A little bit of marketing theory... All it takes is a little theory practiced and applied, and soon you will find that marketing comes naturally. Marketing is more than sales. Marketing is the set of activities used to 1. Get your potential customer's attention 2. Motivate them to buy 3. Get them to actually buy 4. Get them to buy again (and again…) Marketing is how you define your product, promote your product, distribute your product, and to maintain a relationship with your customers. Marketing theory is made up of the 5 P’s.Product, Positioning, Place, Price and Promotion. Each "P" contributes to your marketing Product Product is, of course, the thing (or service) that you have to offer to the customers. There are a number of thing about the product you should evaluate. It is important to understand your product from the customer’s point of view. Product Description It is critical to be able to say in one clear sentence why your product is perfect for a specific buyer and what it does best.” To (target audience), (product name) is the type of (product) that (performs this task)." Product Name It is more important to be descriptive than creative. There are some exceptions to this - such as music band names. One of the best ways to determine a name for a product is to have a brainstorming session. The rules of brainstorming are: 1. No ideas are rejected or criticized 2. It is a free form "brain dump" 3. Someone is in charge of writing the ideas on a board where everyone can see them. 4. After the ideas a generated, they are ranked by preference. 5. The pros and cons of the top ideas are discussed. Functionality, Features & Benefits In order to begin to understand the product from a customer’s point of view, list the functionality, the features, and the benefits that product has. List functionality and features that could be added. Prioritize each for the target market or market segments to determine the development of the product going forward.
BASIC OF MARKETING
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This list will be used in positioning the product.
Product Adaptability By understanding how adaptable your software is, you can incorporate the necessary elements into your marketing. There are five factors for measuring how "adaptable" a new product is: • Relative advantage of the product: How superior is the innovation to the product or other problem-solving methods it was designed to compete against? • Compatibility: Does it fit with current product usage and customer activity? • Complexity: Will difficulty or confusion arise in understanding the innovation’s basic idea? • Divisibility: How easily can trial portions of the product be purchased? • Communicability: How likely is the product to appear in public places where it is easily seen and studied by potential users? Example - Product Music CD What is it that you are selling? You could say you are selling music, or an experience, or a feeling, or yourself. But the bottom line is that you want people to buy your CD. Note: Producing CDs has many advantages over producing tapes. CDs can be produced for about $2 - $3 each, and you can charge $10 - $20 for them. CDs give a professional, polished impression, and it is the media of choice for music listeners. Ah. But what about tickets you sell to a show? Or Tshirts you sell? Aren't these your product? Not really. They are ways to promote your CD. Everything you do should be done with the end result of selling CDs. Positioning Simply, positioning is how your target market defines you in relation to your competitors. A good position is: 1. what makes you unique 2. