 4 : Collecting Data
Once the problem has been defined, the research techniques chosen, and the sample to
be analyzed selected, the researcher must actually collect the needed data. Whatever
collection method is chosen, it is the researcher's task to minimize errors in the process
and errors are easy to make.
Pretesting : Conducting limited trials of a questionnaire or some other aspect of a study to determine
its suitability for the planned research project.
Generally, before the desired data are collected, the collection methods is pretested. A
proposed questionnaire or interview script might be tried out on a small sample of
respondents in an effort to assure that the instructions and questions are clear and
comprehensible. The researcher may discover that the survey instrument is too long,
causing respondents to lose interest, or too short, yielding inadequate information. The
pretesting provides the researcher with a limited amount of data that will give an idea
of what can be expected from the upcoming full-scale study. In some cases, these data
will show that the study is not answering the researcher's questions. The study may
then have to be redesigned. After pretesting shows the data collection method and
questionnaire to be sound, the data can be collected.
Stage 5 : Analyzing the Data
Editing : Checking completed questionnaires or other data collection forms for omissions, incomplete
or otherwise unusable responses, illegibility, and obvious inconsistencies.
Once a researcher has completed what is called the fieldwork by gathering the data
needed to solve the research problem, those data must be manipulated, or processed.
The purpose is to place the data in a form that will answer the marketing manager's
questions.
Processing requires entering the data into a computer. Data processing ordinarily begins
with a job called editing, in which surveys or other data collection instruments are
checked for omissions, incomplete or otherwise unusable responses, illegibility, and
obvious inconsistencies. As a result of the editing process certain collection instruments
may be discarded. In research reports, it is common to encounter phrase, like this
One thousand people were interviewed, yielding 856 usable response. The process
may also uncover correctable errors, such as the recording of a usable response on the
wrong line of a questionnaire.
Coding : Establishing meaningful categories for responses collected by means of surveys or other
data collection forms so that the responses can be grouped into usable classifications.
Once the data collection forms have been edited, the data undergo coding. That is,
meaningful categories are established so that responses can be grouped into classification
usable for computer analysis. For example, for a survey focusing on response differences
between men and women, a gender code, such as 1 = male and 2 = female, might be
used.
Data analysis : Statistical and/or qualitative consideration of data gathered by research.
After editing and coding, the researcher is ready to undertake the process of analysis.
Data analysis may involve statistical analysis, qualitative analysis, or both. The type of
analysis used should depend on management's information requirements, the research
hypothesis, the design of the research itself, and the nature of the data collected.
A review of the many statistical tools that can be used in marketing research is beyond
the scope of this book. They range from simple comparisons of numbers and percentages
(100 people, or 25 percent of the sample, agreed) to complex mathematical
computations requiring a computer. Statistical tools such as the t-test of two means,
the chi-square test, and correlation analysis are commonly used to analyze data. It may
be surprising, in light of the availability of these and many other techniques, that a great
number of studies use statistics no more sophisticated than averages and percentages.
Stage 6 : Drawing Conclusions and Preparing a Report
Remember that the purpose of marketing research is to aid managers in making effective
marketing decisions. The researcher's role is to answer the question What does this
mean to marketing managers? therefore, the end result of the research process must
be a report that usefully communicates research findings to management. Typically,
management is not interested in how the findings were arrived at. Except in special
cases, management is likely to want only a summary of the findings. Presenting these
clearly, using graphs, charts, and other forms of artwork, is a creative challenge to the
researcher and any others involved in the preparation of the final report. If the researcher
does not communicate the findings so that marketing managers can understand them,
the research process has been, in effect, a total waste.
Stage 7 : Following Up
After the researcher submits a report to management, he or she should follow up to
determine if and how management responded to the report. The researcher should ask
how the report could have been improved and made more useful. This is not to say that
researchers should expect that managers will always agree with a report's conclusions
or pursue its suggested courses of action. Deciding such things, is, after all, the role of
managers, not of researchers. Marketing management, for its part, should let researcher
know how report could be improved or how future reports might be made more useful.
Trends in Company Organization
Companies often need to restructure their business and marketing practices in response
to significant changes in the business environment, such as globalization, deregulation,
computer and telecommunications advances, and market fragmentation. The main
responses of business firms to a rapidly changing environment have included these :
l Reengineering : Appointing teams to manage customer-value building processes
and trying to break down department walls between functions.
l Outsourcing : A greater willingness to buy more goods and services from outside
vendors when they can be obtained cheaper and better this way. A number of
multinational companies are outsourcing a number of services from India.
l Benchmarking : Studying best practice companies to improve the companys
performance. Best practices in different functional areas must be identified and
implemented in the company.
l Supplier partnering : Increased partnering with fewer but larger value-adding
suppliers. This will ensure right quality in right quantity at the right price and at the
right time.
l Customer partnering : Working more closely with customers to add value to
their operations, by suggesting the right solutions (products or services) for their
problems.
l Merging : Acquiring or merging with firms in the same industry to gain enconomies
of scale and scope in manufacturing and marketing activities. It also calls for
concentrating on what you do best.
l Globalizing : Increased effort to both think global and act local, because the
world is moving towards global village where the products, services and people
will flow across the borders.
l Flattening : Reducing the number of organizational level to get closer to the
customer so that communication and decision making are faster. Speed is the
way of winning marketing war.
l Focusing : Determining the most profitable businesses and customers and focusing
on them and continuously delighting them with superior products and services.
l Empowering : Encouraging and empowering personnel to produce more ideas
and take more so that the executives can focus more on forward planning rather
than sending time on routine decision making.
All these trends will undoubtedly have an impact on marketing organization and
practices.
Chapter 18
Marketing Organization and Marketing Control
Marketing Organization and Marketing Control 541
The role of marketing in the organization will also have to change. Traditionally, marketers
have played the role of middlemen, charged with understanding customer needs and
transmitting the voice of the customer to various functional areas in the organization,
who then acted upon these needs. Underlying this conception of the marketing function
was the assumption that customers were hard to reach and could not interact directly
with other functional areas. But in a networked enterprise, every functional area can
interact with customers, especially electronically. Marketing no longer has sole ownership
of customer interactions; rather, marketing needs to integrate all the customer facing
processes so that customers see a single face and hear a single voice when they interact
with the firm.
Marketing Organization
Over the years, marketing has grown from a simple sales department into a complex
group of activities. We will examine how marketing departments have evolved in
companies, how they are organized, and how they interact with other company
departments.
The Evolution of the Marketing Department
Marketing departments have evolved through six stages. Companies can be found in
each stage.
Stage 1 : Simple Sales Department
Small companies typically appoint a sales vice president, who manages a sales force
and also does some selling. When the company needs marketing research or advertising,
the sales vice president hires help from the outside [Figure 18.1(a)]. This type of
structure in the small companies operating in a local market whose customers are
located in the diameter of 100 kms.
Stage 2 : Sales Department with Ancillary Marketing Functions
As the company expands, it needs to add or enlarge certain functions. For example, an
South Indian firm that plans to operate in the North India will need to conduct marketing
research to learn about customer needs and market potential. It will have to advertise
its name and products in the area. The sales vice president will hire a marketing
research manager, an advertising manager or some other marketing specialists to handle
these activities. He might hire a marketing director to manage these and other marketing
functions [Figure 18.1(b)]. Nirma detergent brand when tyring to penetrate North
Indian market used this structure very effectively.
Stage 3 : Separate Marketing Department
The continued growth of the company will warrant additional investment in marketing
research, new-product development, advertising and sales promotion, and customer
service. Yet the sales vice president normally focuses time and resources on the sales
force. Eventually the CEO will see the advantage of establishing a separate marketing
department headed by a marketing vice president, who reports, along with the sales
vice president, to the president or executive vice president [Figure 18.1(c)]. At this
stage, sales and marketing are separate functions that are expected to work closely
together to gain maximum advantage from the marketing opportunities.
This arrangement permits the CEO to obtain a more balanced view of company
opportunities and problems. Suppose sales start slipping. The sales vice president
might recommended hiring more sales-people, raising sales compensation, running a
sales contest, providing more sales training or cutting the price so the product will be
easier to sell. The marketing vice president will want to analyze the forces affecting
the market place. Is the company going after the right segments and customers ? Do
the target customers have a changing view of the companys and competitors products?
Are changes in product features, styling, packaging, services distribution, or promotion
warranted ?
Stage 4 : Modern Marketing Department
Although the sales and marketing vice presidents should work together, their relationship
is often strained and marked by distrust. The sales vice president resents efforts to
make the sales force less important in the marketing mix, and the marketing vice president
seeks a larger budget for non-sales force activities.
Figure 18.1: Stages in the Evolution of the Marketing Department
The marketing managers task is to identify opportunities and prepare marketing strategies
and programs. Salespeople are responsible for implementing these programs. Marketers
rely on marketing research, try to identify and understand market segments, spend time
in planning, think long term, and aim to produce profits and gains in market share.
Salespeople, in contrast, rely on street experience, try to understand each individual
buyer, spend time in face-to-face selling, think short term, and try to meet their sales
(a) Stage 1 : Simple Sales Department
President
Sales VP
Sales force
Other marketing
functions
(hired from
outside)
(b) Stage 2 : Sales Department
with Ancillary Marketing Functions
President
Sales VP
Sales force
Marketing Director
Other marketing
functions (Internal
staff and external
support)
(c) Stage 3 : Separate Marketing
Department
President
Sales VP Marketing VP
Sales force
Other marketing
functions
(d) Stages 4 and 5 : Modern/Effective
Marketing company
President
Executive VP
of Marketing and sales
Sales VP Marketing VP
Sales force
Other marketing
functions
(e) Stage 6 : Process- and
Outcome- Based Company
Cross-disciplinary team with
process leader
Marketing
Department
Marketing
Personnel
quotas. There is a conflict of long term goals and short term goals between marketing
and sales functions.
If there is too much friction between sales and marketing, the company president might
place marketing activities back under the sales vice president, instruct the executive
vice president to handle conflicts, or place the marketing vice president in charge of
everything, including the sales force. This last solution is the basis of the modern marketing
department, a department headed by a marketing and sales executive vice president
with managers reporting from every marketing function, including sales management
[Figure 18.1(d)].
Stage 5 : Effective Marketing Company
A company can have an excellent marketing department and yet fail at marketing.
Much depends on how the other departments view customers. If they point to the
marketing department and say, They do the marketing, the company has not
implemented effective marketing. Only when all employees realize that their jobs are
created by customers does the company become an effective marketer. They must
also realize they need the customer, customer dont need them (unless the company
has monopoly).
Stage 6 : Process- and Outcome-Based Company
Many companies are now refocusing their structure on key processes rather than
departments. Departmental organization is increasingly viewed as a barrier to the
smooth performance of fundamental business processes such as new-product
development, customer acquisition and retention, order fulfilment, and customer service.
In the interest of achieving customer-related process outcomes, companies are now
appointing process leaders who manage cross-disciplinary teams. Marketing and
salespeople are consequently spending an increasing percentage of their time as process
team members. As a result, marketing personnel may have a solid-line responsibility to
their teams and a dotted-line responsibility to the marketing department. Each team
sends periodic evaluations of the marketing members performance to the marketing
department. The marketing department is also responsible for training its marketing
personnel, assigning them to new teams, and evaluating their overall performance [Figure
18.1(e)].
Organizing the Marketing Department
Modern marketing departments take numerous forms. The marketing department may
be organized by function, geographic area, products, or customer markets.
Functional Organization
The most common form of marketing organization consists of functional specialists
reporting to a marketing vice president, who coordinates their activities Figure 18.2,
shows five specialists. Additional specialists might include a customer-service manager,
a marketing-planning manager, and a market-logistics manager.
It is quite a challenge to develop smooth working relations within the marketing
department. Cespedes has urged companies to improve the critical interfaces among
field sales, customer service, and product management groups, because they collectively
have a major impact on customer satisfaction. He has proposed several ways to form
tighter links among these three key marketing groups.
The main advantage of a functional marketing organization is its administrative simplicity.
However, this form loses effectiveness as products and markets increase. First, a
functional organization often leads to inadequate planning for specific products and
markets. Products that are not favoured by anyone are neglected. Second, each
functional group competes with the other functions for budget and status. The marketing
vice president constantly has to weigh the claims of competing functional specialists
and faces a difficult coordination problem.
Geographic Organization
A company selling in a national market often organizes its sales force (and sometimes
other functions, including marketing) along geographic lines. The national sales manager
may supervise four regional sales managers, who each supervise six zone managers,
who in turn supervise eight district sales managers, who supervise ten salespeople.
Several companies are now adding area market specialists (regional or local marketing
managers) to support the sales efforts in high-volume, distinctive markets.
Several factors have fueled the move toward regionalization and localization. The
Indian mass market has slowly subdivided into a profusion of minimarkets along
demographic lines : senior citizens, dual role females, youngsters, teenagers, Tibetians
the list goes on. In India each state has its own distinct culture, life style, food habits,
thus making it more like a regional market rather than national market. Data from
retail-store scanners allow instant tracking of product sales, helping companies pinpoint
local problems and opportunities. Retailers themselves strongly prefer local programs
aimed at consumers in their cities and neighbourhoods. To keep retailers happy,
manufacturers now create more local marketing plans.
Companies that have shifted to regional marketing are McDonalds, which now provides
different types of menus for different Indian states. Private banks providing various
types of services to the customers at their doorsteps in Metropolitan cities but not in
other cities. Hindustan Lever Limited running different advertising compaigns in North
and South India.
Regionalization may be accompanied by a move toward branchising. Branchising
means empowering the companys districts or local offices to operate more like
franchises. IBM told its branch managers to make it your business. The
branches resemble profit centers and local managers have more strategy latitude and
incentive.
Product or Brand-Management Organization
Companies producing a variety of products and brands often establish a product (or
brand-) management organization. The product-management organization does not
replace the functional management organization but rather serves as another layer of
management. A product manager supervises product category managers, who in turn
supervise specific product and brand managers. A product-management organization
makes sense if the company's product are quite different, or if the sheer number of
products is beyond the ability of a functional marketing organization to handle. Hindustan
Lever Limited uses a product-management organization structure. Separate product
category managers are in charge of detergents, cosmetics, food products etc.
Product and brand managers have these tasks :
l Developing a long-range and competitive strategy for the product category and
subcategories.
l Preparing an annual marketing plan and sales forecast for each product and brand.
l Working with advertising and Merchandising agencies to develop copy, programs,
and campaigns for different brands.
l Stimulating support of the product among the sales force and distributors to maximise
everyones returns and to increase companys.
l Gathering continuous intelligence on the product's performance, customer and
dealer attitudes, and new problems and opportunities to keep the products and
brands updated according to the needs and requirements of the customers.
l Initiating product improvements to meet changing market needs to keep the products
and brands relevant in the changing conditions.
Figure 18.2: Functional Organization
These tasks are common to both consumer- and industrial product managers. However,
consumer-product managers typically manage fewer products and spend more time on
advertising and sales promotion. They are often younger and MBA-educated. Industrial
product managers spend more time with customers and laboratory and engineering
personnel, think more about the technical aspects of their product and possible design
improvements, and work more closely with the sales force and key buyers because
they handle a few customers who place large orders.
The product management organization introduces several advantages. The
product manager can concentrate on developing a cost effective marketing mix for the
product. The product manager can react more quickly to problems in the marketplace
than a committee of functional specialists can. The company's smaller brands are
less neglected, because they have a product advocate. Product management also is an
excellent training ground for young executives, because it involves them in almost
every area of company operations (Figure 18.3), be it production or personnel or
finance.
Marketing
vice-president
Marketing
administration
manager
Advertising and
sales-promotion
manager
Sales
manager
Marketing
research
manager
New-products
manager
Figure 18.3: The product manager's Interactions
But a product-management organization has some disadvantages. First, product
management creates some conflict and frustration. Typically, product managers are
not given enough authority to carry out their responsibilities effectively. They have to
rely on persuasion to get the cooperation of advertising, sales, manufacturing, and other
departments. They are told they are minipresidents" but are often treated as low-level
coordinators. They are burdened with a great amount of paperwork. They often have
to go over the heads of others to get something done.
Second, product managers become experts in their product but rarely achieve functional
expertise. They vacillate between posing as experts and being cowed by real experts.
This is unfortunate when the product depends on a specific type of expertise, such as
advertising or sales or channel members agressive selling.
Third the product management system often turns out to be costly. One person is
appointed to manage each major product. Soon product managers are appointed to
manage even minor products. Each product manager, usually overworked, pleads
for an associate brand manager. Later, both overworked, they persuade management
to give them an assistant brand manager. With all these people, payroll costs climb.
In the meantime, the company continues to increase its functional specialists in copy,
packaging, media, sales promotion, market surveys, and statistical analysis. The
company is soon saddled with a large and costly structure with large number of
employees.
Purchasing
Publicity
Sales force
Fiscal
Legal
Packaging
Promotion
services
Media
Advertising
agency
Product
manager
Manufacluring
and
distribution
Research and
development
Market
research
Fourth brand managers normally manage a brand for only a short time. Either they
move up in a few years to another brand, or they move to another company. Short-
term involvement with the brand leads to short-term marketing planning and plays havoc
with building the brand's long term strengths.
Fifth, the fragmentation of markets makes it
harder to develop a national strategy from
headquarters. Brand managers must please
more regional-based trade groups and rely
more on the local sales force.
Pearson and Wilson have suggested five steps
to make the product management system
work better.
1. Clearly delineate the limits of the product
manager's role and responsibility. Telling
what he is expected to do and what not.
2. Build a strategy-development-and-
review process to provide a framework
for the product manager's operations.
3. Take into account areas of potential
conflict between product managers and
functional specialists when defining their
respective roles.
4. Set up a formal process that forces to
the stop all conflict-of-interest situations
between product management and
functional line management.
5. Establish a system for measuring results
consistent with the product manager's
responsibilities.
A second alternative is to switch from product managers to product teams. There are
three types of product-team structures in product management (Figure 18.4) :
1. Vertical product team : Product manager, associate product manager, and product
assistant (Figure 18.4 [a]). The product manager is the leader and deals with
other managers to gain their cooperation. The associate product manager assists
in these tasks and also does some paperwork. The product assistant carries out
most of the paperwork and routine analysis.
2. Triangular product team : Product manager and two specialized product
assistants, one who takes care of marketing research and the other, marketing
communications (Figure 18.4 [b]). The Hallmark Company uses a marketing
team consisting of a market manager (the leader), a marketing manager, and a
distribution manager.
3. Horizontal product team : Product manager and several specialists from
marketing and other functions (Figure 18.4 [c]). 3M has teams consisting of a
PM = product manager
APM =associate prod. Manager
PA = product associate
R = market recearcher
C = communication specialist
S = sales manager
D = distribution specialist
F = finance/accounting specialist
E = engineer
R C S D F E
PM
PM
R C
PM
APM
PA
(a) Vertical product team
(b) Triangles product team
(c) Horizontal product team
Figure 18.4: Three Types of
Product Teams.
team leader and representatives from sales, marketing, laboratory, engineering,
accounting, and marketing research.
A third alternative is to eliminate product manager positions for minor products and
assign two or more products to each remaining manager. This is feasible where two or
more products appeal to a similar set of needs. A cosmetics company does not need
separate product manager for each product because cosmetics serve one major need-
beauty. A toiletries company need different managers for headache remedies, toothpaste,
soap, and shampoo, because these products differ in use and appeal.
A fourth alternative is to introduce category management, in which a company focuses
on product categories to manage its brands.
Category management is not a panacea. It is still a product-driven system. Colgate
recently moved from brand management (Colgate toothpaste) to category management
(toothpaste category) to a new stage called customer-need management (mouth
care). This last step finally focuses the organization on a basic customer need.
Market-Management Organization
Many companies sell their products to a diverse set of markets. Canon sells its fax
machines to consumer, business, and government markets. U.S. Steel sells its steel to
the railroad, construction, and public-utility industries. When customers fall into different
user groups with distinct buying preferences and practices, a market management
organization is desirable. A markets manager supervises several market managers
(also called market-development managers, market specialists, or industry
specialists). The market managers draw upon functional services as needed. Market
managers of important markets might even have functional specialists reporting to them.
Market managers are staff (not line) people, with duties similar to those of product
managers. Market managers develop long-range and annual plans for their markets.
They must analyze where their market is going and what new products their company
should offer to this market. Performance is judged by their market's growth and
profitability. This system carries many of the same advantages and disadvantages of
product management systems. Its strongest advantage is that the marketing activity is
organized to meet the needs of distinct customer groups rather than focused on marketing
functions, regions, or products per se.
Many companies are reorganizing along market lines and becoming market centered
organizations. Xerox has converted from geographic selling to selling by industry.
Hewlett-Packard has set up a structure in which salespeople concentrate on businesses
within individual industries.
Product-Management/Market-Management Organization
Companies that produce many products flowing into many markets tend to adopt a
matrix organization. Consider DuPont.
l DuPont : DuPont was a pioneer in developing the matrix structure (Figure 18.5).
Its textile fibres department consists of separate product managers for rayon,
acetate, nylon, orlon, and dacron; and separate market managers for menswear,
women's wear, home furnishings, and industrial markets. The product managers
plan the sales and profits of their respective fibres. Their aim is to expand the use
of their fibre. They ask market managers to estimate how much of their fiber
they can sell in each market at a proposed price. The market managers, however,
are more interested in meeting their market's needs than pushing a particular
fiber. In preparing their market plans, they ask each product manager about the
fiber's planned prices and availabilities. The final sales forecasts of the market
managers and the product managers should add to the same grand total.
Figure 18.5: Product-/Market-Management Matrix System
Companies like DuPont can go one step further and view their market managers as the
main marketers, and their product managers as suppliers. The menswear market
manager, for example, would be empowered to buy textile fibres from DuPont's product
managers or, if DuPont's price is too high, from outside suppliers. This system would
force DuPont product managers to become more efficient. If a DuPont product manager
cannot match the arm's length pricing levels of competitive suppliers, then perhaps
DuPont should not continue to produce that fiber.
A matrix organization would seem desirable in a multiproduct, multimarket company.
The problem is that this system is costly and often creates conflicts. There is the cost
of supporting all the managers. There are also questions about where authority and
responsibility should reside. Here are two of many dilemmas :
1. How should the sales force be organized ? Should there be separate sales
forces for rayon, nylon, and the other fibers ? Or should the sales forces be
organized according to menswear, women's wear, and other markets ? Or should
the sales force not be specialized ? (The marketing concept favours organizing
the sales force by markets, not product).
2. Who should set the price for a particular product or market ? Should the
nylon product manager have final authority for setting nylon prices in all markets?
What happens if the menswear market manager feels that nylon will lose out in
this market unless special price concessions are made ? (Product managers
nevertheless should retain the ultimate authority over pricing).
Corporate-Divisional Organization
As multiproduct-multimarket companies grow, they often convert their larger product
or market groups into separate divisions. The divisions set up their own departments
and services. This raises the questions of what marketing services and activities should
be retained at corporate headquarters.
Market Managers
Men's wear Women's wear
Home
furnishings
Industrial
markets
Rayon
Acetate
Nylon
Orlon
Dacron
Product
Managers
Divisionalized companies have reached different answers to this question :
l No corporate marketing: Some companies lack a corporate marketing staff.
They don't see say useful function for marketing at the corporate level. Each
division has its own marketing department. Division heads report to the corporate
headquarters.
l Moderate corporate marketing: Some companies have a small corporate
marketing staff that performs a few functions, primarily (1) assisting top
management with overall opportunity evaluation, (2) providing divisions with
consulting assistance on request, (3) helping divisions that have little or no marketing,
(4) promoting the marketing concept throughout the company and (5) Managing
corporate advertising and public relations at the corporate level.
l Strong corporate marketing : Some companies have a corporate marketing
staff that, in addition to the preceding activities, also provides various marketing
services to the divisions, such as specialized advertising services, sales-promotion
services, marketing research services, sales-administration services, and
miscellaneous services.
Do companies tend to favour one of these models ? The answer is no. Some companies
have recently installed a corporate marketing staff for the first time; others have expanded
their corporate marketing department; other have reduced its size and scope; and still
others have eliminated it altogether.
The potential contribution of a corporate marketing staff varies in different stages of
the company's evaluation. Most companies begin with weak marketing in their divisions
and often establish a corporate staff to bring stronger marketing into the divisions through
training and other services. Some members of the corporate marketing staff might be
transferred to head divisional marketing departments. As the divisions become strong
in their marketing, corporate marketing has less to offer them. Some companies then
decide corporate marketing has done its job and proceed to eliminate the department.
Evaluation and Control
To deal with the many surprises that occur during the implementation of marketing
plans the marketing department continuously has to monitor and control marketing
activities. In spite of this need, many companies have inadequate control procedures.
This conclusion was reached in a study of 75 companies of varying sizes in different
industries. The main findings were these :
l Smaller companies do a poorer job of setting clear objectives and establishing
systems to measure performance.
l Less than half of the companies studied knew their individual products profitability.
About one-third of the companies had no regular review procedures for spotting
and deleting weak products.
l Almost half of the companies fail to compare their prices with those of the
competition. They also fail to analyze their warehousing and distribution costs, to
analyze the causes of returned merchandise, to conduct formal evaluations of
advertising effectiveness, and to review their sales force's call reports.
l Many companies take four to eight weeks to develop control reports, which are
occasionally inaccurate.
Table 18.1. lists four types of marketing control needed by companies : annual-plan
control, profitability control, efficiency control, and strategic control.
ANNUAL-PLAN CONTROL
The purpose of annual-plan control is to ensure that the company achieves the sales
profits, and other goals established in its annual plan. The heart of annual-plan control
is management by objectives. Four steps are involved (Figure 18.6). First management
sets monthly or quarterly goals. Second, management monitors its performance in the
marketplace. Third, management determines the cause of serious performance
deviations. Fourth, management takes corrective action to close the gaps between
goals and performance.
Figure 18.6: The Control Process
This control model applies to all levels of the organization. Top management sets sales
and profit goals for the year that are elaborated into specific goals for each lower level
of management. Each product manager is committed to attaining specified levels of
sales and costs; each regional and district sales manager and each sales representative
is also committed to specific goals. Each period, top management reviews and interprets
the results.
Managers use five tools to check on planed performance : sales analysis, market share
analysis, marketing expense-to-sales analysis, financial analysis, and market based
scorecard analysis.
Sales Analysis
Sales analysis consists of measuring and evaluating actual sales in relation to sales
goals. Two specific tools are used in sales analysis.
Sales-variance analysis measures the relative contribution of different factors to a
gap in sales performance. Suppose the annual plane called for selling 6,000 units in the
Corrective
action
Performance
diognosis
Performance
measurement
Goal setting
What should
we do about
it ?
Why
is it
happening
What is
happening ?
What do
we want
to achieve ?
first quarter at Rs. 15/- per unit, for total revenue of Rs. 90,000/-. At quarter's end,
only 5,000 units were sold at Rs. 13/- per unit, for total revenue of Rs. 65,000/-. The
sales performance variance is Rs. 25,000, or 27.8% of expected sales. How much of
this underperformance is due to the price decline and how much to the volume decline?
The following calculation answers this questions :
Variance due to price decline = (Rs. 15/- Rs. 13/-) (5,000) = Rs. 10,000 40%
Variance due to volume decline = (Rs. 15/-) (6,000 5,000) = Rs. 15,000 60%
Rs. 25,000 100.0%
Almost three-fifth of the variance is due to failure to achieve the volume target. The
company should look closely at why it failed to achieve expected sales volume.
Microsales analysis looks at specific products, territories, and so forth that failed to
produce expected sales. Suppose the company sells in three territories and expected
sales were 1,500 units, 500 units, and 2,000 units respectively. The actual sales volume
was 1,400 units, 525 units, and 1,075 units, respectively. Thus territory 1 showed a 7
per cent shortfall in terms of expected sales; territory 2, a 5 per cent improvement over
expectations; and territory 3, a 46 per cent shortfall ! Territory 3 is causing most of the
trouble. The sales vice president can check into territory 3 to see what explains the
poor performance. Territory 3's sales representative is loafing or has a personal problem;
a major competitor has entered this territory; or business is a recession in this territory
or customers tastes and preferences have changed in this territory.
Market-Share Analysis
Company sales do not reveal how well the company is performing relative to competitors.
For this purpose, management needs to track its market share. Market share can be
measured in three ways: Overall market share is the company's sales expressed as a
percentage of total market sales. Served market share is its sales expressed as a
percentage of the total sales to its served market. Its served market is all the buyers
who are able and willing to buy its product. Served market share is always larger than
overall market share. A company could capture 100 per cent of its served market and
yet have a relatively small share of the total market. Relative market share can be
expressed as market share in relation to its largest competitor. A relative market share
over 100 per cent indicates a market leader. A relative market share of exactly 100
per cent means that the company is tied for the lead. A rise in relative market share
means a company is gaining on its leading competitor.
Conclusions from market-share analysis, however, are subject to certain qualifications:
l The assumption that outside forces affect all companies in the same way is
often not true : The U.S. Surgeon General's Report on the harmful consequences
of cigarette smoking caused total cigarette sales to falter, but not equally for all
companies.
l The assumption that a company's performance should be judged against the
average performance of all companies is not always valid : A company's
performance should be judged against the performance of its closests competitors
or the best in the industry, if it wants to survive and grow.
l If a new firm enters the industry, then every existing firm's market share
might fall: A decline in market share might not mean that the company is
performing any worse than other companies. Share loss depends on the degree to
which the new firm hits the company's specific markets. If the new firms offer is
superior than the rest of the companies, then the assumption will be true.
l Sometimes a market-share decline is deliberately engineered to improve
profits: For example, management might drop unprofitable customers or products
to improve its profits. Although total sales and market share will decline but the
gross profits and net profits will improve.
Table 18.1: Types of Marketing Control
Type of Control Prime Responsibility Purpose of Control Approaches
I. Annual-plan control Top management To examine whether l Sales analysis
Middle management the planned results are l Market-share analysis
being achieved. l Marketing expense-to-sales analysis
l Financial analysis
l Market-based scorecard analysis
II. Profitability control Marketing controller To examine where the Profitability by :
company is making l product
or losing money l territory
l customer
l segment
l trade channel
l order size
III. Efficiency control Line and staff manage- To evaluate and improve Efficiency of :
ment Marketing con- the spending efficiency l sales force
troller and impact of marketing l advertising
expenditures l sales promotion
l distribution
IV. Strategic control Top management To examine whether the l Marketing-effectiveness review
Marketing auditor company is pursuing its l Marketing audit
best opportunities in l Marketing excellence review
markets, products, and l Company ethical and social responsibility
channels review
l Market share can fluctuate for many minor reasons: For example, market
share can be affected by whether a large sale occurs on the last day of the month
or at the beginning of the next month. Not all shifts in market share have marketing
significance.
Managers must carefully interpret market-share movements by product line, customer
type, region, and other breakdowns.
Marketing Expense-to-Sales Analysis
Annual-plan control requires making sure that the company is not overspending to
achieve sales goals. The key ratio to watch is marketing expense-to-sales. In one
company, this ratio was 30 percent and consisted of five component expense-to-sales
ratios : sales force-to-sales (15 per cent); advertising-to-sales (5 per cent); sales
promotion-to-sales (6 per cent); marketing research-to-sales (1 per cent); and sales
administration-to-sales (3 per cent).
Management needs to monitor these ratios, which will normally exhibit small fluctuations
that can be ignored. Fluctuations outside the normal range are a cause for concern.
The period-to-period fluctuations in each ratio can be tracked on a control chart (Figure
18.7). This chart shows that the advertising expense-to-sales ration normally fluctuates
between 8 per cent and 12 per cent, say 99 out of 100 times. In the fifteenth period,
however, the ratio exceeded the upper control limit. One of two hypotheses can explain
this occurrence : (1) The company still has good expense control, and this situation
represents rare chance event. (2) The company has lost control over this expense and
should find the cause. If no investigation is made to determine whether the environment
has changed, the risk is that some real change might have occurred, and the company
will fall behind. If the environment is investigated, the risk is that the investigation will
uncover nothing and be a waste of time and effort.
Figure 18.7: The Control-Chart Model
The behaviour of successive observations even within the upper and lower control
limits should be watched. Note in Figure 18.7 that the level of the expense-to-sales
ratio rose steadily from the ninth period onward. The probability of encountering six
successive increases in what should be independent events is only 1 in 64. This unusual
pattern should have led to an investigation sometime before the fifteenth observation.
Financial Analysis
The expense-to-sales ratios should be analyzed in an overall financial framework to
determine how and where the company is making its money. Marketers are increasingly
using financial analysis to find profitable strategies beyond sales building.
Management uses financial analysis to identify the factors that affect the companys
rate of return on net worth. The main factors are shown in Figure 18.9, along with
illustrative numbers for a large chain-store retailer. The retailer is earning a 12.5 per
cent return on net worth. The return on net worth is the product of two ratios, the
companys return on assets and its financial leverage. To improve its return on net
worth, the company must increase the ratio of its net profits to its assets or increase the
ratio of its assets to its net worth. The company should analyze the composition of its
assets (i.e., cash, accounts receivable, inventory, and plant and equipment) and see if it
can improve its asset management.
The return on assets is the product of two ratios, the profit margin and the asset
turnover. The profit margin in Figure 18.8, seems low, whereas the asset turnover is
more normal for retailing. The marketing executive can seek to improve performance
in two ways : (1) Increase the profit margin by increasing sales or cutting costs; and
(2) increase the asset turnover by increasing sales or reducing the assets (e.g., inventory,
receivables) that are held against a given level of sales.
Time period
0
1 3 4 5 6
6
7 8
8
9 10
10
11 12
12
13 14
14
15
Upper limit
Desired level
Lower limit
A
d
v
e
r
t
i
s
i
n
g

e
x
p
e
n
s
e
/
s
a
l
e
s

r
a
t
i
o
2
Market-Based Scorecard Analysis
Most company measurement systems amount to preparing a financial-performance
scorecard at the expense of more qualitative measures. Companies would do well to
prepare two market-based scorecards that reflect performance and provide possible
early warning signals.
A customer-performance score-card records how well the company is doing year
after year on such customer-based measures as :
l New customers l Target market preference
l Dissatisfied customers l Relative product quality
l Lost customers l Relative service quality
l Target market awareness
Norms should be set for each measures and management should take action when
results get out of bounds.
The second measure is called a stakeholder-performance scorecard. Companies
need to track the satisfaction of various constituencies who have a critical interest in
and impact on the companys performance : employees, suppliers, banks, distributors,
retailers, stockholders. Again, norms should be set for each group and management
should take action when one or more groups register increased levels of dissatisfaction.
Profitability Control
Here are some disconcerting findings from a bank profitability study :
We have found that anywhere from 20 to 40 per cent of an individual institutions
products are unprofitable, and up to 60 percent of their accounts generate losses.
Our research has shown that, in most firms, more than half of all customer
relationships are not profitable, and 30 to 40 per cent are only marginally so. It
is frequently a mere 10 to 15 per cent of a firms relationships that generate the
bulk of its profits.
1.5%
3.2
4.8% 2.6 12.5%
Profit margin
Net profits
Net sales
Asset turnover
Net sales
Total assets
Return on assets
Financial
leverage
Rate of return
on net worth
Net profits
Total assets
Total assets
Net worth
Net profits
Net worth
= X
=
Figure 18.8: Financial Model of Return on Net Worth.
Out profitability research into the branch system of a regional bank produced
some surprising results ....... 30 per cent of the banks branches were unprofitable.
Clearly, companies need to measure the profitability of their products, territories, customer
groups, segments, trade channels, and order sizes. This information will help management
determine whether any products or marketing activities should be expanded, reduced,
or eliminated.
In general, marketing-profitability analysis indicates the relative profitability of different
channels, products, territories, or other marketing entities. It does not prove that the
best course of action is to drop the unprofitable marketing entities, nor does it capture
the likely profit improvement if these marginal marketing entities are dropped.
Companies are showing a growing interest in using marketing-profitability analysis or
its broader version, activity-based cost accounting (ABC), to quantify the true
profitability of different activities. According to Cooper and Kaplan, ABC can give
managers a clear picture of how products, brands, customers, facilities, regions, or
distribution channels both generate revenues and consume resources.

To improve
profitability, managers can then examine ways to reduce the resources required to
perform various activities, or make the resources more productive or acquire them at a
lower cost. Alternatively, management may raise prices on products that consume
heavy amounts of support resources. The contribution of ABC is to refocus
managements attention away from using only labour or material standard costs to
allocate full cost, and toward capturing the actual cost of supporting individual products,
customers, and other entities.
EFFICIENCY CONTROL
Suppose a profitability analysis reveals that the company is earning poor profits in
certain products, territories, or markets. Are there more efficient ways to manage the
sales force, advertising, sales promotion, and distribution in connection with these
marketing entities ?
Some companies have established a marketing controller position to improve marketing
efficiency. Marketing controllers work out of the controllers office but specialize in
the marketing side of the business. At the leading companies they perform a sophisticated
financial analysis of marketing expenditures and results. They examine adherence to
profit plans, help prepare brand managers budgets, measure the efficiency of promotions,
analyze media production costs, evaluate customer and geographic profitability and
educate marketing personnel on the financial implications of marketing decisions.
Sales Force Efficiency
Sales managers need to monitor the following key indicators of efficiency in their territory
l Average number of calls per l Percentage of orders per 100 sales calls
salesperson per day
l Average sales call time per l Number of new customers
contact per period
l Average revenue per sales call l Number of lost customers per period
l Average cost per sales call l Sales force cost as a percentage of total sales
l Entertainment cost per sales call
When a company starts investigating sales force efficiency, it often finds areas for
improvement. General Electrical reduced the size of one of its divisional sales force
after discovering that its salespeople were calling on customers too often. When a
large airline found that its salespeople were both selling and servicing, they transferred
the servicing function to lower-paid clerks. Another company conducted time-and-
duty studies and found ways to reduce the ratio of idle-to-productive time.
Advertising Efficiency
Many managers believe it is almost impossible to measure what they are getting for
their advertising expenditure. But they should try to keep track of at least the following
statistics :
l Advertising cost per thousand target buyers reached by media vehicle
l Percentage of audience who noted, saw or associated, and read most of each
print ad
l Consumer opinions on the ads content and effectiveness
l Before and after measures of attitude toward the product
l Number of inquiries stimulated by the ad
l Cost per inquiry
Management can take a number of steps to improve advertising efficiency, including
doing a better job of positioning the product, defining objectives, pretesting messages,
using computer technology to guide the selection of media, looking for better media
buys, and doing posttesting.
Sales-Promotion Efficiency
Sales promotion includes dozens of devices for stimulating buyer interest and product
trial. To improve sales promotion efficiency, management should record the costs and
sales impact of each promotion. Management should watch the following statistics :
l Percentage of sales sold on deal
l Display costs per sales dollar
l Percentage of total amount of coupons redeemed to the total sales involving
coupons.
l Number of inquiries resulting from a demonstration.
A sales-promotion manager can analyze the results of different sales promotions and
advise product managers on the most cost-effective promotions to use.
Distribution Efficiency
Management needs to search for distribution economies in inventory control, warehouse
locations, and transportation modes. One problem is that distribution efficiency declines
when the company experiences strong sales increases. Peter Senge describes a situation
in which a strong sales surge causes the company to fall behind in meeting delivery
dates (Figure 18.9). This leads-customers to bad-mouth the company and eventually
sales fall. Management responds by increasing sales force incentives to secure more
orders. The sales force succeeds but once again the company slips in meeting delivery
dates. Management needs to identify the real bottleneck and invest in more production
and distribution capacity.
Figure 18.10: Dynamic Interactions Between Sales Orders and Distribution
Efficiency
Strategic Control
From time to time, companies need to undertake a critical review of overall marketing
goals and effectiveness. Each company should periodically reassess its strategic
approach to the marketplace with marketing-effectiveness reviews and marketing audits.
Companies can also perform marketing excellence reviews and ethical-social
responsibility reviews.
The Marketing-Effectiveness Review
Here is an actual situation.
The president of a major industrial-equipment company reviewed the annual business
plans of various divisions and found several lacking in marketing substance. He
called in the corporate vice president of marketing and said :
I am not happy with the quality of marketing in our division. It is very
uneven. I want you to find out which of our divisions are strong, average
and weak in marketing. I want to know if they understand and are practising
customer-oriented marketing. I want a marketing score for each division.
Management
increases sales
incentives
Sales
fall
Sales
surge
Delivery
Delay
Insufficient production
and distribution
capacity
Perceived nee
to improve
delivery time
No or late
action taken
to add capacity
For each deficient division, I want a plan for improving marketing
effectiveness over the next several years. I want evidence next year that
each deficient division is improving its capabilities.
The corporate marketing vice president agreed. His first inclination was to base
the evaluation on each divisions performance in sales growth, market share, and
profitability. His thinking was that high-performing divisions had good marketing
leadership and poor-performing division had poor marketing leadership.
But good results could be due to a divisions being in the right place at the right time.
Another division might have poor results in spite of excellent marketing planning.
A companys or divisions marketing effectiveness is reflected in the degree to which it
exhibits the five major attributes or a marketing orientation : customer philosophy,
integrated marketing organization, adequate marketing information, strategic
orientation and operation efficiency.
The Marketing Audit
Companies that discovers weaknesses should undertake a thorough study known as a
marketing audit.
l A marketing audit is a comprehensive, systematic, independent, and periodic
examination of a companysor business unitssmarketing environment,
objectives, strategies, and activities with a view to determining problem areas and
opportunities and recommending a plan of action to improve the companys
marketing performance.
Let us examine the marketing audits four characteristics :
1. Comprehensive : The marketing audit covers all the major marketing activities of
a business, not just a few trouble spots. It would be called a functional audit if it
covered only the sales force, pricing, or some other marketing activity. Although
functional audits are useful, they sometimes mislead management. Decline in
sales volume, for example, could be a symptom not of poor sales force training or
company products and promotion. A comprehensive marketing audit usually is
more effective in locating the real source of marketing problems.
2. Systematic : The marketing audit is an orderly examination of the organizations
macro and micromarketing environment, marketing objectives and strategies,
marketing systems, and specific activities. The audit indicates the most needed
improvements which are then incorporated into a corrective action plan involving
both short-run and long-run steps to improve overall marketing effectiveness.
3. Independent : A marketing audit can be conducted in six ways : self-audit, audit
from across, audit from above, company auditing office, company task force audit,
and outsider audit. Self-audits, in which managers use a checklist to rate their
own operations, lack objectivity and independence. Generally speaking however,
the best audits come from outside consultants who have the necessary objectivity,
broad experience in a number of industries, some familiarity with the industry
being audited, and the undivided time and attention to give to the audit.
4. Periodic : Typically, marketing audits are initiated only after sales have turned
down, sales force morale has fallen, and other problems have occurred. Companies
are thrown into a crisis partly because they failed to review their marketing
operations during good times. A periodic marketing audit can benefit companies
in good health as well as those in trouble.
A marketing audit starts with a meeting between the company officer(s) and the
marketing auditor(s) to work out an agreement on the audits objectives, coverage,
depth, data sources, report format, and time frame. A detailed plan as to who is to be
interviewed, the questions to be asked, the time and place of contact, and so on is
prepared so that auditing time and cost are kept to a minimum. The cardinal rule in
marketing auditing is : Dont rely solely on company managers for data and opinion.
Customers, dealers, and other outside groups must also be interviewed. Many companies
do not really know how their customers and dealers see them, nor do they fully understand
customer needs and value judgements.
The marketing audit examines six major components of the companys marketing
situation. The major questions are listed in Table 18.7.
Table 18.7: Components of a Marketing Audit.
Part I. Marketing Environment Audit
(A) Macroenvironment (B) Task Environment
Demographic Markets
Economic Customers
Environmental Competitors
Technological Distribution and Dealers
Political Suppliers
Cultural Facilitators and Marketing Firms
Publics
Part II. Marketing Strategy Audit Part III. Marketing Organization Audit
Business Mission Formal Structure
Marketing Objectives and Goals Functional Efficiency
Strategy Interface Efficiency
Part IV. Marketing System Audit Part V. Marketing Productivity Audit
Marketing Information Systems Profitability Analysis
Marketing Planning System Cost-Effectiveness Analysis
Marketing Control System
New-Product Development System
Part VI. Marketing Function Audit
Products
Price
Distribution
Advertising, Sales Promotion, Publicity, and Direct Marketing
Sales Force
The Marketing Excellence Review
Companies can use another instrument to rate their performance in relation to the best
practices of high-performing businesses. The three columns in Table 18.8, distinguish
among poor, good, and excellent business and marketing practices. Management can
place a check on each line as to its perception of where the business stands.
The resulting profile exposes the businesss weaknesses and strengths,
highlighting where the company might move to become a truly outstanding player in the
marketplace.
Table 18.8: The Marketing Excellence Review : Best Practices
Poor Good Excellent
Product driven Market driven Market driving
Mass-market-oriented Segment-oriented Niche-oriented and customer oriented
Product offer Augmented product offer Customer solutions offer
Average product quality Better than average Legendary
Average service quality Better than average Legendary
End-product-oriented Core-product-oriented Core-competency-oriented
Function-oriented Process-oriented Outcome-oriented
Reacting to competitors Benchmarking competitors Leapfrogging competitors
Supplier exploitation Supplier preference Supplier partnership
Dealer exploitation Dealer support Dealer partnership
Price driven Quality driven Value driven
Average speed Network Teamwork
Vertically integrated Flattened organization Strategic alliances
Stockholder driven Stakeholder driven Societally driven
The Ethical and Social Responsibility Review
Companies need to evaluate whether they are truly practising ethical and socially
responsible marketing. Business success and continually satisfying the customer and
other stakeholders are intimately tied to adoption and implementation of high standards
of business and marketing conduct. The most admired companies in the world abide by
a code of serving peoples interests, not only their own.
Business practices are often under attack because business situations routinely pose
tough ethical dilemmas.
Clearly the companys bottom line cannot be the sole measure of corporate performance
: Ethical issues must be dealt with in many aspects of its business. There are selling
issues such as bribery or stealing trade secrets; advertising issues such as false and
deceptive advertising; channel issues such as exclusive dealing and tying agreements;
product issues such as quality and safety, warranties, and patent protection; packaging
issues such as accurate labelling and use of scarce resources; price issues such as
price-fixing, discrimination, and resale price maintenance; and competitive issues such
as barriers to entry and predatory competition.
Raising the level of socially responsible marketing calls for a three-pronged attack.
First, society must use the law to define, as clearly as possible, those practices that are
illegal, antisocial, or anticompetitive. Second companies must adopt and disseminate a
written code of ethics, build a company tradition of ethical behaviour, and hold their
people fully responsible for observing ethical and legal guidelines. Third, individual
marketers must practise a social conscience in their specific dealings with customers
and various stakeholders.
Social Issues
Marketings impact on Individual Consumers
Consumers have many concerns about how well the marketing system serves their
interests. Surveys usually show that consumers hold mixed or even slightly unfavourable
attitudes toward marketing practices. Consumers, consumer advocates, government
agencies, and other critics have accused marketing of harming consumers through high
prices, deceptive practices, high-pressure selling, shoddy or unsafe products, planned
obsolescence, and poor service to disadvantaged consumers.
High Prices
Many critics charge that the marketing system causes prices to be higher than they
would be under more sensible systems. They point to three factorshigh costs of
distribution, high advertising and promotion costs, and excessive markups.
High Costs of Distribution : A long-standing charge is that greedy intermediaries
mark up prices beyond the value of their services. Critics charge that there are too
many intermediaries, that intermediaries are inefficient and poorly run, or that they
provide unnecessary or duplicate services. As a reuslt, distribution costs too much, and
consumers pay for these excessive costs in the form of higher prices.
How do resellers answer these charges ? They argue that intermediaries do work that
would otherwise have to be done by manufacturers or consumers. Markups reflect
services that consumers themselves wantmore convenience, larger stores and
assortment, longer store hours, return privileges, and others. Moreover, the costs of
operating stores keep rising, forcing retailers to raise their prices. In fact, they argue,
retail competition is so intense that margins are actually quite low. For example, after
taxes, supermarket chains are typically left with barely 1 percent pofit on their sales. If
some resellers try to charge too much relative to the value they add, other resellers will
step in with lower prices.
High Advertising and Promotion Costs : Modern marketing is also accused of pushing
up prices to finance heavy advertising and sales promotion. For example, a dozen
tablets of a heavily promoted brand of aspirin sell for the same price as 100 tablets of
less promoted brands. Differentiated productcosmetics, detergents, toiletriesinclude
promotion and packaging costs that can amount to 40 percent or more of the
manufacturers price to the retailer. Critics charge that much of the packaging and
promotion adds only psychological value to the product rather than functional value.
Retailers use additional promotionadvertising, displays, and conteststhat adds some
more to retail prices.
Chapter 19
Social, Ethical and Legal Issues in Marketing
Social, Ethical and Legal Issues in Marketing 563
Marketers respond that consumers can usually buy functional versions of products at
lower prices. However, they want and are willing to pay more for products that also
provide psychological benefitsthat make them feel wealthy, attractive, or special.
Brand name products may cost more, but branding gives buyers assurances of consistent
quality. Heavy advertising adds to product costs but adds value by informing millions of
potential buyers of the availability and merits of a brand. If consumers want to know
what is available on the market, they must expect manufacturers to spend large sums
of money on advertising. Also, heavy advertising and promotion may be necessary for
a firm to match competitors effortsthe business would lose share of mind if it did
not match competitive spending. At the same time, companies are cost-conscious
about promotion and try to spend their money wisely.
Excessive Markups : Critics also charge that some companies mark up goods
excessively. They point to the drug industry, where a tablet costing 50 paise to make
may cost the consumer Rs. 3/- to buy. They point to the pricing tactics of high charges
by televison repair and auto repair.
Marketers respond that most businesses try to deal fairly with consumers because they
want repeat business. Most consumers abuses are unitentional. When shady marketers
do take advantage of consumers, they should be reported to state and central agencies.
Marketers also respond that consumers often dont understand the reasons for high
markups. For example, pharmaceutical markups must cover the costs of purchasing,
promoting, and distributing existing medicines plus the high research and development
costs of formulating and testing new medicines.
Deceptive Practices
Marketers are sometimes accused of deceptive practices that lead consumers to believe
they will get more value than they actually do. Deceptive practices fall into three groups
: deceptive pricing, promotion, and packaging. Deceptive pricing includes practices
such as falsely advertising factory or wholesale prices or a large price reduction
from a phony high retail list price. Deceptive promotion includes practices such as
overstating the products features or performance, luring the customer to the store for
a bargain that is out of stock, or running rigged contests. Deceptive packaging includes
exaggerating package contents through subtle design, not filling the package to the top,
using misleading labeling, or describing size in misleading terms.
To be sure, questionable marketing practices do occur. For example a pop-up Web
screen promising free goods or discounted prices.
Marketers argue that most companies avoid deceptive practices because such practices
harm their business in the long run. If consumers do not get what they expect, they will
switch to more reliable products. In addition, consumers usually protect themselves
from deception. Most consumers recognize a marketers selling intent and are careful
when they buy, sometimes to the point of not believing completely true product claims.
One noted marketing thinker, Theodore Levitt, claims that some advertising puffery is
bound to occurand that it may even be desirable : There is hardly a company that
would not go down in ruin if it refused to provide fluff, because nobody will buy pure
functionality ..... Worse, it denies ..... peoples honest needs and values. Without
distortion, embellishment, and elaboration, life would be drab, dull, anguished, and at its
existential worst.
High-Pressure Selling
Salespeople are sometimes accused of high-pressure selling that persuades people to
buy goods they had not thought of buying. It is often said that insurance, real estate,
and cars are sold, not bought. Salespeople are trained to deliver smooth, canned talks
to entice purchase. They sell hard because sales contests promise big prizes to those
who sell the most.
Marketers know that buyers often can be talked into buying unwanted or unneeded
things. Laws require door-to-door and telephone salespeople to announce that they are
selling a product. Buyers also have a three-day cooling-off period in which they can
cancel a contract after rethinking it. In addition, consumers can complain to state
consumer protection agencies when they feel that undue selling pressure has been
applied.
But in most cases, marketers have little to gain from high-pressure selling. Such tactics
may work in one-time selling situations for short-term gain. However, most selling
involves building long-term relationship with valued customers. High-pressure or
deceptive selling can do serious damage to such relationships.
Shoddy or Unsafe Products
Another criticism is that products lack the quality they should have. One complaint is
that many products are not made well and many services are not performed well. A
second complaint is that many products deliver little benefit. For example, some
consumers are surprised to learn that many of the healthy foods being marketed
today, such as cholesterol-free edibles, low-fat frozen dinners, and high-fiber cereals,
may have little nutritional value. In fact, they may even be harmful.
[Despite] sincere efforts on the part of most marketers to provide healthier
products, ..... many promises emblazoned on packages and used as ad slogans
continue to confuse nutritionally uninformed consumers and ..... may actually be
harmful to that group .... [Many consumers] incorrectly assume the product is
safe and eat greater amounts than are good for them ......
A third complaint concerns product safety. Product safety has been a problem for
several reasons, including manufacturer indifference, increased production complexity,
poorly trained labour, and poor quality control. For years, Consumers Unionthe non-
profit testing and information organization that publishes the Consumer Report magazine
and Web sitehas reported various hazards in tested products; electrical dangers in
appliances, carbon monoxide poisoning from room heaters, injury risks from lawn
mowers, and faulty automobile design, among many others. The organizations testing
and other activities have helped consumers make better buying decisions and encouraged
businesses to eliminate product flaws.
However, most manufacturers want to produce quality goods. The way a company
deals with product quality and safety problems can damage or help its reputation.
Companies selling poor-quality or unsafe products risk damaging conflicts with consumer
groups and regulators. Moreover, unsafe products can result in product liability suits
and large awards for damages. More fundamentally, consumers who are unhappy
with a firms products may avoid future purchases and talk other consumers into doing
the same. Consider what happened to Bridgestone/Firestone following its recent recall
of 6.5 million flawed Firestone tyres. Product liability and safety concerns have driven
the company to the edge of bank ruptcy :
Profits have disappeared, and both customers and tire dealers alike are fleeing
the Firestone make. Ford, the tyre makers biggest customer, recently announced
plans to replace another 13 million Firestone tyres that it believes are unsafe.
You have a serious risk of the Firestone brand imploding. warns an industry
analyst. How bad will the financial hit get ? Cutting ties with Ford will cost the
company 4 per cent of its $7.5 billion in revenuesabout 40 per cent of its sales
to car companies. Mounting damages award from rollover suits and legal bills
could easily top the companys $463 million legal reserve. And if the National
Highway Traffic and Safety Administration supports Fords latest recall, Firestone
could find itself liable for much of the $3 billion cost.
Thus, quality missteps can have severe consequences. Todays marketers know that
customer-driven quality results in customer satisfaction, which in turn creates profitable
customer relationships.
Planned Obsolescence
Critics also have charged that some producers follow a program of planned
obsolescence, causing their products to become obsolete before they actually should
need replacement. For example, critics charge that some producers continually change
consumer concepts of acceptable styles to encourage more and earlier buying. An
obvious example is constantly changing clothing fashions.
Other producers are accused of holding back attractive functional features, then
introducing them later to make older models obsolete. Critics claim that this occurs in
the consumer electronics and computer industries. For example, Intel and Microsoft
have been accused in recent years of holding back their next-generation computer chips
and software until demand is exhausted for the current generation. Still other producers
are accused of using materials and components that will break, wear, rust, or rot sooner
than they should. One writer put it this way : The marvels of modern technology
include the development of a soda can which, when discarded, will last foreverand a
..... car, which, when properly cared for, will rust out in two or three years.
Marketers respond that consumers like style changes; they get tired of the old goods
and want a new look in fashion or a new design in cars. No one has to buy the new
look, and if too few people like it, it will simply fail. For most technical products,
customers want the latest innovations, even if older models still work. Companies that
withhold new features run the risk that competitor will introduce the new feature first
and steal the market. For example, consider personal computers. Some consumers
grumble that the consumer electronics industrys constant push to produce faster,
smaller, cheaper models means that they must continually buy new machines just to
keep up. Others, however, can hardly wait for the latest model to arrive.
There was a time not so long ago when planned obsolescene was a troubling
ghost in the machine. Four decades ago, consumer advocates described engineers
at General Electric who intentionally shortened the life of lightbulbs and automotive
engineers who proposed limiting the life span of cars. That was then. In todays
topsy-turvy world of personal computers, obsolescence is not only planned, it is
extolled by marketers as a principal virtue. Moreover, there has been hardly a
peep from consumers, who dutifully line up to buy each new generation of faster,
more powerful machines, eager to embrace the promise of simpler, happier, and
more productive lives. Todays computer chips are no longer designed to wear
out; in fact, they will last for decades or longer. Even so, hapless consumers now
rush back to the store ever more quickly, not to replace broken parts but to purchase
new computers that will allow them to talk longer, see more vivid colours, or play
cooler games.
Thus, companies do not design their products to break down earlier, because they do
not want to lose customers to other brands. Instead, they seek constant improvement
to ensure that products will consistently meet or exceed customer expectations. Much
of so-called planned obsolescence is the working of the competitive and technological
forces in a free societyforces that lead to ever-improving goods and services.
Poor Service to Disadvantaged Consumers
Finally, the marketing system has been accused to poorly serving disadvantaged
consumers. For example, critics claim that the urban poor often have to shop in smaller
stores that carry inferior goods and charge higher prices. A Consumers Union study
compared the food-shopping habits of low-income consumers and the prices they pay
relative to middle-income consumers in the same city. The study found that the poor do
pay more for inferior goods. The results suggested that the presence of large national
chain stores in low-income neighbourhoods made a big difference in keeping prices
down. However, the study also found evidence of redlining, a type of economic
discrimination in which major chain retailers avoid placing stores in disadvantaged
neighbourhoods.
Similar redlining charges have been leveled at the insurance, consumer lending, and
banking industries. Most recently, home and auto insurers have been accused of assigning
higher premiums to people with poor credit ratings. The insurers claim that individuals
with bad credit tend to make more insurance claims, and that this justifies charging
them higher premiums. However, critics and consumer advocates have accused the
insurers of a new form of redlining. Says one writer, This is a new excuse for denying
coverage to the poor, elderly, and minorities.
Clearly, better marketing systems must be built to service disadvantaged consumers.
Moreover, disadvantaged consumers clearly need consumer protection. The FTC has
taken action against merchants who advertise false values, sell old merchandise as
new, or charge too much for credit. The Commission is also trying to make it harder for
merchants to win court judgments against low-income people who were wheedled into
buying something.
Marketings Impact on Society As a Whole
The marketing system has been accused of adding to several evils in different societies
at large. Advertising has been a special targetso much so that the American
Association of Advertising Agencies launched a campaign to defend advertising against
what it felt to be common but untrue criticisms.
False Wants and Too Much Materialism
Critics have charged that the marketing system urges too much interest in material
possessions. People are judged by what they own rather than by who they are. To be
considered successful, people must own a large home, two cars, and the latest high-
tech gadgets. This drive for wealth and possessions hit new highs in the 1980s, when
phrases such as greed is good and shop till you drop seemed to characterize the
times.
In the new millennium, even though many social scientists have noted a reaction against
the opulence and waste of the previous decades and a return to more basic values and
social commitment, our infatuation with material things continues.
Its hard to escape the notion that what Americans really value is stuff. Since
1987, weve had more shopping malls than high schools. We average six hours a
week shopping and only forty minutes playing with our children. Our rate of
saving is 2 per centonly a quarter of what it was in the 1950s, when we earned
less than half as much in real dollars. In each of the past three years, more U.S.
citizens have declared personal bankruptcy than have graduated from college.
All this acquisition isnt making us happier; the number of Americans calling
themselves very happy peaked in 1957.
The critics do not view this interest in material things as a natural state of mind but
rather as a matter of false wants created by marketing. Businesses hire Madison
Avenue (where the headquarters of many advertising agencies are located) to stimulate
peoples desires for goods, and Madison Avenue uses the mass media to create
materialistic models of the good life. People work harder to earn the necessary money.
Their purchases increase the output of American industry, and industry in turn uses
Madison Avenue to stimulate more desire for the industrial output. Thus, marketing is
seen as creating false wants that benefit industry more than they benefit consumers.
These criticism overstate the power of business to create needs. However people
have strong defenses against advertising and other marketing tools. Marketers are
most effective when they appeal to existing wants rather than when they attempt to
create new ones. Furthermore, people seek information when making important
purchases and often do not rely on single sources. Even minor purchases that may be
affected by advertising messages lead to repeat purchases only if the product performs
as promised. Finally, the high failure rate of new products shows that companies are
not able to control demand.
On a deeper level, our wants and values are influenced not only by marketers but also
by family, peer groups, religion, ethnic background, and education. If Americans are
highly materialistic, these values arose out of basic socialization processes that go much
deeper than business and mass media could produce alone. Moreover, some social
critics even see materialism as a positivive and rewarding force :
When we purchase an object, what we really buy is meaning. Commercialism is
the water we swim in, the air we breathe, our sunlight and our shade..... Materialism
is a vital source of meaning and happiness in the modern world ..... We have not
just asked to go this way, we have demanded. Now most of the world is lining up,
pushing and shoving, eager to elbow into the mall. Getting and spending has
become the most passionate, and often the most imaginative, endeavour of modern
life. While this is dreary and depressing to some, as doubtless it should be, it is
liberating and democratic to many more.
Too Few Social Goods
Business has been accused of overselling private goods at the expense of public goods.
As private goods increase, they require more public services that are usually not
forthcoming. For example, an increase in automobile ownership (private good) requires
more highways, traffic control, parking spaces, and police services (public goods). The
overselling of private goods results in social costs. For cars, the social costs include
traffic congestion, air pollution, and deaths and injuries from car accidents.
A way must be found to restore a balance between private and public goods. One
option is to make producers bear the full social costs of their operations. The government
could require automobile manufacturers to build cars with even more safety features
and better pollution control systems. Automakers would then raise their prices to cover
extra costs. If buyers found the price of some cars too high, however, the producers of
these cars would disappear, and demand would move to those producers that could
support the sum of the private and social costs.
A second option is to make consumers pay the social costs. A number of highway
authorities around the world are starting to charge congestion tolls in an effort to
reduce traffic congestion.
Cultural Pollution
Critics charge the marketing system with creating cultural pollution. Our senses are
being constantly assaulted by advertising. Commercials interrupt serious programs;
pages of ads obscure printed matter; hoardings mar beautiful scenery. These interruptions
continually pollute peoples minds with messages of materialism, sex. power, or status.
Although most people do not find advertising overly annoying (some even think it is the
best part of television programming), some critics call for sweeping changes.
Marketers answer the charges of commercial noise with these arguments : First,
they hope that their ads reach primarily the target audience. But because of mass-
communication channels, some ads are bound to reach people who have no interest in
the product and are therefore bored or annoyed. People who buy magazines addressed
to their interestssuch as Inside Outside or Health & Fitnesrarely complain about
the ads because the magazines advertise products of interest. Second, ads make much
of television and radio free to users and keep down the costs of magazines and
newspapers. Many people think commercials are a small price to pay for these benefits.
Final, todays consumers have alternatives. For example, they can zip and zap TV
commercials or avoid them altogether on many cable or satellite channels. Thus, to hold
consumer attention, advertisers are making their ads more entertaining and informative.
Too Much Political Power
Another criticism is that business wields too much political power. Oil, tobacco,
auto, and pharmaceuticals senators support an industrys interests against the public
interest. Advertisers are accused of holding too much power over the mass media,
limiting their freedom to report independently and objectively. One critic has asked,
How can [most magazines] afford to tell the truth about the scandalously low
nutritional value of most packaged foods . . . when these magazines are being subsidized
by such advertisers who produce packaged food? . . . The answer is they cannot and
do not.
Moreover, because the media receive advertising revenues from many different
advertisers, it is easier to resist the influence of one or a few of them. Too much
business power tends to result in counter forces that check and offset these powerful
interests.
Marketings Imapct on Other Businesses
Critics also charge that a companys marketing practices can harm other companies
and reduce competition. Three problems are involved : acquisitions of competitors,
marketing practices that create barriers to entry, and unfair competitive marketing
practices.
Critics claim that firms are harmed and competition reduced when companies expand
by acquiring competitors rather than by developing their own new products. The large
number of acquisitions and rapid pace of industry consolidation over the past several
decades have caused concern that vigorous young competitors will be absorbed and
that competition will be reduced. In virtually every major industryretailing,
entertainment, financial services, utilities, transportation, automobiles, telecommunications,
health carethe number of major competitors is shrinking.
Acquistion is a complex subject. Acquisitions can sometimes be good for society. The
acquiring company may gain economies of scale that lead to lower costs and lower
prices. A wellmanaged company may take over a poorly managed company and improve
its efficiency. An industry that was not very competitive might become more competitive
after the acquisition. But acquisitions can also be harmful and therefore, are closely
regulatd by the government.
Critics have also charged that marketing practices bar new companies from entering
an industry. Large companies can use patents and heavy promotion spending, and can
tie up suppliers or dealers to keep out or drive out competitors. Those concerned with
antitrust regulation recognize that some barriers are the natural result of the
economic advantages of doing business on a large scale. Other barriers could be
challenged by existing and new laws. For example some critics have proposed a
progressive tax on advertising spending to reduce the role of selling costs as a major
barrier to entry.
Finally, some firms have in fact used unfair competitive marketing practices with the
intention of hurting or destroying other firms. They may set their prices below costs,
threaten to cut off business with suppliers, or discourage the buying of a competitors
products. Various laws work to prevent such predatory competition. It is difficult,
however, to prove that the intent or action was really predatory.
Although competitors and the governement charge that Microsofts actions are predatory,
the question is whether this is unfair competition or the healthy competition of a more
efficient company against the less efficent.
Citizen and Public Action to Regulate Marketing
Because some people view business as the cause of many economic and social ills,
grassroots movements have arisen form time to time to keep business in line. The two
major movements have been consumerism and environmentalism.
Consumerism
Consumerism is an organised movement of citizens and government agencies to
improve the rights and power of buyers in relation to sellers. Traditional sellers rights
include :
l The right to introduce any product in any size and style, provided it is not hazardous
to personal health or safety; or, if it is, to include proper warnings and controls.
l The right to charge any price for the product, provided no discrimination exists
among similar kinds of buyers.
l The right to spend any amount to promote the product, provided it is not defined as
unfair competition.
l The right to use any product message, provided it is not misleading or dishonest in
content or execution.
l The right to use any buying incentive schemes, provided they are not unfair or
misleading.
Traditional buyers rights include :
l The right not to buy a product that is offered for sale.
l The right to expect the product to be safe.
l The right to expect the product to perform as claimed.
Comparing these rights, many believe that the balance of power lies on the sellers
side. True, the buyer can refuse to buy. But critics feel that the buyer has too little
information, education, and protection to make wise decisions when facing sophisticated
sellers. Consumer advocates call for the following additional consumer rights :
l The right to be well informed about mportant aspects of the product.
l The right to be protected against questionable products and marketing practices.
l The right to influence products and marketing practices in ways that will improve
the quality of life.
Each proposed right has led to more specific proposals by consumerists. The right to be
informed includes the right to know the true interest on a loan (truth in lending), the true
cost per unit of a brand (unit pricing), the ingredients in a product (ingredient labeling),
the nutritional value of foods (nutritional labeling), product freshness (open dating), and
the true benefits of a product (truth in advertising). Proposals related to consumer
protection include strengthening consumer rights in cases of business fraud, requiring
greater product safety, and giving more power to government agencies. Proposals relating
to quality of life include controlling the ingredients that go into certain products and
packing, reducing the level of advertising noise, and putting consumer representatives
on company boards to protect consumer interests.
Consumers have not only the right but also the responsibility to protect themselves
instead of leaving this function to someone else. Consumers who believe they got a bad
deal have several remedies available, including contacting the company or the media;
contacting central, state, or local agencies; and going to small-claims courts.
Environmentalism
Environmentalism An organized movement of concerned citizens and government agencies to
protect and improve peoples living environment.
Whereas consumerists consider whether the marketing system is efficiently serving
consumer wants, environmentalists are concerned with marketings effects on the
environment and with the costs of serving consumers needs and wants.
Environmentalism is an organized movement of concerned citizens, businesses, and
government agencies to protect and improve peoples living environment.
Environmentalists are not against marketing and consumption; they simply want people
and organizations to oprerate with more care for the environment. The marketing
systems goal, they assert, should not be to maximize consumption, consumer choice or
consumer satisfaction, but rather to maximize life quality. And life quality means not
only the quantity and quality of consumer goods and services, but also the quality of the
environment. Environmentalists want environmental costs included in both producer
and consumer decision making.
Environmental sustainability A management approach that involves developing strategies that
both sustain the environment and product profits for the company.
The first wave of modern environmentalism in the United States was driven by
environmental groups and concerned consmer in the 1960s and 1970s. They were
concerned with damage to the ecosystem caused by strip-mining, forest depletion, acid
rain, loss of the atmospheres ozone layer, toxic wastes, and litter. They also were
concerned with the loss of recreational areas and with the increase in health problems
caused by bad air, polluted water, and chemically treated food.
The second environmentalism wave was driven by government, which passed laws
and regulations during the 1970s and 1980s governing industrial practices impacting the
environment. This wave hit some industries hard. Steel companies and utilities had to
invest billions of dollars in pollution control equipment and costlier fuels. The auto industry
had to introduce expensive emission controls in cars. The packaging industry had to
find ways to reduce litter. These industries and others have often resented and resisted
environmental regulations, especially when they have been imposed too rapidly to allow
companies to make proper adjustments. Many of these companies claim they have had
to absorb large costs that have made them less competitive.
The first two environmentalism waves are now merging into a third and stronger wave
in which companies are accepting responsibility for doing no harm to the environment.
They are shifting from protest to prevention, and from regulation to responsibility. More
and more companies are adopting policies of environmental sustainabilitydeveloping
strategies that both sustain the environment and produce profits for the company.
According to one strategist, The challenge is to develop a sustainable global economy
: an economy that the planet is capable of supporting indefinitely. . . . [Its] an enormous
challengeand an enormous opportunity.
Figure 19.1 shows a grid that companies can use to gauge their progress toward
environmental sustainability. At the most basic level, a company can practice pollution
prevention. This involves more than pollution controlcleaning up waste after it has
been created. Pollution prevention means eliminating or minimizing waste before it is
created. Companies emphasizing prevention have responded with green marketing
programsdeveloping ecologically safer product, recyclable and biodegradable
packaging, better polluiton controls, and more energy-efficient operations. They are
finding that they can be both green and competitive.
Figure 19.1: The Environmental Sustainability Grid
At the next level, companies can practice product stewardshipminimizing not just
pollution from production but all environmental impacts throughout the full product life
cycle. Many companies are adopting design for environment (DFE) practices, which
involve thinking ahead in the design stage to create products that are easier to recover,
reuse, or recycle. DEF not only helps to sustain the environment, it can be highly
profitable.
At the third level of environmental sustainability, companies look to the future and plan
for new environmental technologies. Many organizations that have made good headway
in pollution prevention and product stewardship are still limited by existing technologies.
To develop fully sustainable strategies, they will need to develop new technologies.
Monsato is doing this by shifting its agricultural technology base form bulk chemicals to
biotechnology. By controlling plant growth and pest resistance through bioengineering
rather than through the application of pesticides or fertilizers, Monsanto hopes to fulfill
its promise of environmentally sustainable agriculture.
Finally, companies can develop a sustainability vision, which serves as a guide to the
future. It shows how the companys products and services, processes, and policies
must evolve and what new technologies must be developed to get there. This vision of
sustainability provides a framework for pollution control, product stewardship, and
environmental technology.
Most companies today focus on the lower-left quadrant of the grid in Figure 19.1 investing
most heavily in pollution prevention. Some forward-looking companies practice product
stewardship and are developing new environmental technologies. Few companies have
well-defined sustainability visions. Emphasizing only one or a few cells in the
environmental sustainability grid in Figure 19.1 can be shortsighted. For example, investing
only in the bottom half of the grid puts a company in a good position today but leaves it
vulnerable in the future. In contrast, a heavy emphasis on the top half suggests that a
company has good environmental vision but lacks the skills needed to implement it.
Thus, companies should work at developing all four dimensions of environmental
sustainability.
New environmental technology
Is the environmental performance
of our products limited by our existing
technology base ?
Is there potential to realize
major improvements through
new technology ?
Pollution prevention
Where are the most significant
waste and emission streams from
our current operations ?
Can we lower costs and risks by
eliminating waste at the source or
by using it as useful input ?
Sustainability vision
Does our corporate vision direct
us toward the solution of social
and environmental problems ?
Does our vision guide the
development of new technologies,
markets, products, and processes ?
Product stewardship
What are the implications for the product design
and development if we assume responsibility
for a product's entire life cycle ?
Can we add value or lower costs while
simultaneously reducing the impact
of our products ?
Tomorrow
Today
Internal External
Environmentalism created some special challenges for global marketers. As international
trade barriers come down and global markets expand, environmental issues are having
an ever greater impact on international trade. Countries in North America, Western
Europe, and other developed regions are developing stringent environment standards.
In the United States, for example, more than two dozen major pieces of environmental
legislation have been enacted since 1970, and recent events suggest that more regulation
is on the way. A side accord to the North American Free Trade Agreement (NAFTA)
set up a commision for resolving environmental matters. The European Union recently
passed end-of-life regulations that require car makers to recycle or reuse at least 80
per cent of their old automobiles by 2006. And the EUs Eco-Management and Audit
Scheme provides guidelines for environmental self-regulation.
However, environmental policies still vary widely from country to country, and uniform
worldwide standards are not expected for many years. Although countries such as
Denmark, Germany, Japan, and the United States have fully developed environmental
policies and high public expectations, major countries such as China, India, Brazil, and
Russia are in only the early stages of developing such policies. Moreover, environmental
factors that motivate consumers in one country may have no impact on consumers in
another. For example, PVC soft drink bottles cannot be used in Switzerland or Germany.
However, they are preferred in France, which has an expensive recycling process for
them. Thus, international companies are finding it difficult to develop standard
environmental practices that work around the world. Instead, they are creating general
policies and then translating these policies into tailored programs that meet local
regulations and expectations.
Public Actions to Regulate Marketing
Citizen concerns about marketing practices will usually lead to public attention and
legislative proposals. New bills will be debatedmany will be defeated, other will be
modified, and a few will become workable laws.
The task is to translate the laws into thelanguage that marketing executive understand
as they make decisions about competitive relations, products, price, promotion, and
channnesl of distribution. Figure 19.2 illustrates the major legal issues facing marketing
management.
Business Actions Toward Socially Responsible Marketing
At first, many companies opposed consumerism and environmentalism. They thought
the criticisms were either unfair or unimportant. But by now, most companies have
grown to accept the new consumer right at least in principle. They might oppose certain
pieces of legislation as inappropriate ways to solve specific consumer problems, but
they recognize the consumers right to information and protection. Many of these
companies have responded positively to consumerism and environmentalism to serve
consumer needs better.
Enlightened Marketing
Enlightened marketing. A marketing philosophy holding that a companys marketing should
support the best long-run performance of the marketing system; its five principles include consumer-
oriented marketing, innovative marketing, value marketing, sense-of-misssion marketing and societal
marketing.
The philosophy of enlightened marketing holds that a companys marketing should
support the best long-run performance of the marketing system. Enlightened marketing
consists of five principles : consumer-oriented marketing, innovative marketing,
value marketing, sense-of-mission marketing, and societal marketing.
Consumer-Oriented Marketing
Consumer-oriented marketing The philosophy of enlightened marketing that holds that the company
should view and organize its marketing activities from the consumers point of view.
Consumer-oriented marketing means that the company should view and organize its
marketing activities from the consumers point of view. It should work hard to sense,
serve, and satisfy the needs of a defined group of customers. Every successful company
has had this in common : an all-consuming passion for delivering superior value to
carefully chosen customers. Only by seeing the world through its customers eyes can
the company build lasting and profitable customer relationship.
Innovative Marketing
Innovative marketing A principle of enlightened marketing that requires that a company seek real
product and marketing improvements.
The principle of innovative marketing requires that the company continuously seek real
product and marketing improvements. The company that overlooks new and better
ways to do things will eventually lose customers to another company that has found a
better way. An excellent example of an innovative marketer is Colgate-Palmolive :
Value marketing
Value marketing A principle of enlightened marketing that holds that a company should put most of
its resources into value-building marketing investments.
Selling decisions
Bribing ?
Stealing trade secrets ?
Disparaging customer ?
Misrepresenting ?
Disclosure of customer
rights ?
Unfair discrimination ?
Advertising decisions
False advertising ?
Deceptive advertising ?
Bait-and-switch advertising ?
Promotional allowances and
services ?
Channel decisions
Exclusive dealing ?
Exclusive territorial
distributorship ?
Tying agreements ?
Dealer's rights ?
Product decisions
Product additions and
deletions ?
Patent protection ?
Product quality and
safety ?
Product warranty ?
Packaging decisions
Fair packaging and
lebeling ?
Excessive cost ?
Scarce resource ?
Pollution ?
Price decisions
Price-fixing ?
Predatory pricing ?
Price discrimination ?
Minimum pricing ?
Price increases ?
Deceptive pricing ?
Competitive relations decisions
Anticompetitive acquisition ?
Barriers to entry ?
Predatory competition ?
Figure 19.2: Major Marketing Decision Areas that may Called into
Question under the Law
According to the principle of value marketing the company should put most of its resorces
into value building marketing investments. Many things marketers doone shot sales
promotions, minor packaging changes, advertising pufferymay raise sales in the short
run but add less value than would actual improvements in the products quality, features,
or convenience. Enlightened marketing calls for building long-run consumer loyality by
continually improving the value consumers receive form the firms marketing offer.
Sense-of-Mission Marketing
Sense-of-mission marketing A principle of enlightened markeing that holds that a company should
define its mission in broad social terms rather than narrow product terms.
Sense-of-mission marketing means that the company should define its misson in
broad social terms rather than narrow product terms. When a company should defines
a social mission, employees feel better about their work and have a clearer sense of
direction.
Societal Marketing
Societal marketing A principle of enlightened marketing that holds that a company should make
marketing decisions by considering consumerswants, the companys requirements, consuerss
long-run interests, and societys long-run interests.
Following the principle of societal marketing, an enlightened company makes marketing
decisions by considering consumers wants and interests, the companys requirements,
and societys long-run interests. The company is aware that neglecting consumer and
societal long-run interests is a disservice to consumers and society. Alert companies
view societal problems as opportunities.
Deficient products : Products that have neither immediate appeal nor-long run benefits.
Pleasing products : Products that give high immediate satisfaction but may hurt consumers in the
long run.
Salutary Product : Products that have low appeal but may benefit consumers in the long run.
Desirable products : Products that give both high immediate satisfaction and high long-run benefits.
A societally oriented marketer wants to design products that are not only pleasing but
also beneficial. The difference is shown in Figure 19.3. Products can be classified
according to their degree of immediate consumer satisfaction and long-run consumer
benefit. Deficient Products, such as bad-tasting and ineffective medicine, have neither
immediate appeal nor long-run benefits. Pleasing products give high immediate
satisfaction by may hurt consumers in the long run. An example is cigarettes. Salutary
products have low appeal but may benefit consumers in the long-run; for instance, seat
belts and air bags. Desirable products give both high immediate satisfaction and high
long-run benefits, such as a tasty and nutritious breakfast food.
Companies should try to turn all of their products into desirable products. The
challenge posed by pleasing products is that they sell very well but may end up hurting
the consumer. The product opportunity, therefore, is to add long-run benefits without
reducing the products pleasing qualities. The challenge posed by salutary products is to
add some pleasing qualities so that they will become more desirable in the consumers
minds.
Figure 19.3: Societal calssification of products
Marketing Ethics
Conscientious marketers face many moral dilemmas. The best things to do is often
unclear. Because not all managers have fine moral sensitivity, companies need to develop
corporate marketing ethics policiesbroad guidelines that everyone in the organization
must follow. These policies should cover distributor relations, advertising standards,
customer service, pricing, product development, and general ethical standards.
The finest guidelines cannot resolve all the difficult ethical situations the marketer faces.
Table lists some difficult ethical situations marketers could face during their careers. If
marketers choose immediate sales-producing actions in all these cases, their marketing
behaviour might well be described as immoral or even amoral. If they refuse to go
along with any of the actions, they might be ineffective as marketing managers and
unhappy because of the constant moral tension. Managers need a set of principles that
will help them figure out moral importance of each situation and decide how far they
can go in good conscience.
But what principle should guide companies and marketing managers on issues of ethics
and social responsibility ? One philosophy is that such issues are decided by the free
market and legal system. Under this principle, companies and their managers are not
responsible for making moral judgments. Companies in good conscience can do whatever
the system allows.
Table 19.1: Some Morally Difficult Situations in Marketing
1. You work for a cigarette company and up to now have not been convinced that cigarettes cause
cancer. However, recent public policy debates now leave no doubt in your mind about the link
between smoking and cancer. What would you do ?
2. Your R&D department has changed one of your products slightly. It is not really new and improved,
but you know that putting this statement on the package and in advertising will increase sales. What
would you do ?
3. You have been asked to add a stripped-down model to your line that could be advertised to pull
customers into the store. The product wont be very good, but salespeople will be able to switch
buyers up to higher-priced units. You are asked to give the green light for this stripped-down
version. What would you do?
4. You are thinking of hiring a product manager who just left a competitors company. She would be
more than happy to tell you all the competitors plans for the coming year. What would you do?
5. One of your top dealers in an important territory recently has had family troubles, and his sales
have slipped. It looks like it will take him a while to straighten out his family trouble. Meanwhile
you are losing many sales. Legally, you can terminate the dealers franchise and replace him. What
would you do ?
6. You have a chance to win a big account that will mean a lot to you and your company. The
purchasing agent hints that a gift would influence the decision. Your assistant recommends
sending a fine color television set to the buyers home. What would you do ?
Low
Low
High
High
Salutary
products
Deficient
Products
Deficient
products
Pleasing
products
L
o
n
g
-
r
u
n
C
o
n
s
u
m
e
r

b
e
n
e
f
i
t
Immediate
satisfaction
Contd...
7. You have heard that a competitor has a new product feature that will make a big difference in sales.
The competitor will demonstrate the feature in a private dealer meeting at the annual trade show.
You can easily send a snooper to this meeting to learn about the new feature. What would you do?
8. You have to choose between three ad campaigns outlined by your agency. The first (a) is a soft-sell,
honest information campaign. The second (b) uses sex-loaded emotional appeals and exaggerates the
products benefits. The third (c) involves a noisy, irritating commercial that is sure to gain audience
attention. Pretests show that the campaigns are effective in the following order : c, b, and a. What
would you do ?
9. You are interviewing a capable female applicant a for a job as salesperson. She is better qualified that
the men just interviewed. Nevertheless, you know that some of your important customers prefer
dealing with men, and you will lose some sales if you hire her. What would you do ?
A second philosophy puts responsibility not on the system but in the hands of individual
companies and managers. This more enlightened philosophy suggests that a company
should have a social conscience. Companies and managers should apply high standards
of ethics and morality when making corporate decisions, regardless of what the system
allows. History provides an endless list of examples of company actions that were
legal and allowed but were highly irresponsible. Consider the following example :
Prior to the Pure Food and Drug Act, the advertising for a diet pill promised that
a person taking this pill could eat virtually anything at any time and still lose weight.
Too good to be true ? Actually the claim was quite true; the product lived up to its
billing with frightening efficiency. It seems that the primary active ingredient in
this diet supplement was tape worm larvae. These larvae would develop in the
intestinal tract and of course be well fed; thepill taker would in time, quite literally,
starve to death.
Each company and marketing manager must work out a philosophy of socially responsible
and ethical behaviour. Under the societal marketing concept, each manager must look
beyond what is legal and allowed and develop standards based on personal integrity,
corporate conscience, and long-run consumer welfare.
As with environmentalism, the issue of ethics provides special challenges for international
marketers. Business standards and practices vary a great deal from one country to the
next. For example, whereas bribes and kickbacks are illegal for U.S. firms, they are
standard business practice in many South American, African & Asian countries. One
recent study found that companies from some nations were much more likely to use
bribes when seeking contracts in emerging-market nations. The most flagrant bribe-
paying firms were from Russia and China, with Taiwan and South Korea close behind.
The least corrupt were companies from Australia, Sweden, Switzerland, Austria and
Canada. The question arises as to whether a company must lower its ethical standards
to compete effectively in countries with lower standards. In one study, two researchers
posed this question to chief executives of large international companies and got a
unanimous response : No.
For the sake of all of the companys stakeholderscustomers, suppliers, employees,
shareholders, and the publicit is important to make a commitment to a common set of
shared standards worldwide.
Many industrial and professional associations have suggested codes of ethics, and many
companies are now adopting their own codes. For example, the American Marketing
Association, an international association of marketing managers and scholars, developed
the code of ethics shown in Table. Companies are also developing programs to teach
managers about important ethics issues and help them find the proper responses. They
hold ethics workshops and seminars and set up ethics committees. Further, most major
U.S. companies have appointed high-level ethics officers to champion ethics issues and
to help resolve ethics problems and concerns facing employees.
Table 19.2: American Marketing Association Code of Ethics
Members of the American Marketing Association are committed to ethical, professinal conduct. They
have joined together in subscribing to this Code of Ethics embracing the following topics :
Responsibilities of the Marketer
Marketers must accept responsibility for the consequences of their activities and make every effort to
ensure that their decisions, recommendations, and actions function to identify, serve, and satisfy all
relevant publics : customers, organizations and society.
Marketers Professional Conduct Must Be Guided By
1. The basic rule of professional ethics : not knowingly to do harm;
2. The adherence to all applicable laws and regulations;
3. The accurate representation of their education, training and experience; and
4. The active support, practice, and promotion of this Code of Ethics.
Honesty and Fairness
Marketers shall uphold and advance the integrity, honour, and dignity of the marketing profession by :
1. Being honest in serving consumers, clients, employees, suppliers, distributors, and the public.
2. Not knowingly participating in conflict of interest without prior notice to all parties involved; and
3. Establishing equitable fee schedules including the payment or receipt of usual customary, and/or
legal compensation for marketing exchanges.
Right and Duties of Parties in the Marketing Exchange Process
Participants in the marketing exchange process should be able to expect that :
1. Products and services offered are safe and fit for their intended uses;
2. Communications about offered products and services are not deceptive;
3. All parties intend to discharge their obligations, financial and otherwise, in good faith; and
4. Appropriate internal methods exist for equitable adjustment and/or redress of grievance concerning
purchases.
It Is Understood That the Above Would Include, but is Not Limited to, the Following Responsibilities
of the Marketer :
In the Area of Product Development and Management
l disclosure of all substantial risks associated with product or service usage;
l identification of any product component substitution that might materially change the product or
impact on the buyers purchase dicision;
l identification of extra cost-added features.
In the Area of Promotions
l avoidance of false and misleading advertising;
l rejection of high-pressure manipulations or misleading sales tactics;
l avoidance of sales promotions that use deception or manipulation.
Contd...
In the Area of Distribution
l not manipulating the availability of a product for purpose of exploitation;
l not using coercion in the marketing channel;
l not exerting undue influence over the resellers choice to handle a product.
In the Area of pricing
l not engaging in price fixing;
l not practising predatory pricing.
l disclosing the full price associated with any purchase.
In the Area of Marketing Research
l prohibiting selling or fundraising under the guise of conducting research;
l maintaining research integrity by avoiding misrepresentation and omission of pertinent research
data;
l treating outside clients and suppliers fairly.
Organizational Relationships
Marketers should be aware of how their behaviour may influence or impact on the
behaviour of others in organizational relationships. They should not demand, encourage,
or apply coercion to obtain unethical behaviour in their relationships with other, such as
employees, suppliers, or customer. They should
1. Apply confidentiality and anonymity in professional relationships with regard to
privileged information.
2. Meet their obligations and responsibilities in contracts and mutual agreements in a
timely manner;
3. Avoid taking the work of others, in whole, or in part, and representing this work as
their own or directly benefiting from it without compensation or consent of the
originator or owner;
4. Avoid manipulation to take advantage of situations to maximize personal welfare
in a way that unfairly deprives or damages the organization of others.
Any AMA member found to be in violation of any provision this Code of Ethics may
have his or her Association membership suspended or revoked.
Legal Issues
Offences under the Indian Penal Code
When we turn to criminal law, we should first look at the age-old Penal Code which
defines, and prescribes, punishments for all offences which could possibly be envisaged
when it was enacted over a century to weights and measures, adulteration of food and
drink, adulteration of drugs, those relating to public health and safety and also goods
having spurious marks. The relevant provisions of the Penal Code are briefly discussed
below :
Chapter XIII of Penal Code deals with offences relating to Weights and Measures and
Sections 264 to 267 there of prescribe punishment of imprisonment for a term of one
year, or with fine, or with both, for each of the following offences :
(a) Fradulent use of false instruments in weighing, knowing it to be false (Section 264).
(b) Fradulent use of any false weights or false measure of length or capacity or
fradulent use of any such instrument as a different weight and measure from
what it is. Section 264 punishes one who uses false balance, this section makes
penal the use of false weight or measure.
(c) Being in possession of any such instrument, weight or measure of length or capacity
knowing it to be false and intendig that the same may be fradulently used (Section
266it will be seen that mere possession of false weight or measure etc. with
dishonest intention is an offence).
(d) Making, selling or disposing of any instrument for weighing or any weight or any
measure of length or capacity knowing it to be false, in order that it may be used
as true or knowing that it is likely to be used as true (Section 267).
It needs to be noted that guilty intention, or mensrea, as it is called in legal parlance,
is an essential ingredient of these offences.
There are two other statutesStandards of Weights and Measures Act, 1976, and
Standards of Weight and Measures (Enforcement) Act, 1985which provide for
establishement of standards of weights and measures, their enforcement and for
punishment of offenders for commission of offences under these Acts.
Sections 272 and 273 of the Penal Code deal with offences relating to adulteration of
food or drink. A person is liable to be punished with imprisonment which may extend to
six months or with fine which may extend to Rs. 1,000/-, or with both, if he :
(a) adulterates any article of food or drink, so as to make such article noxious as food
or drink, intending to sell such article as food or drink or knowing it to be likely that
it will be sold as food or drink (Section 272);
(b) sells or offers or exposes for sale, as food or drink, any article which has become
noxious, or is in a state unfit for food or drink knowing, or having reason to believe,
that the same is noxious as food or drink (Section 275).
Here again mensrea or guilty knowledge has to be proved to secure punishment for
the offender. It has also to be established that the food or drink has become noxious or
unfit for consumption. Surprisingly, mere adulteration with harmless ingredients for
earning profit is not punishable under these Section, e.g. mixing water with milk, because
the mixture would not be noxious or injurious as food or drink. These provisions were
hardly adequate to check this heinous crime against public, and the Parliament, as we
shall see presently, had to enact a more comprehensive law for prosecution and
punishment of persons guilty of adulteration.
Modern man does not live merly on food; he needs medicines also for his sustenance.
The greedy trader has an irresistible temptation to adulterate drugs or medicines because
of their large scale sale and consumption. The Penal Code provides punishment upto
six months or fine extending upto Rs.1000/- or both, if a person
(a) adulterates any drug or medical preparation in such a manner as to lessen its
efficacy or change its operation or to make it noxious intending that it shall be sold
or used for, or knowing it to be likely that it will be sold or used for any medicinal
purpose, as if it had not undergone such adulteration (Section 274);
(b) knowing any drug or medical preparation to have been adulterated in such a
manner as to lessen its efficacy, to change its operation, or to render it noxious,
sells the same, or offers or exposes it for sale, or issues it from any dispensary for
medicinal purpose as unadulterated, or causes it to be used for medicinal purposes
for any person not knowing of the adulteration (Section 275); and
(c) knowingly sells or offers or exposes for sale or issues from a dispensary for
medicinal purposes any drug or medical preparation as a different drug or medicinal
preparation (Section 276).
Sections 277 and 278 respectively provide punishment for pollution of water of any
public spring or reservoir and for voluntarily vitiating the physical atmosphere of any
place, so as to make it noxious to the health of persons in general, dwelling or carrying
on business in the neighbourhood or passing along a public way. Section 486 of the
Penal Code relates to offences against counterfeiting the property mark. Subject to
certain exceptions, a person who sells or exposes, or has in possession for sale, any
goods or things with a counterfeit mark affixed to or impressed upon the same or to, or
upon, any case, package or other receptacle in which such goods are contained, shall
be punished with imprisonment for a term which may extend to one year, or with fine,
or with both.
Agricultural Produce (Grading & Marketing) Act, 1937
It is desirable and necessary that some articles, particularly articles of agricultural and
some other produce, are graded before they are sold or distributed. For example, eggs
are graded as small, large and extra large. Fixation of a grade designation mark is, so to
speak, an assurance to the customer that the goods contained in the package are of a
definite nature, quality or size. If goods are different in nature or quality, the seller is
guilty of an offence under Section 488 and 489 of Penal Code. It is also an unfair trade
practice as defined in Section 56A (1) (i) of the Monopolies and Restrictive Trade
Practices Act, 1969.
The law considers an article to be mis-graded if :
(i) the article is not of the quality prescribed for the grade designation with which it is
marked;
(ii) the composition of the article offered for grading is altered in any way after a
sample has been drawn for analysis and determination of the grade designation of
the article in accordance with the rules;
(iii) the article is tampered with in any manner; and
(iv) any false claim is made for the quality prescribed for its grade designation, upon
the label or through advertisement, or in any other manner.
The Central Government is empowered under Section 58 of the aforesaid Act to
prescribe compulsory grade designation for various articles if it considers it necessary
in public interest, or for protection of the consumers, so to do.
Drugs and Cosmetics Act, 1940
The Indian Penal Code, as we have just seen, deals with the offences relating to
adulteration of drugs. With the discovery of hither to unknown diseases, new drugs had
to be found and with the addition of more and more drugs, including imported drugs, to
the chemists list, it became necessary to exact a more comprehensive legislation to
regulate the import, manufacture, distribution and sale of drugs. The new Act, which
covers cosmetics also, came into force in 1940. Section 18 of this Act empowers the
State Governments to notify that no person shall himself or by any other person on his
behalf :
(a) manufacture for sale or for distribution or sale, or stock or exhibit or offer for
sale, or distribute
(i) any drug or cosmetic which is not of a standard quality, or is misbranded,
adulterated or spurious;
(ii) any cosmetic which is not of a standard quality or is misbranded or spurious;
(iii) any patent or proprietary medicine, unless there is displayed in the prescribed
manner on the label or container there of the true formula or list of active
ingredients contained in it together with the quantities thereof;
(iv) any drug which by means of any statement, design or device accompanying
it or by any other means, purports or claims to prevent, cure or mitigate
any such disease or ailment, or to have any such other effect as may be
prescribed;
(v) any cosmetic containing any ingredient which may render it unsafe or
harmful for use under the directions indicated or recommended;
(vi) any drug or cosmetic in contravention of any of the provisions of Chapter
IV of the Act or any rule made thereunder;
(b) sell or stock or exhibit or offer for sale, or distribute any drug or cosmetic which
has been imported or manufactured in contravention or any of the Act, or any
rule made there under; and
(c) manufacture for sale or for distribution, or sell, or stock or exhibit or offer for
sale, or distribute any drug or cosmetic, except under, and in accordance with,
the conditions of a licence issued for such purpose.
Section 10 prohibits import of drugs or cosmetics which do not fulfil the above conditions.
One of the exceptions to this rule is that the Central Government is competent to permit
the import of any drug or class of drugs which may not be of standard quality. No
wonder that some of the drugs banned in the western countries after research find their
way into the Indian market. These drugs are not only circulated freely but are also
prescribed as if what is harmful to the consumer abroad is not injurious to the consumer
in India. A similar proviso empowers the Central Government to permit, subject to such
conditions as may be specified, the manufacture for sale of any drug which is not of
standard quality and purity of the drugs sold in the country. The drugs market, as we all
know, is already flooded with spurious, substandard, and even dangerous products. In
western countries, it is extremely difficult, if not totally impossible, to buy an adulterated
drug. In India, it is said, even poison is adulterateda person may not die after consuming
it.
The Drugs (Control) Act was enacted in 1940 for ensuring easy availability of essential
drugs and to protect the interests of the consumers. Under this Act, it is also necessary
to issue a cash-memo compulsorily to the buyer if the amount of purachase is Rs.5/- or
more and, on demand, if the amount is less than Rs.5/-. It rarely happens in practice. It
is one thing to enact laws but quite another to ensure their compliance.
Drugs and Magic Remedies
(Objectionable Advertisements) Act, 1954
It is not uncommon to see in any part of the country quacks advertising their drugs in
newspapers, magazines, wall-posters, to the public at large and also verbally to groups
of gullible persons. Though the quack has no pretensions to scientific knowledgea
holy man, he claims, gave it to his grandfatherthey have a surprisingly large clientele.
Popularised by various kinds of alluring advertisements which claim exotic ingredients,
they attract the sick and the unwary who are tempted to buy and use them. Needless to
say that the remedy they prescribe only aggravates the malady or proves totally inffective
because the drug contains hardly anything useful. The Parliament enacted the Drugs
and the Magic Remedies (Objectional ble Advertisements) Act, 1954, to provide
protection to the consumer against this mischief.
Section 3 of this Act prophibits the advertisements of certain drugs. No person, it lays
down, shall take any advertisement referring to any drug in terms which suggest, or are
calculated to lead to the use of the drug for :
(a) the procurement of miscarriage in women, or prevention of conception in women;
or
(b) the maintenance or improvement of the capacity of human beings for sexual
pleasure; or
(c) the correction of menstrual disorder in women; or
(d) the diagnosis, cure, mitigation, treatment or prevention of any disease, disorder, or
condition specified in the Schedule, or any other disease, disorder or condition ( by
whatsoever name called) which may be specified in the rules under this Act.
Section 4 of this Act prohibits advertisements relating to drugsno person shall take
any part in the publication of any advertisement relating to a drug if it contains any
matter which :
(a) directly or indirectly gives a false impression regarding true character of the drug; or
(b) makes a false claim for the drug; or
(c) is otherwise false or misleading in any material particular.
The Act also bans the advertisements of magic remedies. Section 5 provides that no
person carrying on or purporting to carry on the profession of administering magic
remedies shall take any part in the publication of any advertisement relating to any
magic remedy which, directly or indirectly, claims to be efficacious for any of the
purposes specified in Section 3.
Section 7 of the Act provides that for first conviction for contravention of any of the
provisions of the Act, the offender shall be punished with imprisonment which may
extend to six months, or with fine, or both, and for any subsequent conviction, such
person shall be liable to suffer imprisonment which may extend to one year or with fine,
or with both.
Prevention of Food Adulteration Act, 1954
Section 272 and 273 of the Indian Penal Code, as we have seen, do not foot the bill.
Adulteration of food under these Sections, it needs to be repeated , is an offence only if
the food or drink complained of has been made noxious, i.e. injurious for health. Mixing
water with milk or cottage cheese with boiled rice, or pure ghee with vanaspati, do not
make these articles of food noxious. Morever, to secure punishment, guilty knowledge
of the offender has to be proved which is rather difficult. These shortcomings render
the provisions of the Penal Code highly anaemic. Taking note of this position and also
realising the need to check wide-spread practice of adulteration of food, the Parliament
passed a more comprehensive and also a more stringent legislation, the Prevention of
Food Adulteration Act, in 1954. The new Act does not require proof of mens-rea or
guilty knowledge. The principal is also liable to be punished if the act is done, no matter
how innocently. It is also not necessary to prove that the food is noxious. What needs to
be established is that it is adulterated howsoever small the measure or extent of
adulteration may be. This Act has been enacted to :
(a) ensure the purity of articles of food sold to the public;
(b) eradicate the anti-social evil of adulteration to protect and preserve public health;
(c) prevent manufacture, storing and sale of adulterated or misbranded foodstuff;
(d) ensure that the food which the public is buying is packed and stored under hygienic
conditions; and
(e) provide for adequate punishment to persons guilty of offences under this Act.
The word adulterated is defined in the Act so comprehensively that it is virtually
impossible for the practitioners of this despicable social evil to escape on mere technical
or flimsy grounds. The penalties provided under the Act are meant to have a deterrent
effect. If, for example, the adulterated food, which is distributed by sale, when consumed
by a human being is likely to cause death or grievous hurt, the person from whose
possession such food has been distributed is liable to be punished with imprisonment for
a term which shall not be less than three years, but which may extend to life imprisonment
and also with fine which shall not be less than Rs. 5,000-. The Act also provides a
minimum sentence, which is sufficiently deterrent, for almost every offence. Added to
itand perhaps as a rare departure from normal penal legislationis the power
conferred on the Court which convicts the person for commission of a second offence
of the same kind to cause the offenders name and the place of residence, the offence
and the penalty imposed to be published at the offenders expenses in such newspaper
or in any other manner as it may direct. This shows the Parliaments concern for
repetition of such anti-social acts.
The Courts have also looked at the menace of food adulteration with serious concern
and have condemned this mal-practice in no uncertain terms. Said Bhaskaran, J., in
Food Inspector, Palghat Municipality Vs. Sootha Ram, Rice and Oil Mill :
..........the people of India are confronted with a national problem, which, in
recent time, has assumed serious dimensions arising out of the practice of food
adulteration that has spread unabated like an epidemic. The survival of the society
at present stage appears to depend to a very large extent upon the right and
effective enforcement, both in letter and spirit, of the provisions of the Prevention
of Food Adulteration Act and the taking of other measures to arrest the evil of
adulteration mania, so prevalent among the anti-social elements in the community.
I.D. Dua, J., was no less emphatic in underlining the need for preventing adulteration
of food. Observed he :
In the present day increasing tempo of industrialisation and urbanisation, the
need for the supply of unadulterated food supplies to the citizens in this socialist
Welfare Republic has naturally assumed great importance, the indifferent attitude
towards the social evil of fradulently selling adulterated articles of food is difficult
countenance, for, it affects the health of the whole nation, including the children
on whom depends the future of the country. Those who commit this offence in
respect of one article of food must not forget, but fully realise, that they are also
likely to be similarly defrauded and cheated by dealers in other articles of
consumption which may, for aught one know, affect their childrens health more
seriously.
In a case decided in 1988, the Supreme Court of India observed Adulteration in
foodstuffs bring frustration among the honest consumers, leads to inflation and corruption
in the market and also tends to hamper the economic growth of the community as well
as the nation.
The courts have also emphasised that offences under this Act, being serious, call for
deterrent punishment and in most of the cases, a sentence of imprisonment should be
awarded. Similarly, in the Administrator Municipal Board, Gangapur City Vs. Om
Prakash, the court held that food adulteration is a social crime which endangers the
health of the society at large. Such economic offences deserve different punishment
and any leniency in this respect or effort to acquit the accused deserve outright rejection.
When the offence is proved, the punishment awarded should, as a rule, be rigorous
unless there is full justification (e.g. old age or physical infirmity of the offender) for
awarding simple imprisonment.
It needs to be noted that not only the master but also his servant who actually sells
adulterated stuffs on his behalf and for his benefit is liable to be punished under this
Act. This sometimes leads to strange result. In a case the servant was sentenced to
undergo imprisonment and the employer got away with a small fine. The Supereme
Court of India modified and reversed this decision. The Apex Court also ruled that the
contrary view taken by the Madras High Court in another case was erroneous.
Appreciating the servants position, the Madras High Court had held that :
If the master is caught hold of and punished drastically, there is no need to catch
hold of the servant also and fasten that absolute liability on him even without any
guilty knowledge, express or implied. It is something like the ancient adage that it
is enough to catch a cobra by its head, and then its belly and tail will be controlled,
or like this Nyaya saying that when trunk is out, the branches will fall by
themselves.
Regrettably, but most respectfully, it is submitted that this was, perhaps an example of
misplaced sympathy. The correct position seems to be that the offences under this Act
exclude mens-rea and the servant who sells adulterated food is an much liable to be
punished as his master. This is the clear intention of the legislature. It will be remarkable
if the servants refuse to play their part in the nefarious activities of selling or preparing
adulterated food on behalf of their masters. This evil might be then largely controlled, if
not completely eradicated. But there are compulsions of employment. The Act, so far
as it goes, is an excellent piece of legislation. But, as already stated, enacting a law is
one thing, its strict and honest implementation is quite another. And it is here that the
Act foundersthe enforcement of this stringent measure enacted for the welfare of
the nation, including the adulterators, depends upon that ubiquitous and unscrupulous
class known as inspectors. They catch hold of small vendors; the manufacturers and
wholesalers remain untouched. Said Bhagwati, J., (as he then was) :
The small tradesmen who make out a precarious existence living almost from
hand to mouth are sent to jail for selling foodstuff which is often enough not
adulterated by them and the wholesalers and manufacturers who really adulterate
the foodstuff and fatten themselves on the misery of others escape the arm of the
law. . . .
Viewed thus, this Act is, perhaps, doing more harm than good. It has given a boost to
corruption. One of the redeeming features seems to be that by an amendment in 1986,
recognised consumer associations were authorised to institute criminal prosecution if
they produce in the Court a copy of the report of the public analyst along with the
complaint. Hopefully, these organisations would now play their part in eradicating the
evil of food adulteration.
Essential Commodities Act. 1955
The consumer tends to buy more than what he actually requires, particularly an essential
commodity, if he fears that soon it is likely to disappear from the market. The trader, on
the other hand, likes to hoard it to earn more profit. This creates artificial scarcity. In
such a situation or if there is genuine short supply of some commodities, it is for the
Government to ensure that at least essential commodities are made available to the
consumer at reasonable prices. To enable the Government to achieve this objective,
the Parliament enacted the Essential Commodities Act, 1955. It is one of the important
laws which arms the Government with wide ranging powers to maintain the supply of
essential commodites to the consumers at controlled rates or, to use the modern phrase,
at fair price. For the purpose of this Act,essential commodity means :
(i) cattle fodder, including oilcakes and other concentrates;
(ii) coal, including coke and other derivatives;
(iii) component parts and accessories of automobiles;
(iv) cotton and woollen textiles;
(v) drugs;
(vi) foodstuff, including edible oilseeds and oils;
(vii) iron and steel, including manufactured products of iron and steel;
(viii) paper, including newsprint, paper board and straw board;
(ix) petroleum and petroleum products;
(x) raw cotton, whether ginned or unginned, and cotton seeds;
(xi) raw jute; and
(xii) any other class of commodity which may be declared as such by the Central
Government.
Section 3 of this Act empowers the Government to control production, supply, distribution,
etc., of essential commodities. It lays down that if it is necessary or expedient so to do
for maintaining or increasing supplies of any essential commodity, or for securing their
equitable distribution and availability at fair prices, or for securing any essential
commodity for the defence of India, or the efficient conduct of military operation, the
Central Government may, by order provide for regulating or prohibiting the production
supply and distribution thereof and trade and commerce therein.
For controlling the prices, or prevention of hoarding of any foodstuff in any locality, the
Central Government is competent to direct that the price at which the foodstuff shall be
sold in the locality shall be regulated in accordance with the relevant provisions of this
Act. Section 3 provides for seizure of a commodity and Section 6A for its confiscation
if there has been any contravention of the order of the competent authority issued in
this behalf.
It is absolutely necessary that persons committing offences punishable under this Act
should be tried expeditiously. It has, therefore, been laid down that all offences relating
to :
(i) cotton or woollen textiles;
(ii) foodstuffs, including edible seeds and oils; or
(iii) drugs; and
(iv) contravention of any special order, shall be tried summarily. The act also does
not allow any appeal by a convicted person, if the punishment awarded does not
exceed one month or fine upto two thousand rupees. This is as it should be if the
supply and distribution of essential commodities is to be maintained.
To elicit the help and participation of voluntary consumer associations for ensuring
regular supply of essential commodities, the Act, by an amendment in 1986, empower
them to make a report in writing of the facts constituting the offence under it.
Trade and Merchandise Marks Act, 1958
The Trade and Merchandise Marks Act of 1958 replaces The Trade Marks Act of
1940 and the Merchandise Marks Act enacted more than a century ago. These two
Acts protected, by and large, the trade-marks of trader from being copied by dishonest
competitors. The new Act protects the consumer also. It lays down that if a person in
the course of business applies a false trade description to any goods or supplies or
offers to supply any goods to which a false trade description is applied shall be guilty of
an offence.
A trade description is false if it is untrue or misleading in a material respect as regards
the goods to which it is applied. It includes false description of quantity, manufacturing
method, or alteration of a trade description by addition effacement or otherwise thereby
making the description untrue or misleading in a material respect. It further includes :
(i) any marks or arrangment or combination thereof applied to goods in such a
manner as is likely to lead persons to believe that the goods are the manufacture
or merchandise of some person other than the person whose merchandise or
manufacture they really are; or
(ii) any false name or initials of a person applied to goods in such a manner as if such
name or initials were a trade description in any case where the name or initials
(a) is, or are, not a trade-mark or part of a trade-mark; and
(b) is, or are, identical with or deceptively similar to the name or initials of a person
carrying on business in connection with goods of the same description and who
has not authorised the use of such name or initials; and
(c) is, or are, either the name or initials or a fictitious person or of some person not
bonafide carrying on business in connection with such goods and the fact that a
trade description is a trade-mark or part of a trade-mark shall not prevent such
trade description being a false trade desription within the meaning of this Act.
A leader of second-hand cars, who bring down the odometer of a car by manipulation,
or reduces the mileage covered, is guility of applying a false trade description.
Under Section 96 of Act, the seller of any goods to which a trademark or trade description
is applied, is deemed to warrant that the mark is a genuine mark, and not falsely applied,
or that the trade description is not a false trade description within the meaning of this
Act.
Sections 78 and 79 of the Act respectively provide penalty for applying false trade-
mark, trade description etc. and for selling goods to which a false trade-mark or trade
description is applied.
Service Marketing and International Marketing 589
Service Marketing
The Nature of Services
Service industries are quite varied. The government sector, with its courts, employment
services, hospitals, loan agencies, military services, police and fire departments, post
office, regulatory agencies, and schools, is in the service business. The private nonprofit
sector, with its museums, charities, temples, mosques, colleges, foundations, and hospitals,
is in the service business. A good part of the business sector, with its airlines, banks,
hotels, insurance companies, law firms, management consulting firms, medical practices,
motion-picture companies, plumbing repair companies, and real estate firms, is in the
service business. Many workers in the manufacturing sector, such as computer
operators, accountants, and legal staff, are really service providers. In fact, they make
up a service factory providing services to the goods factory.
l A service is any act or performance that one party can offer to another that is
essentially intangible and does not result in the ownership of anything. Its production
may or may not be tied to a physical product.
Services are also popping up on the Internet. A little surfing on the Web will turn up
virtual service providers. Virtual assistants will word process, plan events, and handle
office chores online consultants will dispense advice by e-mail.
Categories of Service Mix
A companys offering to the marketplace often includes some services. The service
component can be a minor or a major part of the total offering. Five categories of
offerings can be distinguished :
1. Pure tangible good : The offering consists primarily of a tangible good such as
soap, toothpaste, or salt. No services accompany the product.
2. Tangible good with accompanying services : The offering consists of a tangible
good accompanied by one or more services. Levitt observes that the more
technologically sophisticated the generic product (e.g., cars and computers), the
more dependent are its sales on the quality and availability of its accompanying
customer services (e.g., display rooms, delivery, repairs and maintenance,
application aids, operator training, installation advice, warranty fulfillment).
3. Hybrid : The offering consists of equal parts of goods and services. For example,
people patronize restaurants for both food and service.
4. Major service with accompanying minor goods and services : The offering
consists of a major service along with additional services or supporting goods. For
Chapter 20
Service Marketing and International Marketing
example, airline passengers buy transportation service. The trip includes some
tangibles, such as food and drinks, a ticket stub, and an airline magazine. The
service requires a capital-intensive goodan airplanefor its realization, but the
primary item is a service.
5. Pure service : The offering consists primarily of a service. Examples include
baby-sitting, psychotherapy, and massage.
Because of this varying goods-to-services mix, it is difficult to generalize about services
without further distinctions. However, some generalizations seem safe :
First services vary as to whether they are equipment based (automatic car washes,
vending machines) or people based (window washing, accounting services). People-
based services vary by whether they are provided by unskilled, skilled, or professional
workers.
Second, some services require the clients presence and some do not. Brain surgery
involves the clients presence but a car repair does not. If the client must be present,
the service provider has to be considerate of his or her needs. Thus beauty shop operators
will invest in their shops decor, play background music, and engage in light conversation
with the client.
Third, services differ as to whether they meet a personal need (personal services) or a
business need (business services). Physicians will price physical examinations differently
for private patients versus employees on a prepaid company health plan. Service
providers typically develop different marketing programs for personal and business
markets.
Fourth, service provider differ in their objectives (profit or noprofit) and ownership
(private or public). These two characteristics, when crossed, produce four quite different
types of organizations. The marketing programs of a private investor hospital will differ
from those of a private charity hospital or a Veterans Administration hospital.
Characteristics of Services and their Marketing Implications
Services have four major characteristics that greatly affect the design of marketing
programs : intangibility, inseparability, variability, and perishability.
Intangibility
Services are intangible. Unlike physical products, they cannot be seen, tasted, felt,
heard, or smelled before they are bought. The person getting a face lift cannot see the
exact results before the purchase, and the patient in the psychiatrists office cannot
know the exact outcome.
To reduce uncertainty, buyers will look for signs or evidence of the service quality.
They will draw inferences about quality from the place, people, equipment, communication
material, symbols, and price that they see. Therefore, the service providers task is to
manage the evidence, to tangibilize the intangible. Whereas product marketers are
challenged to add abstract ideas, service marketers are challenged to add physical
evidence and imagery to abstract offer.
Suppose a bank wants to position itself as the fast bank. It could tangibilize this
positioning strategy through a number of marketing tools :
1. Place : The physical setting must connote quick service. The exterior and interior
should have clean lines. The layout of the desks and the traffic flow should be
planned carefully. Waiting lines should not get overly long.
2. People : Personnel should be busy. There should be a sufficient number of
employees to manage the workload.
3. Equipment : Equipmentcomputers, copying machines, desksshould be and
look state of the art.
4. Communication material : Communication materialstext and photosshould
suggest efficiency and speed.
5. Symbols : The name and symbol should suggest fast service.
6. Price : The bank could advertise that it will deposit Rs. 50/- in the account of any
customer who waits in line for more than five minutes.
Service marketers must be able to transform intangible services into concrete benefits.
Inseparability
Services are typically produced and consumed simultaneously. This is not true of physical
goods, which are manufactured, put into inventory, distributed through multiple resellers,
and consumed later. If a person renders the service, then the provider is part of the
service. Because the client is also present as the service is produced, provider-client
interactions is a special feature of services marketing. Both provider and client affect
the outcome.
In the case of entertainment and professional services, buyers are very interested in
the specific provider. It is not the same concert if Ghulam Ali is indisposed and replaced
by Kumar Sanu, or if a legal defense will be supplied by John Nobody because Ram
Jethmalani is unavailable. When clients have strong provider preferences, Price is raised
to ration the preferred providers limited time.
Several strategies exist for getting around this limitation. The service provider can learn
to work with larger groups. Psychotherapists and Yoga Instructors have moved from
one-on-one therapy to small-group therapy to groups of over 300 people in a large hotel
conference room. The service provider can learn to work fasterthe psychotherapist
can spend 30 minutes with each patient instead of 50 minutes and can see more
patients. The service organization can train more service providers and build up client
confidence.
Variability
Because they depend on who provides them and when and where they are provided,
services are highly variable. Some doctors have excellent bedside manner; others are
less patient with their patients. Some surgeons are very successful in performing a
certain operation; others are less successful. Service buyers are aware of this variability
and often talk to others before selecting a service provider.
Service firms can take three steps toward quality control. The first is investing in good
hiring and training procedures. Recruiting the right service employees and providing
them with excellent training is crucial regardless of whether employees are highly skilled
professionals or low-skilled workers.
The second step is standardizing the service-performance process throughout the
organization. This is helped by preparing a service blueprint that depicts events and
processes in a flowchart, with the objective of recognizing potential fail points. Figure
20.1 shows a service blueprint for a nationwide floral-delivery organization. The
customers experience is limited to dialing the phone, making choices and placing an
order. Behind the scenes, the floral organization gathers the flowers, places them in a
vase, deliver them, and collects payment. Any one of these activities can be done well
or poorly.
The third step is monitoring customer satisfaction through suggestion and complaint
systems, customer surveys, and comparison shopping.
Perishability
Services cannot be stored. Some doctors charge patients for missed appointments
because the service value existed only at that point. The perishability of services is not
a problem when demand is steady. When demand fluctuates, service firms have
problems. For example, public-transportation companies have to own much more
equipment because of morning and evening rush-hour demand than if demand were
even throughout the day.
Sasser has described several strategies for producing a better match between demand
and supply in a service business.
Figure 20.1: A Service-Performance-Process Map: Nationwide Floral Delivery
On the demand side :
l Differential Pricing will shift some demand from peak to off-peak periods.
Examples include low night telephone tariffs and weekend discount prices for car
rentals.
Take
order
Vase A Group A
Place flowers
in container
Arrangement A
Deliver Collect
payment
Line of Visibility
Select
container
Select
flower
Inventory Inventory
Facilitating goods and services
l Nonpeak demand can be cultivated. McDonalds opened a breakfast service,
and hotels reduces their tariffs during off-season.
l Complementary services can be developed during peak time to provide alternatives
to waiting customers, such as cocktail lounges in restaurants and automatic teller
machines in banks.
l Reservation systems are a way to manage the demand level. Airlines, railways,
hotels, and physicians employ them extensively.
On the supply side :
l Part-time employees can be hired to serve peak demand. Colleges add part-time
teachers when enrollment goes up, and restaurants call in part-time servers when
needed.
l Peak-time efficiency routines can be introduced. Employees perform only essential
tasks during peak periods. Paramedics assist physicians during busy periods.
l Increased consumer participation can be encouraged. Consumers fill out their
own medical records or bag their own groceries.
l Shared services can be developed. Several hospitals can share medical-equipment
purchases.
l Facilities for future expansion can be developed. An amusement park buys
surrounding land for later development.
Marketing Strategies for Service Firms
Until recently, service firms lagged behind manufacturing firms in their use of marketing.
Many service businesses are small (shoe repair, barbershops) and do not use formal
management or marketing techniques. There are also professional service businesses
(law and accounting firms) that formerly believed it was unprofessional to use marketing.
Other service businesses (colleges, hospitals) faced so much demand or so little
competition until recently that they saw no need for marketing. But this has changed.
Traditional four Ps marketing approaches work well for goods, but additional elements
require attention in service businesses. Booms and Bitner suggested three additional Ps
for service marketing : people, physical evidence, and process. Because most services
are provided by people, the selection, training, and motivation of employees can make a
huge difference in customer satisfaction. Ideally, employees should exhibit competence,
a carrying attitude, responsiveness, initiative, problem-solving ability, and goodwil. Service
companies such as Federal Express and Marriott trust their people enough to empower
their front-line personnel to spend up to $100 to resolve a customer problem.
Companies also try to demonstrate their service quality through physical evidence and
presentation. A hotel will develop a look and observable style of dealing with customers
that carries out its intended customer value proposition, whether it is cleanliness, speed,
or some other benefit. Finally, service companies can choose among different processes
to deliver their service. Restaurants have developed such different formats as cafeteria-
style, fast-food, buffet, and candlight service.
Service encounters are affected by several elements (Figure 20.2). Consider a customer
visiting a bank to get a loan (service X). The customer sees other customers waiting for
this and other services. The customer also sees a physical environment consisting of a
building, interior, equipment, and furniture. The customer sees bank personnel and
deals with a loan officer. All this is visible to the customer. Not visible is a whole
backroom production process and organization system that supports the visible business.
Thus the service outcome, and whether or not people will remain loyal to a service
provider, is influenced by a host of variables.
Figure 20.2: Elements in a Service Encounter
In view of this complexity, Gronroos has argued that service marketing requires not
only external marketing but also internal and interactive marketing (Figure 20.3). External
marketing describes the normal work to prepare, price, distribute, and promote the
service to customers. Internal marketing describes the work to train and motivate
employees to serve customers well. Berry has argued that the most important contribution
the marketing department can make is to be exceptionally clever in getting everyone
else in the organization to practice marketing.
Interactive marketing descibes the employees skill in serving the client. Because the
client judges service not only by its technical quality (e.g., Was the surgery successful
?) but also by its functional quality (e.g., Did the surgeon show concern and inspire
confidence ?), service providers must deliver high touch as well as high tech.
For some services, customers cannot judge the technical quality even after they have
received the service. Figure 20.4 arrays various products and services according to
difficulty or evaluation. At the left are goods high in search qualitiesthat is,
characteristics the buyer can evaluate before purchase. In the middle are goods and
services high in experience qualitiescharacteristics the buyer can evaluate after
purchase. At the right are goods and services high in credence qualitiescharactersitics
the buyer normally finds hard to evaluate even after consumption.
Service Business
Internal
organizational
system
Not visible to customer
physical
environment
Contact
personal
visible to customer
Service X
Customer A
Advertising
Billing and payment
Sales calls
Media stories
Word-of-mouth comments
Other
service
Other
customer
Direct interactions
Secondary interactions
The service Business as a System
Because services are generally high in experience and credence qualities, there is
more risk in purchase. This has several consequences. First, service consumers generally
rely on word of mouth rather than advertising. Second, they rely heavily on price,
personnel, and physical cues to judge quality. Third, they are highly loyal to service
providers who satisfy them.
Service companies face three tasksincreasing competitive differentiation,
service quality, and productivity. Although these interact, we will examine each
separately.
$
Company
Internal
Marketing
Employees Interactive
Marketing
Customer
External
Marketing
Cleaning/
maintenance
service
Financial/
banking
services
Restaurant
industry
Figure 20.3: Three Types of Marketing in Service Industries
Most goods
Most services
Easy to
evaluate
Difficult
to evaluate
High in search
qualities
High in experience
qualities
High in credence
qualities
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Figure 20.4: Continuum of Evaluation for Different Types of Products
Managing Differentiation
Service marketers frequently complain about the difficulty of differentiating their services.
The deregulation of several major service industriescommunications, transportation,
energy, bankingprecipitated intense price competition. The success of budget-priced
airlines has shown that many fliers care more about travel costs than service. To the
extent that customers view a service as fairly homogeneous they care less about the
provider than the price.
The alternative to price competition is to develop a differentiated offer, delivery, or
image.
Offer
The offer can include innovative features. What the customer expects is called the
primary service package, and to this can be added secondary service features. In the
airline industry, various carriers have introduced such secondary service features as
movies, merchandise for sale, air-to-ground telephone service, and frequent-fliers award
programs.
The major challenge is that most service innovations are easily copied. Still, the company
that regularly introduces innovations will gain a succession of temporary advantages
over competitors. Through earning a reputation for innovation, it may retain customers
who want the best. Citicorp enjoys the reputation as a leading innovator in the banking
industry for such innovations as automatic teller machines, nationwide banking, broad-
spectrum financial accounts and credit cards, and floating prime rates.
Delivery
A service company can hire and train better people to deliver its service (Home Depot,
Nordstrom). It can develop a more attractive physical environment in which to deliver
the service. Or it can design a superior delivery process (McDonalds).
Image
Service companies can also differentiate their image through symbols and branding.
The Harris Bank of Chicago adopted the lion as its symbol and uses it on its stationery,
on its advertising, and even on the stuffed animals it offers to new depositors. As a
result, the Harris lion is well known and confers an image of strength to the bank.
Several hospitals have attained megabrand reputations for being the best in their
field, such as the Escorts Heart Institute, Apollo Hospital and AIIMS. These hospitals
could open clinics in other cities and attract patients on the strength of their brand
reputation.
Managing Service Quality
A service firm may win by delivering consistently higher-quality service than competitors
and exceeding customers expectations. These expectations are formed by their past
experiences, word of mouth, and advertising. After receiving the service, customers
compare the perceived service with the expected service. If the perceived service falls
below the expected service, customers lose interest in the provider. If the perceived
service meets or exceeds their expectations, they are apt to use the provider again.
Word-of-month
communications
Personal needs
Past experience
Expected service
Perceived service
Service delivery
(including pre-
and-past-contacts)
Translation of
perceptions into
service-quality
specifications
Management
perceptions of
consumer
expectations
External
communications
to consumers
GAP1
GAP2
GAP3
GAP4
GAP5
Consumer
Marketer
Parasuraman, Zeithaml, and Berry formulated a service-quality model that highlights
the main requirements for delivering high service quality. The model, shown in Figure
20.5, identifies five gaps that cause unsuccessful delivery :
1. Gap between consumer expectation and management perception :
Management does not always perceive correctly what customers want. Hospital
administrators may think that patients want better food, but patients may be more
concerned with nurse responsiveness.
2. Gap between management perception and service-quality specification :
Management might correctly perceive the customers wants but not set a specified
performance standard. Hospital administrators may tell the nurses to give fast
service without specifying it quantitatively.
3. Gap between service-quality specifications and service delivery : The
personnel might be poorly trained, or incapable or unwilling to meet the standard
. Or they may be held to conflicting standards, such as taking time to listen to
customers and serving them fast.
4. Gap between service delivery and external communications : Consumer
expectations are affected by statements made by company representatives and
ads. If a hospital brochure shows a beautiful room, but the patient arrives and
finds the room to be cheap and tacky looking, external communications have
distorted the customers expectations.
5. Gap between perceived service and expected service : This gap occurs when
the consumer misperceives the service quality. The physician may keep visiting
the patient to show care, but the patient may interpret this as an indication that
something really is wrong.
Figure 20.5: Service-Quality Model
The same researchers found five determinants of service quality. These are presented
in order of importance.
1. Reliability: The ability to perform the promised service dependably and
accurately. For e.g., Doctor is always available whenever you need.
2. Responsiveness: The willingness to help customers and to provide prompt service.
For e.g., Doctor quickly diagnose the disease and give prescription.
3. Assurance: The knowledge and courtesy of employees and their ability to convey
trust and confidence. For e.g., The past track record and ability to diagnose the
disease quickly will assure the patient that he is in the right hands.
4. Empathy: The provision of caring, individualized attention to customers. For
e.g., The Doctor may put himself in Patients place and understand how he is
feeling.
5. Tangibles: The appearance of physical facilities, equipment, personnel, and
communication materials. For e.g., The design and decor, lighting, cool
environment etc. will make the patient happy or depressed.
Various studies have shown that excellently managed service companies share the
following common practice : a strategic concept, a history of top-management
commitment to quality, high standards, systems for monitoring service performance
and customer complaints, and an emphasis on employee satisfaction.
Strategic Concept
Top service companies are customer obsessed. They have a clear sense of their
target customers and their needs. They have developed a distinctive strategy for satisfying
these needs.
Top-Management Commitment
Companies such as Marriott, Disney, and McDonalds have thorough commitments to
service quality.Their management looks not only at financial performance on a monthly
basis but also at service performance. Ray Kroc of McDonalds insisted on continually
measuring each McDonalds outlet on its conformance to QSCV : quality, service,
cleanliness, and value. Some companies insert a reminder along with the employees
paychecks : BROUGHT TO YOU BY THE CUSTOMER.
High Standards
The best service providers set high service-quality standards. Swissair, for example,
aims at having 96 percent or more of its passengers rate its service as good or superior.
Citibank aims to answer phone calls within 10 seconds and customer letters within 2
days. The standards must be set appropriately high. A 98 percent accuracy standard
may sound good but it would result in Federal Express losing 64,000 packages a day, 10
misspelled words on each page, 400,000 misfilled prescriptions daily, and unsafe drinking
water 8 days a year. Companies can be distinguished between those offering merely
good service and those offering breakthrough service aiming at 100 percent defect-
free service.
Monitoring Systems
Top firms audit service performance, both their own and competitors, on a regular
basis. They use a number of measurement devices : comparison shopping, ghost
shopping, customer surveys, suggestion and complaint forms, service-audit teams, and
letters to the president. General Electric sends out 700,000 response cards a year asking
households to rate its service peoples performance. Citibank checks continuously on
measures of ART (accuracy, responsiveness, and timeliness). The First Chicago Bank
employs a weekly Performance Measurement Program charting its performance on a
large number of customer-sensitive issues. Figure 20.6 shows a typical chart to track
the banks speed in answering customer service phone inquiries. It will take action
whenever performance falls below the minimum acceptable level. It also raises its
performance goal over time.
Services can be judged on customer importance and company performance.
Importance-performance analysis is used to rate the various elements of the service
bundle and identify what actions are required. Table 20.1 shows how customers rated
14 service elements (attributes) of an automobile dealers service department on
importance and performance. For example, Job done right the first time (attribute 1)
received a mean importance rating of 3.83 and a mean performance rating of 2.63,
indicating that customers felt it was highly important but not performed well.
The ratings of the 14 elements are displayed in Figure 20.7 and divided into four sections.
Quadrant A shows important service elements 1, 2 and 9. The dealer should concentrate
on improving the servcie departments performance on these elements. Quadrant B
shows important service elements that are being performed well; the company needs
to maintain the high performance. Quadrant C shows minor service elements that are
being delivered in a mediocre way buy do not need any attention. Quadrant D shows
that a minor service element, Send out maintenance notices, is being performed in an
excellent manner. Perhaps the company should spend less in sending out maintenance
notices and reallocate the savings toward improving the companys performance on
important elements. The analysis can be enhanced by checking on the competitors
performance levels on each element.
Minimum Acceptable Performance
Customer-Service Phone Inquiries
Average Speed of Answer
Current Performance
Performance Goal
S
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Jan Feb Mar Apr May Jun
0
5
10
15
20
25
30
35
40
45
Figure 20.6: Tracking Customer Service Performance
Satisfying Customer Complaints
Studies of customer dissatisfaction show that customers are dissatisfied with their
purchases about 25 percent of the time but that only about 5 percent complain. The
other 95 percent either feel that complaining is not worth the effort, or that they dont
know how or to whom to complain.
Of the 5 percent who complain , only about 50 percent report a satisfactory problem
resolution. Yet the need to resolve a customer problem in a satisfactory manner is
critical. On average, a satisfied customer tells three people about a good product
experience, but the average dissatisfied customer gripes to eleven people. If each of
them tells still other people, the number of people exposed to bad word of mouth may
grow exponentially.
Table 20.1: Customer Importance and Performance Ratings for an
Auto Dealership
Mean Mean
Attribute Attribute Importance performance
Number Description Rating
a
Rating
b
1. Job done right the first time 3.83 2.63
2. Fast action on complaints 3.63 2.73
3. Prompt warranty work 3.60 3.15
4. Able to do any job needed 3.56 3.00
5. Service available when needed 3.41 3.05
6. Courteous and friendly service 3.41 3.29
7. Car ready when promised 3.38 3.03
8. Perform only necessary work 3.37 3.11
9. Low prices on service 3.29 2.00
10. Clean up after service work 3.27 3.02
11. Convenient to home 2.52 2.25
12. Convenient to work 2.43 2.49
13. Courtesy buses and cars 2.37 2.35
14. Send out maintenance notices 2.05 3.33
a
Ratings obtained from a four-point scale of extremely important (4), important (3), slightly
important (2) and not important (1).
b
Ratings obtained from a four-point scale of excellent (4), good (3), fair (2) and poor (1). A
no basis for judgement category was also provided.
Nonetheless, customers whose complaints are satisfactorily resolved often become
more company-loyal than customers who were never dissatisfied. About 34 percent of
customers who register major complaints will buy again from the company if their
complaint is resolved, and this number rises to 52 percent for minor complaints. If the
complaint is resolved quickly, between 52 percent (major complaints) and 95 percent
(minor complaints) will buy again from the company.
Tax and Brown have found that companies that encourage disappointed customers to
complainand also empower employees to remedy the situation on the spotachieve
higher revenues and greater profits than complanies that dont have a systematic
approach for addressing service failures. Tax and Brown found that companies that
are effective at resolving complaints :
l Develop hiring criteria and training programs that take into account employees
service-recovery role.
l Develop guidelines for service recovery that focus on achieving fairness and
customer satisfaction.
l Remove barriers that make it difficult for customers to complain, while developing
effective responses, which may include empowering employees to provide
compensation for the failure.
l Maintain customer and product databases that let the company analyze types and
sources of complaints and adjust its policies.
Satisfying Both Employees and Customers
Excellently managed service companies believe that employee relations will affect
customer relations. Management carries out internal marketing and provides employee
support and rewards for good performance. Management regularly audits employee
job satisfaction. Karl Albrecht observed that unhappy employees can be terrorists.
Rosenbluth and Peters, in The Customer Comes Second, go so far as to say that the
companys employees, not the companys customers, have to be made number one if
the company hopes to truly satisfy its customers.
An important part of satisfying employees is helping them cope with their lives outside
the office. As employees put a higher premium on family time, companies are offering
more flexible work schedules.
Managing Productivity
Service firms are under great pressure to keep costs down and increase productivity.
There are seven approaches to improving service productivity.
The first is to have service providers work more skillfully. The company can hire and
foster more skillful workers through better selection and training and giving them higher
salary than others.
Figure 20.7: Importance-Performance Analysis
Extremely important
A. Concentrate here B. Keep up the good work
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The second is to increase the quantity of service by surrendering some quality. At
Escorts Heart Institute, the heart specialist operate 3 or 4 patients at a time in different
operation theatres by the help of closed circuit television.
The third is to industrialize the service by adding equipment and standardizing
production. Levitt recommended that companies adopt a manufacturing attitude
toward producing services as represented by McDonalds assembly-line approach to
fast-food retailing, culminating in the technological hamburger.
The fourth is to reduce or make obsolete the need for a service by inventing a product
solution, the way television substituted for out-of-home entertainment and the microwave
oven reduced the need for going to the bakeries.
The fifth is to design a more effective service. How-to-quit-smoking clinics may reduce
the need for expensive medical services later on. Hiring students to work part-time
reduces the need for more expensive regular employees.
The sixth is to present customers with incentives to substitute their own labour for
company labour. Business firms that are willing to sort their own mail before delivering
it to the post office pay lower postal rates. The self service restaurants require customers
to pay their bills and obtain what they want and dispose the used serving trays on their
own.
The seventh is to harness the power of technology to give customers access to better
service and make service workers more productive. Companies that use their Web
sites to empower customers can lessen workloads, capture valuable customer data,
and increase the value of their businesses.
Companies must avoid pushing productivity so hard that they reduce perceived quality.
Some methods lead to too much standardization and rob the customer of customized
service; high touch is replaced by high tech. Burger King challenged McDonalds
running a Have it your way campaign, where customers could get a customized
hamburger even though this offer reduced Burger Kings productivity somewhat.
International Marketing
Major Decisions in International Marketing
Deciding Whether to go Abroad
Most companies would prefer to remain domestic if their domestic market were large
enough. Managers would not need to learn other languages and laws, deal with volatile
currencies, face political and legal uncertainties, or redesign their products to suit different
customer needs and expectations. Business would be easier and safer.
Yet several factors are drawing more and more companies into the International arena:
l Global firms offering better products or lower prices can attack the companys
domestic market. The company might want to counter attack these competitors
in their home markets. For e.g., Japanese car makers entered the American market
and captured the significant part of the market.
l The company discovers that some foreign markets present higher profit
opportunities than the domestic market. For e.g., India and China offers huge
opportunities for value for money products because of their population base.
Figure 20.8: Major Decisions in International Marketing.
l The company needs a larger customer base to achieve economies of scale which
is not possible in case of developed countries where population growth rate has
established.
l The company wants to reduce its dependence on any one market. So that poor
performance in one market did not hurt its profitability.
l The companys customers are going abroad and require international servicing
because the barriers to move across the countries are fast declining.
Before making a decision to go abroad, the company must weigh several risks :
l The company might not understand foreign customer preferences and fail to offer
a competitively attractive product (Table 20.2 lists some famous blunders in this
arena).
l The company might not understand the foreign countrys business culture or know
how to deal effectively with foreign nationals. Table 20.2 lists some of the many
challenges.
Deciding whether
to go abroad
Deciding which
markets to
enter
Deciding how
to enter the
market
Deciding on
the marketing
program
Deciding on
the marketing
organization
Table 20.2: Blunders in International Marketing
Hallmark cards failed when they were introduced in France. The French dislike syrupy sentiment
and prefer writing their own cards.
Philips began to earn a profit in Japan only after it had reduced the size of its coffeemakers to fit into
smaller Japanese kitchens and its shavers to fit smaller Japanese hands.
Coca-Cola had to withdraw its two-liter bottle in Spain after discovering that few Spaniards owned
refrigerators with large enough compartments to accommodate it.
General Foods Tang initially failed in France because it was positioned as a substitute for orange
juice at breakfast. The French drink little orange juice and almost none at breakfast.
Kelloggs Pop-Tarts failed in Britain because the percentage of British homes with toasters was
significantly lower than in the United States and the product was too sweet for British tastes.
P&G Crest toothpaste initially failed in Mexico when it used the U.S. campaign. Mexicans did not
care as much for the decay-prevention benefit, nor did scientifically oriented advertising appeal to
them.
General Foods squandered millions trying to introduce packaged cake mixes to Japanese consumers.
The company failed to note that only 3 percent of Japanese homes were equipped with ovens.
Then they promoted the idea of baking cakes in Japanese rice cookers, overlooking the fact that the
Japanese use their rice cookers throughout the day to keep rice warm and ready.
S.C. Johnsons wax floor polish initially failed in Japan. The wax made the floors too slippery, and
Johnson had overlooked the fact that Japanese do not wear shoes in their homes.
Because of the competing advantages and risks, companies often do not act until some
event thrusts them into the international arena. Someonea domestic exporter, a foreign
importer, a foreign governmentsolicits the company to sell abroad. Or the company is
saddled with overcapacity and must find additional markets for its goods.
Deciding Which Markets to Enter
In deciding to go abroad, the company needs to define its international marketing
objectives and policies. What proportion of foreign to total sales will it seek ? Most
companies start small when they venture abroad. Some plan to stay small. Others
have bigger plans, believing that their foreign business will eventually be equal to, or
even more important than, their domestic business.
The company must decide whether to market in a few countries or many countries and
determine how fast to expand.
Generally speaking, it makes sense to operate in fewer countries with a deeper
commitment and penetration in each. Ayal and Zif have argued that a company should
enter fewer countries when
l Market entry and market control costs are high.
l Product and communication adaptation costs are high.
l Population and income size and growth are high in the initial countries chosen.
l Dominant foreign firms can establish high barriers to entry.
The company must also decide on the types of countries to consider. Attractiveness is
influenced by the product, geography, income and population, political climate, and other
factors. The seller might have a predilection for certain countries or regions. Kenichi
Ohmae recommends that companies concentrate on selling in the triad marketsthe
United States, Western Europe, and the Far Eastbecause these markets account for
a large percent of all international trade.
Although Ohmaes position makes short-run sense, it can spell disaster for the world
economy in the long run. The unmet needs of the developing world represent huge
potential markets for food, clothing, shelter, consumer electronics, appliances, and other
goods. Many market leaders are now rushing into Eastern Europe, China, Vietnam and
India where there are many unmet needs to satisfy.
Regional economic integrationtrading agreements between blocs of countrieshas
intensified in recent years. This development means that companies are more likely to
enter entire regions overseas rather than do business with one nation at a time.
Regional Free Trade Zones
Certain countries have formed free trade zones or economic communitiesgroups of
nations organized to work toward common goals in the regulation of international trade.
One such community is the European Union (EU). Formed in 1957, the European
Union set out to create a single European market by reducing barriers to the free flow
of products, services, finances, and labour among member countries and developing
policies on trade with nonmember nations. Today, the European Union is using a common
currency, the euro monetary system. In 1998, 11 participating countries locked their
exchange rates together, as a first step in a multi year plan for a common currency
(Britain, Denmark and Swedan are the holdouts, so far). The euro coins and bills that
will eventually replace member countries currencies will not be in circulation until
2002, and businesses and private citizens will not be required to switch before then.
Today, the European Union represents one of the worlds single largest markets. Its 15
member countries contain more than 370 million consumers and account for 20 percent
of the worlds exports. As more European nations seek admission to the EU in the
twenty-first century, it could contain as many as 450 million people in 28 countries.
European unification offers tremendous trade opportunities for U.S. and other non-
European firms. However, it also poses threats. As a result of increased unification,
European companies will grow bigger and more competitive. Witness the competition
in the aircraft industry between Europes Airbus consortium and the Untied States
Boeing. Perhaps an even bigger concern, however, is that lower barriers inside Europe
will only create thicker outside walls. Some observers envision a fortress Europe
that heaps favours on firms from EU countries but hinders outsiders by imposing
obstacles such as stiffer import quotas, local content requirements, and other nontariff
(nontax) barriers.
Also, companies that plan to create pan-European marketing campaigns directed to
a unified Europe should proceed with caution. Even if the European Union truly does
manage to standardize its general trade regulations and implement the euro, creating an
economic community will not create a homogeneous market. Companies marketing in
Europe face 14 different languages, 2,000 years of historical and cultural differences,
and a daunting mass of local rules.
The most successful pan-European ads are those that are highly visual and symbolic.
These ads focus on the product and consumer and are aimed at one of the two audiences
that market researchers really agree are turning into Euroconsumersthe young and
the rich. One such ad is for TAG Heuer watches in which a swimmer races a shark,
a hurdler leaps over an oversized razor blade, and a relay runner grabs a dynamite
baton, all mind games that athletes everywhere use to rev up their performance.
In North America, the United States and Canada phased out trade barriers in 1989. In
January 1994, the North American Free Trade Agreement (NAFTA) established a
free trade zone among the United States, Mexico and Canada. The agreement created
a single market of 360 million people who produce and consume $6.7 trillion worth of
goods and services. As it is implemented over a 15-year period, NAFTA will eliminate
all trade barriers and investment restrictions among the three countries. Prior to NAFTA,
tariffs on American products entering Mexico averaged 13 percent, whereas U.S.
tariffs on Mexican goods averaged 6 percent.
Other free trade areas are forming in Latin America and South America. For example,
MERCOSUL now links Brazil, Colombia and Mexico. Chile and Mexico have formed
a successful free trade zone. Venezuela, Colombia and Mexicothe Group of
Threeare negotiating a free trade area as well. It is likely that NAFTA will eventually
merge with this and other arrangements to form an all-Americas free trade zone.
Although the United States has long regarded Latin America as its backyard, it is the
European nations that have tapped this markets enormous potential. As Washingtons
efforts to extend NAFTA to Latin America have stalled, European countries have
moved in with a vengeance. MERCOSULs two-way trade with the EU in 1995
amounted to $43 billion, a total that exceeded trade with the United States by $14
billion. When Latin American countries instituted market reforms and privatized public
utilities, European companies rushed in to grab up lucrative contracts for rebuilding
Latin Americas infrastructure. Spains Telefonica de Espana has spent $5 billion buying
phone companies in Brazil, Chile, Peru, and Argentina. European companies have
moved rapidly into the private sector. In Brazil, seven of the ten largest private companies
are European owned, compared to two controlled by Americans. Among the notable
European companies operating in Latin America are automotive giants Volkswagen
and Fiat, the French supermarket chain Carrefours, and the Anglo-Dutch personal
care products group Gessy-Lever.
As U.S. companies have watched Europeans make inroads in Latin America, they
have pressured Washington to move more quickly on integrating Chile into NAFTA
and toward Free Trade Area of the Americas. MERCOSUL doesnt repesent only a
huge domestic market of 220 million consumers; with its entire Pacific Coast beckoning
toward Asia, MERCOSUL also stands to become an important low-cost platform for
world export. Yet two groups in the United Stateslabour unions and
environmentalistsare skeptical about the benefits of a Free Trade Area of the
Americas. Union feel that NAFTA has already led to the exodus of manufacturing
jobs to Mexico where wage rates are much lower. Environmentalists poit out that
companies unwilling to play by the strict rules of the U.S. Environmental Protection
Agency relocate to Mexico, where pollution regulation has been lax.
Eighteen Pacific Rim countries, including the NAFTA member states, Japan and China,
have been discussing the possible creation of a pan-Pacific free trade area under the
auspices of the Asian Pacific Economic Cooperation forum (APEC). There are also
active attempts at regional economic integration in the Caribbean, Southeast Asia, and
parts of Africa.
Yet, however much nations and regions integrate their trading policies and standards,
each nation still has unique features that must be understood. A nations readiness for
different products and services and its attractiveness as a market to foreign firms
depend on its economic, political-legal, and cultural environments.
EVALUATING POTENTIAL MARKETS
Suppose a company has assembled a list of potential markets to enter. How does it
choose among them ? Many companies prefer to sell to neighbouring countries because
they understand these countries better, and they can control their costs better. It is not
surprising that the United States largest market is Canada, or that Swedish companies
first sold to their Scandinavian neighbours. As growing numbers of U.S. companies
expand abroad, many are deciding the best place to start is next door, in Canada.
At other times, psychic proximity determines choices. Many U.S. firms prefer to sell
in Canada, England, and Australiarather than in larger markets such as Germany
and Francebecause they feel more comfortable with the language, laws and culture.
In general, a company prefers to enter countries (1) that rank high on market
attractiveness, (2) that are low in market risk, and (3) in which the company possesses
a competitive advantage.
Deciding how to Enter the Market
Once a company decides to target a particular country, it has to determine the best
mode of entry. Its broad choices are indirect exporting, direct exporting, licensing,
joint ventures and direct investment. These five market-entry strategies are shown
in Figure 20.9. Each succeeding strategy involves more commitment, risk, control and
profit potential.
Figure 20.9: Five Modes of Entry into Foreign Markets
Direct
investment
Joint
ventures
Licensing
Direct
exporting
Indirect
exporting
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Indirect Export
The normal way to get involved in a foreign market is through export. Occasional
exporting is a passive level of involvement in which the company exports from time to
time, either on its own initiative or in response to unsolicited orders from abroad. Active
exporting takes place when the company makes a commitment to expand its exports
to a particular market. In either case, the company produces its goods in the home
country and might or might not adapt them to the foreign market.
Companies typically start with indirect exportingthat is, they work through
independent intermediaries to export their product. There are four types of intermediaries
: Domestic-based export merchants buy the manufacturers products and then sell
them abroad. Domestic-based export agents seek and negotiate foreign purchases
and are paid a commission. Included in this group are trading companies. Cooperative
organizations carry on exporting activities on behalf of several producers and are
partly under their administrative control. They are often used by producers of primary
products such as fruits or nuts. Export-management companies agree to manage a
companys export activities for a fee. Indirect export has two advantages. First, it
involves less investment. The firm does not have to develop an export department, an
overseas sales force, or a set of foreign contacts. Second, it involves less risk. Because
international-marketing intermediaries bring know-how and services to the relationship,
the seller will normally make fewer mistakes.
Direct Exports
Companies eventually may decide to handle their own exports. The investment and
risk are somewhat greater, but so is the potential return.
A company can carry on direct exporting in several ways:
l Domestic-based export department or division: Might evolve into a self-
contained export department operating as a profit center.
l Overseas sales branch or subsidiary: The sales branch handles sales and
distribution and might handle warehousing and promotion as well. It often serves
as a display and customer service center.
l Traveling export sales representatives: Home-based sales representatives are
sent abroad to find business.
l Foreign-based distributors or agents: These distributors and agents might be
given exclusive rights to represent the company in that country or only limited
rights.
Whether companies decide to export indirectly or directly, many companies use exporting
as a way to test the waters before building a plant and manufacturing a product
overseas.
One of the best ways to initiate or extend export activities is by exhibiting at an overseas
trade show. A U.S. software firm might show its product at an international software
expo in Hong Kong. With the World Wide Web, it may not even be necessary to attend
trade shows to show ones wares to overseas buyers and distributors. Electronic
communication via the Internet is extending the reach of companies, particularly small
ones, to worldwide markets. The Internet has become an effective means of everything
from gaining free exporting information and guidelines, conducting market research
and offering customers several time zones away a secure process for ordering and
paying for products.
Licensing
Licensing is a simple way to become involved in international marketing. The licensor
licenses a foreign company to use a manufacturing process, trademark, patent, trade
secret, or other item of value for a fee or royalty. The licensor gains entry at little risk;
the licensee gains production expertise or a well-known product or brand name.
Licensing has some potential disadvantages. The licensor has less control over the
licensee than if it had set up its own production and sales facilities. Furthermore, if the
licensee is very successful, the firm has given up profits; which the firm might have
earned if it entered in that country on their own and if and when the contract ends, the
company might find that it has created a competitor. To avoid this, the licensor usually
supplies some proprietary ingredients or components needed in the product (as Coca-
Cola does). But the best strategy is for the licensor to lead in innovation so that the
licensee will continue to depend on the licensor.
There are several variations on a licensing arrangement. Companies such as Hyatt
and Marriot sell management contracts to owners of foreign hotels to manage these
businesses for a fee. The management firm may even be given the option to purchase
some share in the managed company within a stated period.
Another variation is contract manufacturing, in which the firm hires local manufacturers
to produce the product. Contract manufacturing has the drawback of giving the company
less control over the manufacturing process and the loss of potential profits on
manufacturing. However, it offers a chance to start faster, with less risk and with the
opportunity to form a partnership or buy out the local manufacturer later.
Finally, a company can enter a foreign market through franchising, which is a more
complete form a licensing. The franchiser offers a complete brand concept and operating
system. In return, the franchisee invests in and pays certain fees to the franchiser.
McDonalds KFC and Avis have entered scores of countries by franchising their retail
concepts.
Joint Ventures
Foreign investors may join with local investors to create a joint venture company in
which they share ownership and control.
Forming a joint venture may be necessary or desirable for economic or political reasons.
The foreign firm might lack the financial, physical, or managerial resources to undertake
the venture alone. Or the foreign government might require joint ownership as a condition
for entry. Even corporate giants need joint ventures to crack the toughest markets.
When it wanted to enter Chinas ice cream market, Unilever joined forces with Sumstar,
a state-owned Chinese investment company. The ventures general manager says
Sumstars help with the formidable Chinese bureaucracy was crucial in getting a high
tech ice cream plant up and running in just 12 months.
Joint ownership has certain drawbacks. The partners might disagree over investment,
marketing, or other policies. One partner might want to reinvest earnings for growth,
and the other partner might want to declare more dividends. The failure of the joint
venture between AT&T and Olivetti was due to the companies inability to agree on
strategy. Furthermore, joint ownership can prevent a multinational company from carrying
out specific manufacturing and marketing policies on a worldwide basis.
Direct Investment
The ultimate form of foreign involvement is direct ownership of foreign-based assembly
or manufacturing facilities. The foreign company can buy part or full interest in a local
company or build its own facilities. If the foreign market appears large enough, foreign
production facilities offer distinct advantages. First, the firm secures cost economies in
the form of cheaper labour or raw materials, foreign-government investment incentives,
and freight savings. Second, the firm strengthens its image in the host country because
it creates jobs. Third, the firm develops a deeper relationship with government,
customers, local suppliers, and distributors, enabling it to adapt its products better to the
local environment. Fourth, the firm retains full control over its investment and therefore
can develop manufacturing and marketing policies that serve its long-term international
objectives. Fifth, the firm assures itself access to the market in case the host country
starts insisting that locally purchased goods have domestic content.
The main disadvantage of direct investment is that the firm exposes a large investment
to risks such as blocked or devalued currencies, worsening markets, or expropriation.
The firm will find it expensive to reduce or close down its operations, because the host
country might require substantial severance pay to the employees.
The Internationalization Process
Most countries lament that too few of their companies pariticipate in foreign trade.
This keep the country from earning sufficient foreign exchange to pay for needed
imports. Many governments sponsor aggressive export-promotion programs to get
their companies to export. These programs require a deep understanding of how
companies become internationalized.
Johanson and Wiedersheim-Paul have studied the internationalization process among
Swedish companies. They are firms moving through four stages :
1. No regular export activities.
2. Export via independent representatives (agents)
3. Establishment of one or more sales subsidiaries
4. Establishment of production facilities abroad.
The first task is to get companies to move from stage 1 to stage 2. This move is helped
by studying how firms make their first export decisions. Most firms work with an
independent agent and enter a nearby or similar country. A company then engages
further agents to enter additional countries. Later, it establishes an export department
to manage its agent relationships. Still later, the company replaces its agents with its
own sales subsidiaries in its larger export markets. This increases the companys
investment and risk but also its earning potential. To manage these subsidiaries, the
company replaces the export department with an international department. If certain
markets continue to be large and stable, or if the host country insists on local production,
the company takes the next step of locating production facilities in those markets,
representing a still larger commitment and still larger potential earnings. By this time,
the company is operating as a multinational company and engaged in optimizing its
global sourcing, financing, manufacturing and marketing.
Deciding on the Marketing Program
International companies must decide how much to adapt their marketing strategy to
local conditions. At one extreme are companies that use a globally standardized
marketing mix worldwide. Standardization of the product, advertising and distribution
channels promises the lowest costs. At the other extreme is an adapted marketing
mix, where the producer adjust the marketing-mix elements to each target market.
Between the two extremes, many possibilities exist. Here we will examine potential
adaptations that firms might make to their product, promotion, price, and distribution as
they enter foreign markets.
Product
Keegan has distinguished five adaptation strategies of product and promotion to a foreign
market (Figure 20.10).
Figure 20.10: Five International Product and Promotion Strategies
Straight extension means introducing the product in the foreign market without any
change. Top management instructs its salespeople : Find customers for the product as
it is. However, the company should first determine whether foreign consumers use
that product. Deodorant usage among men ranges from 80 percent in the United States
to 55 percent in Sweden to 28 percent in Italy to 8 percent in the Philippines. In
interviewing women in one country about how often they used a deodorant, a typical
response was I use it when I go dancing once a year : hardly grounds for introducing
the product.
Straight extension has been successful with cameras, consumer electronics, and many
machine tools. In other cases, it has been a disaster. Straight extension is tempting
because it involves no additional R&D expense, manufacturing, retooling, or promotional
modification. But it can be costly in the long run.
Product adaptation involves altering the product to meet local conditions or preferences.
There are several levels of adaptation. A company can produce a regional version of
its product, such as a Western European version. Finnish cellular phone superstar
Nokia made its 1100 series phone especially for India. Developers built in rudimentary
Product
Do Not Change
Product
Adapt
Product
Develop New
Product
Straight
extension
Product
adaptation
Product
Invention
Communication
adaptation
Dual
adaptation
Do Not Change
Promotion
Adapt
Promotion
P
r
o
m
o
t
i
o
n
voice recognition for Asia, where keyboards are a problem and raised the ring volume
so the phone could be heard on crowded Asian streets.
Product invention consists of creating something new. It can take two forms, Backward
invention is reintroducing earlier product forms that are well adapted to a foreign
countrys needs. Forward invention is creating a new product to meet a need in
another country. There is an enormous need in less developed countries for low-cost,
high-protein foods. Companies such as Quaker Oats, Swift, and Monsanto are
researching these countries nutrition needs, formulating new foods, and developing
advertising campaigns to gain product trial and acceptance. In globalizations latest
twist, American companies are not only inventing new products for overseas markets
but also lifting products and ideas from their international operations and bringing them
home. Product invention is a costly strategy, but the payoffs can be great, particularly
if you can parlay a product innovation overseas into a new hit at home.
A growing part of international trade is taking place in services. The world market for
services is growing at double the rate of world merchandise trade. Large firms in
accounting, advertising, banking, communications, construction, insurance, law,
management consulting, and retailing are pursuing global expansion. Arthur Andersen,
American Express, Citicorp, Hilton, and Thomas Cook are known worldwide.
At the same time, many countries have erected entry barriers or regulations. Brazil
requires all accountants to possess a professional degree from a Brazilian university.
Many Western European countries want to limit the number of U.S. television programs
and films shown in their countries. Many U.S. states bar foreign bank branches. At
the same time, the United States is pressuring South Korea to open its markets to U.S.
banks. The General Agreement of Tariffs and Trade (GATT) is pressing for more free
trade in international services, but the progress is slow.
Promotion
Companies can run the same advertising and promotion campaigns used in the home
market or change them for each local market, a process called communication
adaptation. If it adapts both the product and the communciation, the company engages
in dual adaptation.
Consider the message. The company can change its message at four different levels.
The company can use one message everywhere, varying only the language, name, and
colours. Exxon used Put a tiger in your tank with minor variations and gained
international recognition. Colours might be changed to avoid taboos in some countries.
Purple is associated with death in Burma and some Latin American nations; white is a
mourning colour in India; and green is associated with disease in Malaysia. Even
names and headlines may have to be modified. When Clairol introduced the Mist
Stick, a curling iron, into Germany, it found that mist is slang for manure. Few Germans
wanted to purcahse a manure stick. In Spain, Chevrolets Nova translated as it
doesnt go.
The second possibility is to use the same theme globally but adapt the copy to each
local market. For example, a Camay soap commercial showed a beautiful woman
bathing. In Venezuela, a man was seen in the bathroom; in Italy and France, only a
mans hand was seen; and in Japan, the man waited outside.
The third approach consists of developing a global pool of ads, from which each country
selects the most appropriate one. Coca-cola and Goodyear use this approach. Finally,
some companies allow their country managers to create country-specific adswithin
guidelines, of course.
The use of media also requires international adaptation because media availability varies
from country to country. Norway, Belgium, and France do not allow cigarettes and
alcohol to be advertised on TV, Austria and Italy regulate TV advertising to children.
Saudi Arabia does not want advertisers to use women in ads. India taxes advertising.
Magazines vary in availability and effectiveness; they play a major role in Italy and a
minor one in Austria. Newspapers have a national reach in the United Kingdom, but
the advertiser can buy only local newspaper coverage in Spain.
Marketers must also adapt sales-promotion techniques to different markets. Greece
prohibits coupons and France prohibits games of chance and limits premiums and gifts
to 5 percent of product value. People in Europe and Japan tend to make inquiries via
mail rather than phonewhich may have ramifications for direct-mail and other sales-
promotion campaigns. The result of these varying preferences and restrictions is that
international companies generally assign sales promotion as a responsibility of local
management.
Price
Multinationals face several pricing problems when selling abroad. They must deal with
price escalation, transfer prices, dumping charges, and gray markets.
When companies sell their goods abroad, they face a price escalation problem. A
Gucci handbag may sell for $120 in Italy and $240 in the United States. Why ? Gucci
has to add the cost of transportation, tariffs, importer margin, wholesaler margin, and
retailer margin to its factory price. Depending on these added costs, as well as the
currency-fluctuation risk, the product might have to sell for two to five times as much in
another country to make the same profit for the manufacturer. Because the cost
escalation varies from country to country, the question is how to set the prices in different
countries. Companies have three choices :
1. Setting a uniform price everywhere : Coca-Cola might want to charge 60 cents
for Coke everywhere in the world. But then Coca-Cola would earn quite different
profit rates in different countries because of varying escalation costs. Also, this
strategy would result in the price being too high in poor countries and not high
enough in rich countries.
2. Setting a market-based price in each country : Here Coca-Cola would charge
what each country could afford. But this strategy ignores differences in the actual
cost from country to country. Also, it could lead to a situation in which intermediaries
in low-price countries reship their Coca-Cola to high-price countries.
3. Setting a cost-based price in each country : Here Coca-Cola would use a
standard markup of its costs everywhere. But this strategy might price Coca-
Cola out of the market in countries where its costs are high.
Another problem arises when a company sets a transfer price (i.e., the price that it
charges to another unit in the company) for goods that it ships to its foreign subsidiaries.
If the company charges too high a price to a subsidiary, it may end up paying higher
tariff duties, although it may pay lower income taxes in the foreign country. If the
company charges too low a price to its subsidiary, it can be charged with dumping.
Dumping occurs when a company charges either less than its costs or less than it
charges in its home market, in order to enter or win a market. Zenith accused Japanese
television manufacturers of dumping their TV sets on the U.S. market. When the U.S.
Customers Bureau finds evidence of dumping, it can levy a dumping tariff on the guilty
company. Various governments are watching for abuses and often force companies to
charge the arms-length pricethat is, the price charged by other competitors for the
same or a similar product.
Many multinational are plagued by the gray-market problem. A gray market occurs
when the same product sells at different prices geographically. Dealers in the low-
price country find ways to sell some of their products in higher-price countries, thus
earning more.
Very often a company finds some enterprising distributors buying more than they can
sell in their own country and reshipping goods to another country to take advantage of
price differences. Multinationals try to prevent gray markets by policing the distributors,
by raising their prices to lower-cost distributors, or by altering the product characteristics
or service warranties for different countries.
In the European Union, the gray market may disappear altogether with the transition to
a single currency unit. The adoption of the single currency by 11 countries will certainly
reduce the amount of price differentiation. In 1998, a bottle of Gatorade, for instance,
cost 3.5 European currency units (ECU) in Germany but only about 0.9 in Spain. Once
consumers recognize price differentiation by country, companies will be forced to
harmonize prices throughout the countries that have adopted the single currency.
Companies and marketers that offer the most innovative, specialized, or necessary
products or services will be least affected by price transparency.
The Internet will also reduce price differentiation between countries. When companies
sell their wares over the Internet, price will become transparent as customers can
easily find out how much products sell for in different countries. Take an on-line
training course, for instance. Whereas the price of a classroom-delivered day of training
can vary significantly from the United States to France to Thailand, the price of an on-
line-delivered day of training would have to be similar.
Another global pricing challenge that has arisen in recent years is that countries with
overcapacity, cheap currencies, and the need to export aggressively have pushed prices
down and devalued their currencies. For multinational firms this poses challenges :
Sluggish demand and reluctance to pay higer prices make selling in these emerging
markets difficult. Instead of lowering prices, and taking a loss, some multinationals
have found more lucrative and creative means of coping.
Place (Distribution Channels)
Too many manufacturers think their job is done once the product leaves the factory.
They should pay attention to how the product moves within the foreign country. They
should take a whole-channel view of the problem of distributing products to final users.
Figure 20.11, shows the three major links between seller
Figure 20.11: Whole-channel concept for International Marketing
and ultimate user. In the first link, sellers international marketing headquarters,
the export department or international division makes decisions on channels and other
marketing-mix elements. The second link, channels between nations, gets the products
to the borders of the foreign nation. The decisions made in this link include the types of
intermediaries (agents, trading companies) that will be used, the type of transportation
(air, sea), and the financing and risk arrangements. The third link, channels within
foreign nations, gets the products from their entry point to final buyers and users.
Within-country distribution channels vary considerably among countries. To sell soap
in Japan, Procter & Gamble has to work through one of the most complicated distribution
systems in the world. It must sell to a general wholesaler, who sells to a product
wholelaser, who sells to a product-specialty wholesaler, who sells to a regional wholesaler,
who sells to a local wholesaler, who finally sells to retailers. All these distribution levels
can mean that the consumers price ends up double or triple the importers price. If
P&G takes the soap to tropical Africa, the company might sell to an import wholesaler,
who sells to several jobbers, who sell to petty traders (mostly women) working in local
markets.
Another difference lies in the size and character of retail units abroad. Large-scale
retail chains dominate the U.S. scene, but much foreign retailing is in the hands of small
independent retailers. In India, millions of retailers operate tiny shops or sell in open
markets. Their markups are high, but the real price is bought down through haggling.
Incomes are low, and people must shop daily for small amounts and are limited to
whatever quantity can be carried home on foot or on a bicycle. Most homes lack
storage and refrigeration space to keep food fresh. Packaging costs are kept low in
order to keep prices low. In India, cigarettes are often bought singly. Breaking bulk
Seller
Seller's
international
marketing
headquarters
Channels
between
nations
Channels within
foreign nations
Final
buyers
remains an important function of intermediaries and helps perpetuate the long channels
of distribution, which are a major obstacle to the expansion of large-scale retailing in
developing countries.
Deciding on the Marketing Organization
Companies manage their international marketing activities in three ways : through
export departments, International divisions, or a global organization.
Export Department
A firm normally gets into international marketing by simply shipping out its goods. If its
international sales expand, the company organize an export department consisting of a
sales manager and a few assistants. As sales increase further, the export department
is expanded to include various marketing services so that the company can go after
business more aggressively. If the firm moves into joint ventures or direct investment,
the export department will no longer be adequate to manage international operations.
International Division
Many companies become involved in several international markets and ventures. Sooner
or later they will create international divisions to handle all their international activity.
The International division is headed by a division president, who sets goals and budgets
and is responsible for the companys international growth.
The international divisions corporate staff consists of functional specialists who provide
services to various operating units. Operating units can be organized in several ways.
First, they can be geographical organizations. Reporting to the international division
president might be regional vice presidents for North America, Latin America, Europe,
Africa, the Middle East, and the Far East. Reporting to the regional vice president are
country managers who are responsible for a sales force, sales branches, distributors,
and licensees in the respective countries. Or the operating units may be world product
groups, each with an international vice president responsible for world-wide sales of
each product group. The vice presidents may draw on corporate-staff area specialists
for expertise on different geographical areas. Finally, operating units may be
international subsidiaries, each headed by a president. The various subsidiary
presidents report to the president of the international division.
Global Organization
Several firms have become truly global organizations. Their top corporate management
and staff plan worldwide manufacturing facilitites, marketing policies, financial flows,
and logistical systems. The global opearting units report directly to the chief executive
or executive committee, not to the head of an international division. Executives are
trained in worldwide operations, not just domestic or international. Management is
recruited from many countries; components and supplies are purchased where they
can be obtained at the least cost; and investments are made where the anticipated
returns are greatest.
These companies face several organizational complexities. For example, when pricing
a companys mainframe computers to a large banking system in Germany, how much
influence should be wielded by the headquarters product manager, by the companys
market manager for the banking sector, and by the companys German country manager?
Bartlett and Ghoshal have proposed circumstances under which different approaches
work best. In their Managing Across Borders, they describe forces that favour global
integration (e.g., capital-intensive production, homogeneous demand) versus national
responsiveness (e.g., local standards and barriers, strong local preferences). They
distinguish three organizational strategies:
1. A global strategy treats the world as a single market. This strategy is warranted
when the forces for global integration are strong and the forces for national
responsiveness are weak. This is true of the consumer electronics market, for
exmaple, where most buyers will accept a fairly standardized pocket radio, CD
player or TV. Matsushita has performed better than GE and Philips in the consumer
electronics market because Matsushita operates in a more globally coordinated
and standardized way.
2. A multinational strategy treats the world as a portfolio of national opportunities.
This strategy is warranted when the forces favouring national responsiveness are
strong and the forces favouring global integration are weak. This is the situation
in the branded packaged-goods business (food product cleaning products). Bartlett
and Ghoshal cite Unilever as a better performer than Kao and P&G because
Unilever grants more decision-making autonomy to its local branches.
3. A glocal strategy standardizes certain core elements and localizes other
elements. This strategy makes sense for an industry (such as telecommunications)
where each nation requires some adaptation of its equipment but the providing
company can also standardize some of the core components. Bartlett and Ghoshal
cite Ericsson as balancing these considerations better than NEC (too globally
oriented) and ITT (too locally oriented).
1. Relationship Marketing
Relationship Marketing : The Key
To understand customer relationship marketing, we
must review the process involved in attracting and
keeping customers. Figure 21.1, shows the main steps
in the customer development process. The starting
point is suspects, everyone who might conceivably
buy the product or service. The company looks hard
at the suspects to determine who are the most likely
prospects the people who have a strong potential
interest in the product and the ability to pay for it.
Disqualified prospects are those the company rejects
because they have poor credit or would be
unprofitable. The company hopes to convert many of
its qualified prospects into first-time customers, and
then to convert those satisfied first-time customers
into repeat customers. Both first-time and repeat
customers may continue to buy from competitors as
well. The company then acts to convert repeat
customers into clients people whom the company
treats very specially and knowledgeably. The next
challenge is to turn clients into members, by starting a
membership program that offers a whole set of benefits
to customers who join. Hopefully then, the members
will turn into advocates, customers who
enthusiastically recommend the company and its
products and services to others. The ultimate
challenge is to turn advocates into partners, where
the customer and the company work together actively.
Some customers will inevitably become inactive or
drop out for reasons of bankruptcy, moves to other
locations, dissatisfaction, and so on. Here the
companys challenge is to reactivate dissatisfied
customers through customer win-back strategies. It
is often easier to reattract ex-customers, because the
company knows their names and histories, than to find
new ones.
Developing more loyal customers increases revenue. However, the company has to
spend more to build greater customer loyalty. How much should a company invest in
Suspects
Prospects
Disqualified
prospects
First-time
customers
Repeat
Customers
Clients
Members
Advocates
Partners
Inactive or
ex-customers
Figure 21.1: The Customer-
Development Process.
Chapter 21
Recent Development in Marketing
Recent Development in Marketing 619
Many customer/
distributors
Medium number of
customer/
distributors
Few customer/
distributor
Accountable
Proactive
Partnership
Reactive
Accountable
Proactive
Basic or reactive
Reactive
Accountable
HIGH MARGIN MEDIUM MARGIN LOW MARGIN
relationship building, so that the costs do not exceed the gains ? We need to distinguish
five different levels of investment in customer-relationship building :
1. Basic marketing : The salesperson simply sells the product.
2. Reactive marketing : The salesperson sells the product and encourages the
customer to call if he or she has questions, comments, or complaints.
3. Accountable marketing : The salesperson phones the customer a short time
after the sale to check whether the product is meeting expectations. The
salesperson also asks the customer for any product- or service-improvement
suggestions and any specific disappointments. This information helps the company
continuously improve its performance.
4. Proactive marketing : The company salesperson contacts the customer from
time to time with suggestions about improved product uses or helpful new products.
5. Partnership marketing : The company works continuously with the customer
to discover ways to perform better.
Most companies practice only basic marketing when their markets contain many
customers and their unit profit margins are small. Heinz is not going to phone each
ketchup buyer to express appreciation. At best, Heinz will set up a customer hot line.
At the other extreme, in markets with few customers and high profit margins, most
sellers will move toward partnership marketing. Boeing, for example, works closely
with American Airlines in designing Boeing air planes that fully satisfy Americans
requirements. As Figure 21.2, shows, the likely level of relationship marketing depends
on the number of customers and the profit margin level.
The best relationship marketing going on today is driven by technology. GE Plastics
couldnt target its newsletter so effectively to customers if it werent for advances in
database software. Dell, discussed
Figure 21.2: Levels of Relationship Marketing.
couldnt customize computer ordering for its global corporate without advances in Web
technology. Companies are using e-mail, Web sites, call centres, databases, and database
software to foster continuous contact between company and customer.
Enhancing Customer Relations with Relationship Marketing
Relationship marketing : Marketing activities aimed at building long-term relationship with the
parties, especially customers, that contribute to a companys success; also called relationship
management.
Effective marketers view customer services within the larger context of relationship
marketing. The term relationship marketing is used to communicate the idea that a
major goal of marketing, whether the product is a good or a service, is to build long term
relationships with suppliers, customers, and other parties who contribute to a companys
success. The customer relations dimension of relationship marketing seeks to build
customer loyalty by fulfilling promises and continuing to satisfy customer wants and need.
Theodore Levitt put it somewhat differently :
The relationship between a buyer and seller seldom ends when a sale is made. In
a greatly increasing proportion of transactions, the relationship actually intensifies
subsequent to the sale. This becomes the buyers critical factor in the buyers
choice of a seller the next time around..... The sale merely consummates the
courtship. Then the marriage begins. How good the marriage is depends on how
well the relationship is managed by the seller.
Effective marketers view making a sale not as the end of a process but as the start of
an organizations relationship with a customer. When they need to repurchase the
same product in the future, customers will return to the company that treated them
best. If they need a related item, satisfied customers know the first place to look.
Thus, once an exchange is made, effective marketers focus marketing efforts on
solidifying relationships, transforming indifferent customers into loyal ones, retaining
customers, and serving customers as clients.
Benefits to the Organization
An old business adage says It costs six times as much to get a new customer as it does
to keep and old customer. Although the figures vary industry by industry, the point is
valid. Working to retain customers by managing relationships with them will generally
increase revenues and, in most cases, reduce costs. Thus, profits rise when companies
retain customers.
Consumer Benefits
Customers also profit from relationship marketing. First, many buyers do not want to
evaluate too many factors when choosing among alternatives. The continuity derived
from a relationship with the same seller simplifies the buying process. Customers who
keep coming back find buying relatively effortless. Feeling comfortable in a buyer-
seller relationship is a major customer benefit.
Because services are intangible, they are difficult to evaluate prior to purchase. Buyers
become loyal customers because they want to do business with organizations that will
provide consistent service quality. For example, most consumers are very loyal to their
hairdressers or barbers. They do not want to risk buying a service whose quality is not
up to their expectations.
Another benefit customers gain from relationship marketing is increased customization
of goods or services. An ongoing relationship allows marketers to know their customers
names and the nature of their needs. People want to be dealt with individually. Relationship
marketing has been called one-to-one marketing because it allows marketers to tailor
their offerings to individual consumers. Companies that wish to delight customers
personalize their relationship and customize products.
Effective marketers who customize products and cater to individual lifestyles must
learn a great deal about their customers. Sales personnel at specialty clothing stores
ask regular customers about their jobs, families, and lifestyles. They keep an eye out
for clothes to suit their customers tastes and put aside possible selections. They know
that personalized service and their customers trust in their ability to select items greatly
enhance their relationship with customers. In the past, sales personnel note such
information in notebooks. Unfortunately, if they left the organization, so did the client
information.
In an age when personalization is rare, information technology is bringing it back. With
todays information technology, personalized service can be greatly expanded through
databased marketing.
Three Levels of Relationship Marketing Programs
It is possible to categorize three types of relationship marketing : financial, social, and
structural. The categories are based on the primary reason for the bond between the
marketer and the customer.
Financial Relationships : Frequency & Club Marketing Programs
Two financial benefits that companies can offer are frequency marketing programs
and club marketing programs. Frequency marketing programs (FMPs) are designed
to provide rewards to customers who buy frequently and/or in substantial amounts.
Frequency marketing is an acknowledgment of the fact that 20 percent of a companys
customers might account for 80 percent of its business.
American Airlines was one of the first companies to pioneer a frequency marketing
program when it decided to offer free mileage credit to its customers in the early
1980s. Hotels next adopted FMPs, with Marriott taking the lead with its Honoured
Guest Program. Frequent guests receive room upgrades or free rooms after earning
so many points. Shortly thereafter, car rental firms sponsored FMPs. Then credit-card
companies began to offer points based on their cards usage level.
Typically, the first company to introduce an FMP gains the most benefit, especially if
competitors are slow to respond. After competitors respond, FMPs can become a
financial burden to all the offering companies.
Most frequency marketing programs are based on financial incentives. Season tickets
for professional basketball games or the opera provide discounts to fans who establish
a relationship with the organization. Banks often offer higher interest rates for deposits
that will be kept in an account for a longer duration. Frequent flyer programs offer a
free trip after a customer flies a certain number of segments or miles. In effect, these
programs provide a discount pricing incentive to reward consumers for high levels of
spending or multiple purchases.
Many companies have created club membership programs to bond customers closer
to the company. Club membership can be open to everyone who purchases a product
or service, such as a frequent fliers or frequent diners club, or it can be limited to an
affinity group or to those willing to pay a small fee. Although open clubs are good for
building a database or snatching customers from competitors, limited membership clubs
are more powerful long-term loyalty builders. Fees and membership conditions prevent
those with only a fleeting interest in a companys products from joining. Limited customer
clubs attract and keep those customers who are responsible for the largest portion of
business. Some highly successful clubs include the following :
l IKEA The IKEA Family, the club formed by the Swedish furniture company, has
members in nine countries and more than 200,000 members in Germany alone.
Some club benefits include furniture transportation, insurance, and a program for
members to swap each others holiday homes or condos. A club member in the
Rocky Mountains might let a Swedish family use his mountain cabin while he
spends a few weeks on a Scandinavian fjord.
l Swatch Swatch afficionados buy an average of nine of the companys quirky
watches every year, so Swiss watchmaker Swatch uses its club to cater to
collectors. Club members can buy exclusives, such as the Garden Turf watch,
a clear watch with an Astroturf band. Club members also receive a newsletter
and the World Journal, a magazine filled with Swatch news from the four corners
of the globe. Swatch counts on enthusiastic word-or-mouth from club members
as a boost to business.
l Harley-Davidson The world-famous motorcycle company sponsors the Harley
Owners Group (HOG), which now numbers 360,000 members. The first-time
buyers of a Harley-Davidson motorcycle gets a free one-year membership. HOG
benefits include a magazine (Hog Tales), a touring handbook, emergency road
service, a specially designed insurance program, theft reward service, discount
hotel rates, and a Fly & Ride program enabling members to rent Harleys while on
vacation.
Social Relationships
One form of relationship marketing involves the formation of a social bond between the
company and its customers. Many people know about the thousands of Saturn owners
who converge annually on the car companys headquarters in Spring Hill, Tennessee
for a barbecue, a plant tour, and a chance to talk with other Saturn owners about how
much they love their cars. However, even this type of relationship marketing pales
somewhat in comparison to what Chrysler does to bond with its Jeep owners.
One weekend each year, dozens of owners driving their Jeeps meet in the tiny mountain
town of Blanding, Utah for Chrysler Corporations Jeep Jamboree. The Jeep owners
gas up and form a convoy to Arches Canyon National Park, a 20 minute drive away.
There, for the next two days and nights, they get to test their vehicles on narrow roads
in natures roughest terrain. For the Jeep owners who participate, the Jeep Jamboree
adventure offers a rare chance to experience the promise of Jeep commercials. (Only
10 percent of those who own sport-utility vehicles ever get a chance to drive off-road,
studies show.) For Chrysler, this relationship marketing event provides an opportunity
to bond with customers and establish brand loyalty. Chrysler expects participants in the
jamborees to become ambassadors for the brand.
Here company personnel work on increasing their bonds with customers by individualizing
and personalizing customer relationships. Table contrasts a socially sensitive approach
with a socially insensitive approach to customers. In essence, thoughtful companies
turn their customers into clients. Donnelly, Berry, and Thompson draw this distinction:
Customers may be nameless to the institution; clients cannot be nameless.
Customers are served as part of the mass or as part of larger segments;
clients are served on an individual basis .... Customers are served by anyone
who happens to be available; clients are served by the professional assigned
to them.
Some companies take steps to bring their customers together to meet and enjoy each
other. Companies such as Harley-Davidson, Saturn, and chrysler are said to be engaged
in building brand communities.
Table 21.1: Social Actions Affecting Buyer-Seller Relationships
Good Things Bad Things
Initiate positive phone calls Make only call backs
Make recommendations Make justifications
Candor in language Accommodative language
Use phone Use correspondence
Show appreciation Wait for misunderstanding
Make service suggestions Wait for service requests
Use we problem-solving language Use owe-us legal language
Get to problems Only respond to problems
Use jargon or shorthand Use long-winded communications
Personality problems aired Personality problems hidden
Talk of our future together Talk about making good on the past
Routinize responses Fire drill and emergency responsiveness
Accept responsibility Shift blame
Plan the future Rehash the past
Structural Relationships
When a stockbroker, such as Charles Schwab, provides its Velocity computer software
so that a client in its signature program can check stock quotes, evaluate port-folio
histories, get information about companies, and trade stocks over the Internet, it is
creating a structural solution to an important customer problem. Relationships based
on structural bonds do not depend on the relationship-building skills of a particular service
provider, as in the traditional customer-stockbroker relationship, but on the service
delivery system that is part of the company structure. Many marketers use the Internet
to build structural relationships.
The company may supply customers with special equipment or computer linkages that
help customers manage their orders, payroll, inventory, and so on. A good example is
McKesson Corporation, a leading pharmaceutical wholesaler, which invested millions
of dollars in EDI capabilities to help independent pharmacies manage inventory, order
entry processes, and shelf space. Another example is Milliken & Company, which
provides proprietary software programs, marketing research, sales training, and sales
leads to loyal customers.
The Role of the Internet in Providing Customer Services
Technology is playing an ever bigger role in the ways customers communicate with
businesses. For many organizations, the Internet has revolutionized the nature of customer
services. Technology can replace what a human does. For example, in the past, if you
wanted to know if your bank had processed one of your cheques, you had to call the
bank. Today you can access the banks Web site to learn your bank balance, which of
your cheques have been processed, and whether you need to move money from your
credit line into your checking account. But in using technology to perform tasks that
humans could perform, effective marketers make sure that Internet technology provides
an opportunity for service enhancement, not service replacement. For example, the
Gateway Computers Web site allows customers who are waiting for their custom-
made computers to check the status of their orders as often as they want, any time of
the day or night. Offering easy, round-the-clock access enhances Gateways customer
service.
Internet-based customer service can give customers control over all aspects of
their interaction with a company through a userfriendly Web site. A FAQ (Frequently
Asked Questions) list can be one of the most beneficial customer services on a Web
site.
The Internet allows customer service to be personalized. For example, Yahoo! offers
a service known as My Yahoo!, a customizable version of the popular portal. When a
visitor logs on to My Yahoo!, he or she gets local weather reports, sports scores for
teams that are of personal interest, and prices for stock portfolios that the visitor has
entered into My Yahoo! database.
The speed of customer service can be greatly enhanced by using e-mail. E-mail is an
inexpensive way of responding to a complaint or answering a specific consumer question.
In addition, many organizations use e-mail to provide other customer services. CNET,
which covers the technology industry, sends a daily e-mail listing of headlines and special
features to its thousands of subscribers. The Internet news site tries to build brands
loyalty by making sure that its readers get the news highlights as quickly as possible.
Internet customer services may both enhance customer service and save the company
money. By transferring its package tracking system to the Web, FedEx increased
customer satisfaction while significantly reducing expenses. The company saves money
by using fewer customer service representatives and spending less on traditional support
services such as its telephone service centre. A customer can learn about shipments
or drop-off locations at his or her own convenience and obtain printed records
instantaneously.
Share of Customer
Relationship marketing leads to a different kind of thinking about the nature of a business.
Historically, marketers have thought in terms of a single product, and their goal has
been to achieve a high share of the marketmore customers than their competitors
have. In relationship marketing, the company objective often is to achieve a high share
of customer. The company tries to sell an individual customer as many goods and
services as it can over the lifetime of that customers patronage. An effective marketer
determines the lifetime value of each of its customers and adjusts its marketing strategy
accordingly. It treats its best customers differently than its other customers. It sends
the right message to its best customers at the right time.
Increasing share of customer has become more popular as a marketing objective as
customer databases and new information technologies have allowed marketers to track
customers individually and then customize their marketing efforts.
Customers Retention
Customer retention is a major objective of relationship marketing. An insurance agent
may send a postcard to a client on his birthday. This is a friendly reminder that she
thinks of him as an individual and wants their business relationship to continue.
Information technology and customer databases are making it possible for large
organizations to focus on customer retention by once again treating their customers as
individuals. The reward of focusing on customer retention can be enormous. Suppose
a telephone company has 6 million customers using a call-waiting feature that costs $5
a month. During the course of a year, a certain percentage of these customers cancel
their service. If the organization could, through data-based marketing and personalized
promotional messages, stop 1 percent of these customersor 60,000 accounts from
canceling, it would retain $3.6 million in annual revenue.
What Makes a Successful Relationship?
Relationship commitment and trust are the two essential factors required for successful
relationship marketing.
Relationship commitment is defined as an enduring desire to maintain a valued
relationship. A strong commitment to a relationship develops if the relationship is mutually
beneficial to the parties. A committed partner believes the relationship has value and is
willing to work at preserving it. This is especially true of relationships with suppliers
and intermediaries.
If a customer is committed to a relationship, he or she will resist attractive short-term
alternatives in favour of the expected long-term benefits of staying with existing partners.
Trust exists when one party has confidence that he or she can rely on the other exchange
partner. In many situation, trust means a customer believes that the marketer is reliable
and has integrity. In many personal selling situations, trust means that a customer has
confidence that the sales representative is honest, fair, and responsible and that his or
her word can be relied on. When there is trust in a relationship, all partners believe that
none will act opportunistically. Marketers, especially the marketers of services, establish
trust by maintaining open and honest communication and by keeping the promises they
make.
Internal Marketing Enhances Relationship Building
Marketers who stress service quality and relationship marketing strive to manage the
service encounter. This is because the customers evaluation of service quality and the
building of a positive relationship between the customer and the organization are highly
dependent on what takes place during the service encounter. Internal marketing is
important in improving the service employees provide, which in turn improves relationship
with customers.
The term internal marketing is often used by marketers, especially those in service
businesses, to refer to public relations efforts aimed at their own employees who have
contact with the ultimate consumer or who have a direct effect on the ultimate
consumers satisfaction with the product. The objective of internal marketing may be
to have employees recognize their role in the organizations effort to create customer
satisfaction; these employees may better understand that their providing a high level of
service is essential to the firms existence.
2. Internet Mktg./E-mktg/Web Marketing
Marketing on the web is an altogether new way of interacting with people and doing
business with them. It has a lot more power as compared to all other forms of marketing.
It is powerful because it is interactive. In fact, it enables an interaction, which closely
approximates real-life interaction.
Marketing on the web is alternatively referred to as online marketing, E-marketing or
Internet-marketing.
Marketing on the Web, A Part of E-commerce
Marketing on the web is a part of electronic commerce, or e-commerce, or e-business.
E-commerce has already revealed its potential across the world. In fact, it has come to
be described as the biggest development in commerce since the invention of money.
Powered by the breakthroughs in information technology and telecom, and the rapid
growth of the Internet, e-commerce is already changing the way people work, buy and
live. According to Fortune magazine : It is the foundation of a new industrial order. It
will change the relationship between consumers and producers in ways more profound
than one can yet imagine.
E-commerce involves the exchange of products, services, information and payment
through the electronic medium of computers/networks. In other words, e-commerce
means business done online. E-commerce results when a firm connects its business
systems to its customers, distributors, vendors, and suppliers-via Intranets, extranets,
and the Internet/web. E-commerce is the umbrella term for the entire spectrum of
activities such as electronic data interchange (EDI), electronic payment system, order
management, information exchange and other business applications, with electronic/
paperless documentation.
The Three Components of E-Commerce
E-commerce has three broad components.
l B
l B to B (B2B)
l B to C (B2C)
B refers to Internet transactions of e-commerce. B-to-B (B2B) or business-to-business
e-commerce refers to inter-enterprise e-commerce, where business firms sell their
products and services to other business firms on the net. B-to-C (B2C) or business-to-
consumer e-commerce refers to marketing of product and services to ultimate/household
consumers on the net.
The Two Components of Web Marketing
B to B and B to C e-commerce constitute marketing on the web. They correspond
respectively to
l Marketing to business buyers
l Marketing to ultimate consumers
Though both components are equally important, a greater part of the challenge of web
marketing lies in the second component. In fact, over the long term, more of the
opportunities too lie in this component. This chapter will concentrate on this component
of web marketing.
Understanding the web and web Marketing Correctly
We can view the Web/Internet in four ways.
l A Business
l A Medium
l A Marketing Channel (or a tool for channel-less marketing)
l A Complete Marketplace
To an Internet service provider (ISP), for example, the Internet is a business in itself.
To an advertiser or an information provider, it is a medium. To a seller, it is either a
marketing channel, or a complete market place, depending on how he approaches it
and uses it. The interesting point is that all these are integral to the web, but none of
them in isolation constitutes a proper description of the web. The web represents a
larger concept.
The Medium Becomes the Marketplace
It is interesting indeed. While the web can be described as a communication medium,
as a marketing channel and as a tool of channel-less marketing it cannot be disposed
off as one of these things. It is an arena, wherein all elements of marketing, including
communication and channel functions, take place. In other words, it represents the
marketplace as well as the medium for reaching the marketplace.
When TV was making its entry as a new communication medium, Marshall Macluhan,
the noted communication guru, drew attention to the uniqueness of the medium, with
the statement, The medium itself is the message. In the same vein, one can now say
about the web : The medium itself is the marketplace. Innovative marketers and
creative IT men have elevated the web from a medium of communication
communication between computersinto a marketing channel and beyond, into a total
marketplace. The medium has become a bazaar, the largest, most dynamic, sleepless,
electronic bazaar/mall of goods and services the world has ever seen.
Benefits of Web Marketing
The web constitutes a reliable, readily accessible and inexpensive means of bringing
together buyers and sellers, large and small, right across the globe. With web marketing,
the market comes to the doorsteps of the customer. Basically, web marketing has all
the plus point which direct marketing has. After all, it is one form of direct marketing.
Benefits the Seller as well as the Consumer
Web marketing confers significant benefits on the seller as well as the buyer. It is a
true win-win proposition.
Benefits the Seller
Access to all markets, opportunity for constraint-free growth, scope for enhancing
customer value and building abiding relations with them, scope for enhancing marketing
productivity and reducing marketing costs, and flexibility in marketing communications
are some of the main benefits web marketing confers on sellers.
1. Access to All Markets
With web marketing, a marketer located in any part of the globe can compete in the
markets of the whole world. The web enables firms/marketers to free themselves of
the inherent limitations of their existing geographic moorings/location. A web marketer
can attract customers located all over the world, compete for the global market, build
global supply chains and operate with global strategies. Opening a website is the
equivalent of opening a marketing office, which anyone in the world can access, readily
and instantly. In other words, it is the equivalent of opening branches everywhere in
the world. Actually, many entrepreneurs see access to international markets as the
No. 1 benefit of web marketing.
Enables even small firms attempt global marketing : Web marketing enables
even small firms to access the markets of the world. It makes it affordable for them.
With a website, even a one-man enterpriseone that manufacturers some herbal
shampoo in some remote place in India for examplecan sell its products and services
anywhere in the world and at a low marketing cost. The web is a great leveller of the
playing field, and scale is not a limitation in web marketing.
2. Scope for Unimpeded, Constraints-Free Growth
With web marketing, a business can grow unimpeded by the various constraints that
normally delimit the growth under conventional marketing. Limitations of showroom/
retail shop space, warehouse space, sales staff and other resources do not choke a
business in web marketing. Manufacturers/marketers can carry on their operations on
the web with just one central warehouse and a small team of staff.
3. Scope for Enhancing Customer Value and Customer Service
Being an interactive medium and a platform for innovation, the web presents great
opportunities to the seller to enhance customer value.
Helps offer many services and products from a single stop : A web marketer
can offer a variety of services and products to the customer from a single website, a
single stop on the net. Also, depending on the actual needs of the customer, he can
deliver supplementary services to him. Even where the services demanded are outside
his involvement, he can still serve the customer by providing him a path for getting to
the agencies that are in a position to provide those services. He is able to do this
because the web provides him a direct and interactive access to the customer.
Helps target the customer individually and customise the offer : The web also
helps the marketer target the customers individually, because of the facility of direct,
interactive, and online communication with them. The marketer can easily gain all
essential knowledge about the consumers, wherever in the world they may be located.
He can also provide from his side an uninterrupted flow of information to the consumers.
In mass marketing, it is difficult to target the customers so precisely. Neither customised
mailing, nor tele-marketing, can come anywhere near web marketing in targeting the
customers individually and customising the offers. Moreover, the web accomplishes
this task at a very low cost. Targeting customers individually helps to provide tailor-
made products and personalized services to them. The customisation practised by Dell
computers in the web marketing of its PCs, which is explained in the following section
is an example.
Imparts speed to responses; and speed becomes a customer value : In modern
times, speed has become a major ingredient of successful marketing. For example,
speed in order processing, sales/distribution, and service has become important. So is
speed in product development and cycle time of various business processes. Speed in
these and other such aspects has become a major source of customer value, and hence
an important source of competitive advantage to a marketer. The web helps achieve
speed and thereby helps enhance customer value.
4. Helps Build Relationship with Customers
Web marketing also helps build relationship with customers. Being totally interactive
and one-to-one marketing, web marketing is more effective in this respect compared to
other forms of direct marketing. With web marketing, the marketer can interactively
elicit a lot of information about the consumer. This helps him to offer customised products,
customised services and customised incentives. It also helps offer demonstrations of
specific products, which a particular customer may want.
5. Helps Reduce Costs
Business/transaction costs : Since web marketing conducts business processes
and transactions through real-time interactions using electronic media and paperless
technologies, it significantly reduces the cost of various business operations, transaction
costs in particular. It is estimated that the cost of producing and processing an invoice
in web marketing is less than one-tenth of what is costs to process it in conventional
marketing. Moreover, as the web reduces the order processing time as well as the
cycle time of the various business processes, it reduces total business costs. Using the
web is the cheapest method of answering a customer request.
Channel costs : Channel costs, which are a significant part of marketing costs, are
reduced considerably when a product is marketed through the web. In web marketing
one need not maintain a vast network of showrooms or employ an army of sales staff.
All it needs is some core staff to download and execute orders. As stores need not be
maintained, the associated costs of rent, insurance, utilities as well as sales personnel
are eliminated.
This is, of course, true only where the web is used as the channel for the entire business
of the firm. However, at the moment most firms resorting to the web employ it only as
an add-on channel. Even so, it provides immense value addition to the firms marketing
effort at a very low incremental cost.
Communication/promotion costs : Communication/promotion costs, which are
another major part of marketing costs, can also be reduced in web marketing as the
web enables gaining worldwide communication at a low unit cost.
Savings in marketing costs also come from faster movement of inventory, quicker order
execution and faster realisation of money. Web marketing also generates valuable
sales leads at zero cost.
6. Enhances Productivity of Sales People
Web marketing also makes marketing/sales people more efficient and productive. Since
basic transactions are taken care of by the computer programme, sales people are free
to devote their time for more meaningful tasks, leaving the mechanical transactions to
the net.
Web marketing keeps the staff together electronically and enables them to work as a
team in serving the customers, sharing ideas and information freely. This leads to
higher productivity. In conventional marketing, getting people together in one place and
making them work as a team is no easy task. In web marketing, the staff can work as
a team without having to be physically together in one place; and the firm can get them
togetherhowever far they may physically beat a low cost. One can consult the
other easily over the net and serve the customer better.
Allows companies to operate like beehives : The web allows information to be
shared horizontally. Information need not travel up to the CEOs office and then back
travel down to reach the other. In the conventional setup, an identified person will be in
charge of the information. Such a thing does not apply in the case of the Internet.
Everyone has ready access to the information. Moreover, web marketing simplifies
processes. It also facilitates the development of meaningful and high quality MIS. It
has the added merit of low lead-time in procuring the information.
In conventional marketing, variation in motivation levels of the sales personnel and
problems of human memory, fatigue, etc., can affect the quality of marketing. In web
marketing, it does not happen. The information once stored is available with great
consistency and it can also be updated as per needs.
7. Enables the Marketer Adjust to Market Conditions Quickly
Marketing on the web enables the marketers to adjust fact to changing market conditions.
They can quickly know what the market wants and offer it. For example, they can add
products to their basket, alter prices, enlarge services and find-tune their offering with
greater speed.
A Versatile Medium of Communication
As a medium of communication, the web is versatile tool indeed. It is the equivalent of
a combination of several medianewspaper, magazine, hoarding, radio, telephone, and
TV. Second, web marketing allows flexibility in marketing communications; it allows
the marketer to adjust the size and other attributes of his mediumthe websiteat
short notice. Conventional media, like print or broadcast, do not lend for such quick
adjustment. Moreover, with the web, there is no upper limit on advertising space, in
contrast to other media.
Moreover, because the medium on which the consumer watches the advertisement
and places his order in web marketing is an intelligent computer equipped with data
storage capability, the marketer starts with an advantage. He is backed by the power
of data. For example, when a customer buys an item using the net, a lot of relevant
personal information about him, including his preferences, stay in the computer that
processed the interaction. So, the next time the customer visits the same site, the
marketer is able to feed him information which would be of interest to him. Customer
data is also available for sharing by other marketers through suitable sharing
arrangements.
The Internet again is a unique medium in the sense that it is a mass medium in terms of
reach and low unit cost of reaching customers, and yet is a medium that can be
personalised so perfectly that it can target each consumer individually. With it, the
marketer gets the best of both worldsa mass medium as well as a personalised
medium!
Marketing on the web is proactive. The web marketer is catching the consumer when
he is actively browsing the web. And, the web serves as the ideal setting for the
marketer for cathing the consumer. The consumer is spending time on the web of his
own volition; he is depending on it for communication and infotainment; and the web is
practically a part of his life. A web marketer thus fulfils the dictum, You have to be
where the consumer is. By catching the consumer on the web, a web marketer
actually cathes them when they are actively looking for confirmation. They are already
in the search mode and, therefore, are more pre-disposed to buy.
The web has just started revelling its power and influence, and marketers have just
started harnessing it.
Benefits the Consumer too
For the consumer, convenience, scope for informed and competitive buying, search
advantage and wider options, customised and personalised products and services, greater
transparency, and greater bargaining power are the main benefits of web marketing.
1. Convenience
First, sitting at home, the customer can purchase the products and services. He can
escape all the hassles involved in conventional shopping, which include a physical visit
to the stop. More importantly, he can escape the frustration involved in going all the
way to the shop just to know that the product he was looking for was not available there
at all. Second, he can order his requirements at any timeday or nightand from
wherever on the globe he is located. Third, he can have a complete online interaction
with the marketer; he can have an online demonstration of the product; he can place an
online order; he can also pay online and complete the whole purchase process on the
web. In short, he can shop privately, conveniently and swiftly.
Dell Computers : To cite an example, he can buy a PC sitting at home. And he can
get it tailor-made to his specifications. Dell Computers sells its custom-made PCs to
the consumers on its website. The consumer has to just log onto the Internet, visit the
Dell website, select his specifications and place the order, keying in his credit card
number. Dell delivers the PC at the customers doorstep within a few days of placing
the order. Interestingly, only after a consumer thus places an order on the web, does
Dell commence the assembling of the customised PC. Now, Dell sells computers
worth $ 10 million in this fashion every day.
Even where the final step in the purchase process can be carried out only by visiting the
shop, the consumer still derives substantial benefit from web marketing; he can complete
the groundwork of his purchase on the web; and he can collect all relevant details about
the product through the web. He need physically visit the shop only for the final step of
taking delivery of the product.
2. Scope for Informed and Competitive Buying
Scope for informed buying is the second major benefit from web marketing for the
consumer. The web offers him access to a great deal of information about the products
and services he is looking for.
Search advantage and wider options : In conventional shopping, consumers stop
with limited searches. They visit four or five outlet at best before deciding on the brand
to be bought. They conclude that the benefits of extended search will be just incremental.
And, the search is quite tedious. With web shopping, the situation is different; for high
value purchase in particular, extended search often proves highly beneficial. It throws
up a large number of options and the search is hassle free. There are software that
create menu-driven dialogues, which simplify the job of searching and finding the
alternatives.
In conventional shopping, they may have to visit several retail stores to get an idea
about the brands, which fit with their specifications, and still the search may not be
comprehensive. In the case of web, thanks to the cross linkages, it becomes possible
for the consumer to access all details about the competing offers, including prices,
quality, performance and availability. In other words, the web provides the consumer
information that is qualitatively and quantitatively superior; and he gets it with the least
effort on his part. In short, the web provides great search advantage to the consumer.
Consumers can bargain on the net with a host of sellers : Most importantly,
because of the interactive nature of the web, the consumer can actually bargain on the
net with a host of sellers and get the best price and terms. He can compare a multitude
of brandsfeature by featureand their prices, and secure the best deal. Sophisticated
search engines on the web come to his help in this regard.
Chart 21.1: Benefits of Web Marketing
Benefits to the seller l Enhances marketing productivity.
l Access to all markets l Keeps sales people together electronically
l Renders global marketing feasible for and enables them work as a team in serving
even small firms the customers
l Helps unimpeded and constraints-free l Allows companies to function like beehives
growth
l Scope for enhancing customer value l Enables to adjust quickly to market conditions
and customer service
Helps offer many services and products l Flexibility in marketing communications too
from a single stop l A mass medium as well as personalised
medium
Benefits to the consumer
Helps target the customer individually l Convenience
Imparts speed to all responses; and the l Scope for informed and competitive buying
Contd...
speed becomes a source of customer
value
l Helps building relationship with customers l Search advantage and options
l Helps reduce costs l Consumer can actually bargain on the net with
a host of sellers
Business costs l Can get more for less
Marketing costs l Transparency
Channel costs l Accuracy
Communication/promotion costs l Shifting of the power equation in favour of the
consumer
Consumers can get more for less : With web marketing, consumers can get more
value for their money. As a rule, web marketers make competitive offers to the
customers, voting for a policy of giving more for less in a value-price equation. They
do so largely because they know that in a borderless e-commerce world, consumers
are in a position to buy from anywhere, wherever they will get the best price and value.
Transparency : Web marketing also provides for a very high degree of transparency,
which was hiterto unknown in business transactions. There is no suppression of
information. By browsing through the web, buyers can become aware of just about all
sellers selling the particular product and their prices and terms.
Accuracy of information : Accuracy of information regarding schemes, discounts
and validity guarantees are all available and this actually makes him want to buy more.
3. The Power Equation Shifts in Favour of the Consumer
In short, web marketing actually alters the power equation between the marketer and
the buyer, in favour of the latter. In conventional marketing, marketers (retailers)
concentrate more on the supply side and take the consumers for granted. They assume
that the latter will take the trouble of coming to their stores as long as the stores are
well stocked. With web marketing, they can no longer go by this assumption. They
have to woo the consumers.
Chart 21.1 summarises the benefits of web marketing.
Growth of Web Marketing Worldwide
World over, e-commerce/web marketing is fast becoming the new marketing paradigm.
The growth in e-commerce/web marketing has manifested itself in three ways :
(i) Growth in volume of business done on the net,
(ii) Enlargement in the range of products marketed, and
(iii) Growth in Internet subscriber base.
Growth in Volume
As per estimates of Forester Research Inc. USA, one of the leading research companies,
global online transactions amounted to $ 109 billion in 1999. Some optimistic
estimates talk of global e-commerce exploding to a trillion dollars by 2002 (over
Rs. 400,000 crore) three times Indias current gross national product. Even as per the
projection by
Exhibit 21.1: Intel
l Intel ranks No. 1 in the world for overall l Customers are checking products, specifi-
e-commerce revenue. cations, prices, availability, order status and
delivery dates in real time.
l On an average, Intel is getting $ 1 billion l All information is personalised for every
worth of online orders every month from company and for every type of user. Now,
customers in 46 countries. close to half of Intels direct customers business
is happening on-line.
Source : PC Computing, July 1999, Reported in Economic Times, 23 September 1999.
Forester Research, by 2003 world business-to-business e-commerce is likely to grow
to $ 1.3 trillion and business-to-consumer e-commerce to $ 108 billion.
Exhibit 21.1 gives details of e-commerce carried out by Intel, the largest revenue earner
on the Net.
Enlargement in the Range of Products Marketed
The list of products available on the Web for sale also has been increasing steadily. It
now spans a wide range, from toys and books to passenger cars, computers and
education. And, this is true of India, as well. Exhibit 21.2 shows one relevant example
from the Indian scene.
Growth in Subscriber Base of the Internet
The Internet has become a mass medium very fast. Over 100 million people use the
Internet today. Optimistic predictions are that by 2005 there will be over 800 million
Internet subscribers worldwide. The growth in the number of people hooked onto the
Internet has a direct bearing on the growth of web marketing.
Limitations of Web Marketing and the Need for Moderating the Hype
Web marketing has its limitations, too. Marketers have to correctly size up the plus and
minus of the web. They should in particular discount the hype.
All Products do not Lend Equally well for Web Marketing
The first limitation is that web marketing is not suited for any and every product. For
example, when Philips India went in for web marketing, it had to select a few products
and keep the others off.
Costs Involved are not Inconsequential
Another limitation is that the costs involved in web marketing are not as low as is often
made out. The costs do not stop with a one-time expenditure on the setting up of the
website. The marketer is required to keep spending sizeable sums on running,
maintaining, and updating the site. Moreover, websites have to be kept alive round the
clock and throughout the year, as customers are spread over different time zones, and
want to do business on the net whenever they wish.
Question Marks about Profitability
One has to take note of the fact that as of now most web-marketers (B2C) are struggling
to make their business viable and profitable. Even Amazon, the worlds biggest online
marketer, is yet to break even. The point is that while web marketing is full of potential,
the execution part is beset with difficulties.
Exhibit 21.2: Management Education on the NetMacmillan India and IIM-C
l Publishing house, Macmillan India Ltd, offers l The programme is a separate entity and
management development programmes on the not a part of other management development
Internet in collaboration with IIM-Calcutta. courses offered by the institute.
l This is the first exclusive online executive l Executives across the world can undergo
education programme in India. management training through this
programme.
l The delivery of the programme is digitised l The programme has built-in-flexibility. It
and is accessible through a portal. could be completed in a period ranging from a
week to a month.
Web Marketing : Indian Scene
Quite a few studies have been conducted on e-commerce in India in recent years.
They include the BCG-Nasscom study, the CII/IMRB study and the PwC study.
All estimates suggest that the scope is mostly for B2B e-commerce to begin with.
Firms will deal with their suppliers, channels and business buyers on the net. In other
words, business processes such as supply chain management and distribution
management will pick up initially. Retailing to ultimate consumers on the web, which
poses greater complexities and risks, may follow in due course. Service industries like
insurance, banking, financial services, travel, information/communication, education and
entertainment may be the pioneers here.
Regarding B2C, according to Boston Consulting Group-Nasscom survey, the volume
of online transactions by individual consumers is expected to touch Rs. 3,000 crore in
India by 2005.
Another study by IDC India shows that there will be 5 million Internet users in India by
2003. This should constitute a critical mass for a thrust in web marketing.
Problems Web Marketing Faces In India
In India, web marketing faces a number of problems. For convenience of discussion,
we can divide them into four categories :
l Legal/regulatory problems
l Infrastructural problems
l Commercial problems
l Other problems.
Legal/Regulatory Problems
The first set of problems emanate from the absence of a legal and regulatory framework
for e-commerce.
E-documentation not yet legally admissible : E-commerce does away with papers
and uses electronic documentation for recording transactions. While most developed
countries have embraced e-documentation as legal tender, in India it is not yet legally
admissible. Current Indian laws do not provide for digital signatures, digital certification,
electronic payment systems and online filling of statutory documents. As of now, a
physical signature is necessary for approving of an online order. The absence of sanctity
about the contracts that are entered into electronically inhibits individuals/corporates
alike in their forays into e-commerce.
Web marketing also needs effective and trusted mechanisms for privacy and security.
This has several dimensions such as confidentiality, authentication, non-repudiation and
certification. Web marketing provides for authentication, which enables either party in
a transaction to be satisfied with the identity of the other party. Non-repudiation means
the parties to the transaction can not subsequently deny their participation. The privacy
and security mechanisms depend upon certification by a trusted third party, such as a
government body. For the consumers, security relating to credit card numbers and
password protection is a big concern. These aspects have their global as well as Indian
dimensions. And, a framework is also needed for dealing with cyber crimes.
Absence of taxation law : Absence of appropriate taxation law covering e-commerce
is the other major problem in this category. In India, the government is yet to come up
with taxation laws for e-commerce systems. It has to address itself to questions such
as how much tax should be charged and how it should be collected. Sharing the
proceeding of taxation among countries, which is the larger issue in this regard, also
needs.
In short, a lot of new legal enactment and amendments in existing enactments, such as
the Evidence Act and the Excise and Customs Act, are required. Amendments are
needed in banking regulations too. Overall, the absence of a legal framework covering
cyber transactions is a hurdle in the spread of web marketing.
Infrastructural Problems
As of date, India does not have the sufficient infrastructure needed for effective web
marketing. While individual firms may accept the limitations and make a beginning, for
web marketing to become a normal form of marketing in the country, the infrastructural
constraints must disappear.
Low density of telephone, PCs and Internet : In India, the telephone density, PC
population and density of Internet access are all too low to support viable e-business.
Currently, telephone density in India in just two per 100 persons. Internet density is
practically minuscule. And even the few who have the access, face a difficulty in
logging onto the Internet because of the poor quality of the last mile connection.
Bandwidth limitation : The bandwidth available is not enough to meet the user load.
While those who use the Internet for downloading information or sending e-mail may
put up with erratic lines, those who buy and sell products cannot afford to do so. They
require a foolproof system with zero downtime. The entry of private ISPs into the
service has no doubt made a difference; but it needs to be matched with increase in
bandwidth. Setting up of independent gateways by private ISPs can, of course, solve
the bandwidth problem to some extent. However, given the high costs involved, the
nascent market, the competition and the slow return, many private ISPs may not be
prepared to venture into the gateway business.
Networking limitation : The other barrier relates to networks. Networking is most
essential for e-commerce. In India, though many companies do have networks of their
own, they cannot be shared with anyone else because of Indias telecom policy, which
has all along been favouring closed user networks.
Infrastructural bottlenecks at the delivery end : Infrastructural bottlenecks at the
delivery end also hamper web marketing in the country. For example, delivery of
products is not easy. Indian roads and airways are unable to support 24 hour- or 48
hour-delivery schemes that are common in countries like the United States. Courier
services/air express companies are also quite inadequate.
Commercial Problems
Problems relating to payment : Payment problem is one significant element of
commercial problems. Apart from the legal dimension discussed earlier, there is a
commercial dimension to the payment problem. The No. 1 malady is the low density of
credit cards, debit cards and smart cards in India. Added to this, in India, even those
who have such cards cannot make online payment through their cards to international
sellers. The regulations in vogue constrain Indians in transacting through credit cards
with suppliers in foreign countries.
Other Problems
Confidence in the system is low : Another problem is that confidence in the system
on the part of the potential users is still low. The absence of legal framework already
highlighted is one aspect. Corporates
Chart 21.2: Problems Web Marketing Faces in India
l Legal/Regulatory Problems l Commercial problems
E-documentation is not yet legally admissible Problem relating to payment
Absence of an overall legal framework covering Low density of credit cards
cyber transactions and payment Inability to pay foreign suppliers
Absence of taxation law online (in foreign currency)
l Infrastructural problems l Other problems
Low density of telephone, PCs and Internet access Confidence in the system is low
Bandwidth limitation Problem of hacking
Networking limitation
Infrastructural bottlenecks at the delivery end
and household-consumers alike seem to be still skeptical about the efficacy of the
process. Surveys indicate that even those who are considered as prospects for the
system are not happy to buy on the net; they feel that they cannot be sure of the quality
of the products bought or their timely delivery. Marketers on the web in India obviously
have a long way to go; they have to create the necessary confidence among the potential
customers and persuade them to see web marketing as a perfectly normal way of
doing business; they have to make them comfortable with the innovation.
Problems of hacking : The possibility of hackers misusing e-commerce is another
issue, though it is not peculiar to India. Luckily, of late, improved software is providing
they remedy to a good extent. Encryption is also being tried out to ensure safety of
data in transit. Yet, the problem is not fully resolved.
Chart 21.2 summarises the problems which web marketing faces in India.
Government Tries to Remove the Roadblocks
In recent times, the government has initiated certain moves that will facilitate the growth
of e-commerce and web marketing in the country. The New Telecom Policy, 1999, is
one major move. The New Internet Policy, allowing private Internet service providers
(ISPs) to offer Internet service is another. These policies will help develop connectivity,
which is a part of the infrastructure needed for the speed of e-commerce. The opening
up to private operators, for example, will lower the rates and enlarge the number of
Internet subscribers/surfers. And this will be one main driver for the spread of e-
commerce.
Indian Firms Taking to Web Marketing
Notwithstanding these limitations, several companies in India have already made a
beginning in e-commerce, especially in B-to-B. In B-to-C, however, we notice only
very few endeavours as of now. Even in B-to-B e-commerce, money does into flow
over the net yet; but all other transactionsrequests, orders, amendments, schedules,
delivery instructions, receipts, invoices, payment terms and clarificationscertainly flow
over the net.
As for business-to-consumer web marketing, we see that firms in service industries,
such as banking, airlines and entertainment (cinema halls), have made a beginning. We
also see a few independent web marketers selling products like books and music records.
Banking industry : While almost all major banks in India have set up websites, only
a handful of them have moved towards real net banking. ICICI Bank, Induslnd Bank,
Citibank, and HDFC Bank are among the early birds. Exhibit 21.3 gives the details of
net banking by ICICI Bank.
Entertainment industry : Cinema halls in metros like Delhi and Mumbai permit
customers to book seats through the net. Delhi's premium cinema hall, PVR Anupam
is an example, Customers can book seats at Anupam online.
Information service : Information is another service where some advancement in
web marketing has taken place in India. Kotak Mahindra is an example. Kotak markets
an online information service with the brand name, Matrix. Selling information products
on the web is the business. Matrix also facilitates payments through the net. When
subscriber decides on the information, article he would like to download, he pays for it
by keying in his credit card number.
Exhibit 21.3: Net Banking of ICICI Bank, WWW. ICICI Bank.Com
l Net banking service of ICICI bank provides information about the bank and its products.
l Offers access to account information on the web.
l Provides select banking transactions through the web.
l A customer can track his account and download balances/accounts summaries.
l He can download account-opening forms and also apply for a chequebook.
l ICICI has given a brand name to its Internet banking service Infinity.
l By 2000, the bank had already crossed the five lakh mark in individual online customers.
l The net banking also covers billing/payment of public utilities such as telecom and electricity. It
also takes care to filing tax returns.
l ICICI's net banking is particularity useful to its NRI clients. In the regular banking system, it
takes them days to know the status of funds transferred by them. With the net banking, they can
know the status within 24 hours, ICICI is making efforts towards reducing this time lag further;
its should finally be possible to give the information instantly.
Contd...
l The bank's NRI deposits more than doubled within short span of time after the launch of its net
banking. It went up to 10 per cent of the total deposits from 4.5 per cent.
l The bank has subsequently extended its online banking to its corporate clients also making a
beginning with Hindustan Lever. HLL has linked ICICI Bank's Internet product with its main
HLL dealers so as to facilitate instant payments from them for the supplies. The online billing
will make transactions paperless and instant. The bank intends to extend the facility to other
corporates.
l The bank has adopted Bank Away software for their Internet banking.
Airways : Jet airways allows its travellers to book their tickets on the net.
Hotels : The Oberoi Group of Hotels informs its guests through its website about the
availability of rooms. It also offers them the choice over the net.
Other Industries
In other industries, companies like Asian Paints and Philips India have now ventured
into web marketing.
Asian Paints : While it has not yet started marketing its paints on the web, AP has put
all the relevant information, including all the possible choice of shades, on the net. The
customer can decide on his purchase by surfing the AP website. He can make the
choice sitting at home. This builds traffic on the site, a prerequisite for successful
marketing when AP eventually goes the whole hog towards web marketing.
Philips India : Philips India too has finalised its plans for marketing its products on the
web, though for the present, its website serves only as showcase of the products under
Philips brand. Philips has realised that all its products are not equally amenable for
marketing on the web. It has decided to pick cyber-friendly products from its wide
portfolio spanning four categories : Consumer electronics, business electronics, domestic
appliances and lighting. It has done the required research on the possible demand of
each of its products on the net. Philips online marketing endeavour has two goals : (i)
to use the net as a medium to showcase its technological strength and build the Philips
brand, and (ii) to build interactive relationships with consumers.
3. Green Marketing
The marketplace is greener now than ever before and will become even more
responsive to products and services promising environmental responsibility well into the
21st century. The reasons are many.
People are Worried
In the 1980s environmental calamities dominated the news. Almost daily, headlines
trumpeted oil spills, toxic-waste dumps, and nuclear meltdowns. A hole punctured the
ozone layer, a garbage barge searched in vain for a dumpsite, apples were not considered
safe to eat. The issues were no longer in someone elses backward far away, but in our
own.
The environment rose to the top of the publics worry list. Children picketed the United
Nations with Ronald McToxic in effigy. The 20th-anniversary celebration of Earth
Day in 1990 attracted 100 million participants around the world, and Time magazine
named spaceship Earth, Planet of the Year.
In Maine, aseptic juice boxes were swept from grocery shelves because they were not
broadly recycled. To preserve its markets and safeguard its reputation, industry quickly
greened up its products and issued environmental communiques and ads asserting its
commitment to a cleaner Earth.
Consumers felt listened to. They began to recycle their Pepsi cans and aluminium foil,
cut down on disposables, and take other environmental steps that gave them a sense of
control over their day-to-day lives.The environment-related hysteria of the late 1980s
and early 1990s is now behind us, but consumers desire to quell their concerns is
actually higher now than at the peak of the eco-craze. Their motivation : trepidation for
what they see as a very shaky future.
Since the 1980s, the headlines have shifted away from wandering garbage barges and
medical waste washing up on the New Jersey shore to genetic breakthroughs and
Hollywood murders. However, people still worry about any number of such specific
environmental issues as industrial air and water pollution, ozone layer depletion, radiation
from nuclear power plants, and destruction of rain forests (see Exhibit).
Very Serious Environmental Concerns
Percent describing as very serious problems
Industrial water pollution 55%
Destruction of ozone layer 53%
Destruction of rain forests 53%
Industrial accidents 53%
Hazardous waste 52%
Oil spills 52%
Industrial air pollution 52%
Radiation from nuclear power plant 52%
accidents
Drinking-water contamination 51%
Ocean contamination 50%
Auto air pollution 50%
Endangered species 47%
Pesticides on food 44%
Greenhouse effect 43%
Solid waste 42%
Destruction of wetlands 42%
Acid rain 34%
Biotechnology 34%
Indoor air pollution from household 33%
cleaners, tobacco smokes, asbestos, etc.
Indoor air pollution from radon 30%
Green Marketing Opportunities
Equipped with a better grasp of ecological issues, enlightened business people voluntarily
adopt environmentally responsible business practices. A growing number of CEOs
now appreciate the link between environmental responsibility and more efficientand
profitablebusiness practices. And more and more business communicators know
how to use green marketing strategies to take advantage of opportunities to boost their
corporate environmental images.
More Profits
Many companies, and especially those in such highly polluting industries as chemical,
oil, and electrical power generation, now have management systems in place to make
sure corporate environmental profiles and products exceed consumers expectations.
Today, major U.S. corporations conduct environmental audits and recycle their waste.
Countless others upgrade their facilities with energy-efficient technology. Such steps
reduce operating costs and liability while boosting profits.
Producing eco-efficient products creates less waste, uses fewer raw materials, and
saves energy, too. Thanks to innovative manufacturing processes suggested by highly
motivated and environmentally trained employees.
The changes required to make and market environmentally sensitive products enhance
employee morale and productivity with a payoff in improved customer relations and
overall returns on investment. Enhanced corporate imagery ensues, and this can help
attract investors and top talent.
Competitive Advantages
Many marketers now know that being the first to the shelf with an environmental
innovation brings competitive advantage. Rayovac introduced Renewal brand reusable
alkaline batteries and redefined the market for rechargeables. With 50 percent of the
production capacity for phosphate detergents, German-based Henkel pioneered the
market for zeolites and claimed market leadership when their consumers shifted to
phosphate-free detergents. Philips Lighting, inventors of compact fluorescent lighting
technology, stood ready when business and electric power utilities came calling for
replacements for energy-guzzling incandescents. Wellman, Inc., has expanded its
business definition from plastics recycler to pioneer in the market for branded polyester
fiber made from used Coke bottles.
Many of these leaders are being showered with any number of eco-accolades now
offered by industry, media, government, or environmental groups. One example is the
Special Edison Award for Environmental Achievement bestowed by the American
Marketing Association. It has been won by Fortune 1000 firms including 3M and
Procter & Gamble as well as by a raft of up-and-coming firms with a deep-green
orientation, such as Natural Cotton Colours, Patagonia, and Toms of Maine.
Young, aggressive competitors adept at capturing the imaginations and winning the
hearts of highly desirable environmentally and socially conscious customers are
introducing some of the most exciting green products. The success of Patagonia
outerwear, Stony-field Farm yogurt, and Toms Maine toothpaste suggests that
consumers now have higher expectations for the products they buy and that quality is
an image that no longer stands apart from environmental impact.
Looking to cash in on the potential for future green-oriented sales, well-established
mass marketers now shop for green companies with promising green brands; recent
acquisitions include Earths Best Baby Foods (by Heinz), Murphys Oil Soap (Colgate-
Palmolive), and Earth Rite Cleaning Products (Reckitt & Colman). After nearly two
decades of compromising on quality and languishing on once-dusty health-food-
store shelves as a result todayss crop of green products finally embody all that
consumers demand: an opportunity to clean up the mess without having to give up
price or quality. With the deepened consumer confidence in green products that results,
the market becomes legitimized.
Increased Market Share
Time are tough for marketers of branded products. Brand loyalty is near all-time lows,
and the percentage of Americans who feel that some brands are worth paying more
for is declining. In this tough competitive climate, environmental compatibility breaks
ties at the shelf. Pragmatic consumers skew purchases to those products and packages
that can be recycled or otherwise safely disposed of in their communities. All else
being equal, the biggest group of consumers do their bit by happily switching brands
buycotting companies and products deemed environmentally sound and boycotting
the brands of companies with disappointing environmental track records.
These growth opportunities have not been on such market leaders as Procter & Gamble,
McDonalds, and Compaq. They offer the greenest of mainstream products and take
pains to project environmentally appropriate corporate images. Pick up a bottle of Tide
laundry detergent and learn how it is phosphate-free, contains biodegradable cleaning
agents, and is packaged in a recycled-content bottle. Check out the basic brown
paper carry out bags and speckled (recycled) napkins at McDonalds (they are now
testing Earth Shell compostable food wraps), and buy a Compaq PC emblazoned
with the ENERGY STAR energy-saving designation.
Many executives would be shocked to discover just how many consumers are aware
of and act upon their knowledge of corporations track records for environmental
and social responsibility. In one poll conducted by the Porter Novelli public relations
firm, for example, consumers were five times more apt to think that a companys
record on the environment was an important factor in their purchasing decisions that
corporate executives believed.
Executives Underestimate the Role of Corporate Environment and Social
Responsibility in Consumers Purchasing Decisions
Percent saying a factor is important in consumer buying decision
Source : Porter Novelli, Survey of Factors influencing Purchasing Decisions, 1995. DDB Needham
Lifestyle Survey, 1995.
4%
20%
4%
24%
3%
20%
1%
16%
Corporate Executives Consumers
Company
Record on
Environment
Fairness/
Equality
in Hiring
Employs
Community
Residents
Company
Record on
Worker Safety
Better Products
While much brand-switching is conducted in the name of altruism, what attracts most
consumers to greener products is quite simply the prospect of higher quality : water-
saving shower heads slash energy bills, concentrated laundry detergents are easier to
carry and store, and nontoxic garden products are safer for children. Expect these
enhanced primary benefits of performance, convenience, price, and safety, for
example, that accompany environmental improvements to continue to propel the market
for environmentally preferable products in the years and decades ahead.
Personal Rewards, Too
Green marketing offers a rare opportunity to integrate our values into the workplace.
Creating products that are more in sync with nature allows us to personally contribute
to environmental cleanup and helps ensure a more secure future for our children.
A mind once expanded never goes back to where it was. No longer content to promise
consumers that their clothes will become whiter than white or that their breath is
fresher than fresh, green marketerslike their bosses who manage for a double
bottom linecultivate higher levels of satisfaction and reward. They offer their
consumers the prospect of healthier, more fulfilled lives, and the power to make the
world a better place. These promises the personal rewards for the marketers.
Why Conventional Marketing Wont Work
Conventional marketing is out. Green marketing is in. Effectively addressing the needs
of consumers with a raised environmental consciousness cannot be achieved with the
same assumptions and formulas that guided consumer marketing in the high production-
high consumption postwar era. New strategies and innovative product and service
offering are required.
Conventional marketing entails developing products that meet consumers need at
affordable prices and then communicating the benefits of those products in a compelling
way. Environmental marketing is more complex. It serves two key objectives :
l to develop products that balance consumers needs for quality, performance,
affordable pricing, and convenience with environmental compatibility, that is,
minimal impact on the environment.
l to project an image of high quality, including environmental sensitivity, relating to
both a products attributes and its manufacturers track record for environmental
achievement.
These objectives cannot be met using conventional marketing strategies. Marketers in
the age of environmental consumerism face tough new standards. Environmental
consumerism represents deep psychological and sociological shifts, as did its
predecessors Naderism and feminism. Naderism spurred marketers to product
safer, higher-quality products and to advertise those products with more credible claims.
Feminism forced marketers to develop convenient products and to portray women with
a new respect. Meeting the challenges of environmental consumerism presents its
own mandates for corporate processes, product quality, and promotion.
To realize that conventional strategies wont succeed, one need only recall the unsavoury
backlash that pioneering green marketers incurred over what was perceived by
environmentalists, regulators, and the press as inconsistent and often misleading labels
and claims. Marketers, desirous of keeping in step with competitors and encouraged
by polls erroneously suggesting that overwhelming majorities of consumers would pay
hefty premiums for greener goods, rushed headlong to underscore the environmental
benefits of their offerings, however insignificant or coincidental. Indeed, according to
J. Walter Thompson Company, green claims quadrupled between 1989 and 1990. Trash
bags and diapers were touted as degradable and hair sprays were branded as ozone
friendly. One product label even claimed earth friendly since 1889.
The resulting deluge of skepticism, confusion, and regulatory nightmares that these
green claims spawned quickly proved that environmental marketing involves more than
tweakng one or two product attributes and dressing up packages with meaningless
(and often misleading) claims. Too many marketers learned the hard way that partaking
of environmentally related opportunities requires a total corporate commitment to
greening ones products and communications. It affects how a corporation interacts
with all the groups and individuals who may be affected by its environmental practices.
As such, this commitment needs to be founded on a thorough greening of ones entire
companyand values.
The New Marketing Paradigm
A new paradigm is now in the making. Basic assumptions about how best to cater to
consumer needs are in question. Successful green marketers no longer view consumers
as individuals with insatiable appetites for material goods, but as human beings concerned
about the condition of the world around them, how they themselves interact with the
rest of nature, and cognizant of how material goods impact their lives positively as well
as negatively, short term as well as long term.
Products are no longer designed in a linear cradle-to-grave fashion, with no regard
for the long-term impact on society of their eventual disposal or no appreciation for the
value of natural resources they represent. A one-size-fits-all system of nationally
marketed brands now gives way to more flexible product offerings the best fit regional
environmental considerations. Yesterdays resource-intensive products are being
replaced by innovative products with radical new designs, even with dematerialized
services. These offerings are marketed with ads and promotions that derive added
value from the educational messages they impart and the values they project.
The corporations that excel at green marketing are those that are pro-active in nature.
Aiming to surpass minimal compliance standards, they define the rules by which they
and their competitors will be judged. Ideologically responsive corporations consider
themselves to be like natures processes interdependent. These corporations join with
corporate environmental stakeholders in cooperative, positive alliances, and they work
hand in hand with suppliers and retailers to manage environmental issues throughout
the value chain. Internally, crossfunctional teams convene to find the best possible
holistic solutions to environmental challenges. Long-term rather than short-term in their
orientation, these companies manage with a double bottom lineone bottom line for
profits, the other one reflecting their contribution to society.
The New Green Marketing Paradigm
Conventional Green
Marketing Marketing
Consumers Consumers with Human beings with
lifestyles lives*
Products Cradle-to-grave Cradle-to-cradle
One-size-fits-all Flexible
Products Services
Marketing and Communications Selling-oriented Educational
End benefits Values
Corporate Reactive Pro-active
Independent Interdependent
Competitive Cooperative
Departmentalized Holistic
Short-term oriented Long-term oriented
Profit-maximizing Double bottom line
*William McDonough
Source : J. Ottman Consulting, Inc.
The Seven Strategies Of Green Marketing Success
The currency of the green business world is innovation, flexibility, change, and heart.
New rules have emerged from the cloud of green marketing dust kicked up in the late
1980s and early 1990s. We know better what works and what does not. Seven
strategies that work are listed. Using these strategies, eco-entrepreneurs Gary Hirshberg
and Samuel Kayman set a greener pace that others now must follow.
J. Ottman Consultings Seven Winning
Strategies of Green Marketing
1. Do your homework. Understand the full range of environmental, economic, political, and
social issues that affect your consumer and your products and services now and over the long
term.
2. Create new products and services that balance consumers desires for high quality, convenience,
and affordable pricing with minimal environmental impact over the entire life of your products.
3. Empower consumers with solutions. Help them understand the issues that affect your business
as well as the benefits of your environmentally preferable technology, materials, and designs.
4. Establish credibility for your marketing efforts.
5. Build coalitions with corporate environmental stakeholders.
6. Communicate your corporate commitment and project your values.
7. Dont quit. Continuously strive for zero environmental impact of your products and
processes; learn from your mistakes.
Green by Design
Environmental product issues are varied and complex. They span every phase of a
products life cycle, and include a plethora of sub-issues, such as conservation of natural
resources like water and land, energy efficiency, and protection of natural habitats and
endangered species.
Upgrading products and packaging to minimize environmental impact can be tricky.
What may appear to be an environmental benefit may actually result in little or no
added value to the environment. For example, plastic trash bags that are technically
designed to disintegrate in the presence of sunlight will not degrade when buried in a
landfill. Sometimes, the presumed greening of one attribute can actually increase overall
environmental impact. CPC, the makers of Muellers pasta, found that converting to
recycled carton material would actually add about 20 percent to the width of their
packaging material. This would at least partially offset savings to the environment,
considering the added energy needed to ship the new boxes. For these reasons, and
also to prevent backlash from consumers, environmental groups, and other stakeholders,
all of whom may be quick to point out the short-comings of products and packaging
touted as green, a thorough approach to greening is required. A tool called life cycle
inventory (LCI) can help.
An LCI, the first step in conducting a full life cycle analysis of a product, is a process
that quantifies the use of energy, resources, and emission to the environment associated
with a product throughout its life cycle. It accounts for the environmental impact of
raw-material procurement, manufacturing and production, packaging, distribution, and
in-use characteristics straight through to after-use and disposal.
An LCI of cotton versus disposable diapers, for example, would quantify the amount of
pesticides and water used to grow cotton, as well as the water and energy needed to
manufacture the diapers and transport them to stores and homes. Finally, it would
consider the amount of water and energy used to launder the cloth diapers. An LCI of
disposable diapers would take into account the environmental implications of cutting
down and processing trees for wood pulp, along with the environmental burdens of
extraction and refining the petroleum required to produce the plastic backsheets. It
would quantify the energy used in manufacturing and transportation, as well as the
amount of solid waste eventually sent to landfills.
Initially developed during the 1970s to help reduce the amount of energy used for
developing and distributing products, an LCI is extremely useful for
l comparing the costs associated with energy and resource usage and environmental
emissions associated with existing products and their alternatives
l identifying significant areas for reducing energy use and waste
l comparing energy and resource usage and environmental emissions associated
with possible alternative ways to manufacture of package products
Green Product Development Issues
Raw Materials Acquisition and Processing
l Conservation of natural resources like water, land, and air
l Protection of natural habitats and endangered species
l Waste minimization and pollution prevention, especially the use and release of
toxins
l Transportation
l Use of renewable resources: sustainable use to resources
l Use of recycled materials
l Energy consumption
Manufacturing and Distribution Issues
l Minimal use of materials
l Toxic use/release
l By-product/waste generation and handling
l Energy consumption
l Water use
l Emissions to air, land, and water
Product Use and Packaging Issues
l Energy efficiency
l Conservation to natural resources such as water required for the use of the product
l Consumer health and environmental safety
After-Use/Disposal Issues
l Recyclability; ease of reuse, remanufacture, and repair
l Durability
l Biodegradability/combustibility
l Safety when incinerated or landfilled.
Ideas for Action
Use the following checklist to explore the myriad opportunities for refining existing
products or developing new ones that meet environmental imperatives and satisfy
consumers' primary demands.
Raw Material Procurement
l Can we minimize the potential for our raw-materials procurement process to
avoid tropical deforestation ? Land stripping ? Oil spills ?
l Can we use renewable resource or resources that are sustainably managed ?
Manufacturing
l What steps can we take to prevent or otherwise reduce the production of solid
and hazardous waste in our manufacturing processes ? How can we reduce our
use of water ? Emissions to air and waterways ?
Use
l Can we redesign our products to make them more energy- or resource-efficeint
and therby reduce operating costs ?
l Can we make our products safer or more pleasant to use ?
l Can we use alternative ingredients that help to minimize risks to health and the
environment ?
After-Use Recovery and Disposal
l Can we design our products to be durable? Refillable? Reusable? Repairable?
Remanufacturable? Rechargeable?
l Can we redesign our products or packages to reduce the need for landfilling?
l Can we make our products and packaging safer to landfill or incinerate?
l Can we use materials and ingredients that are inherently biodegradable or
compostable?

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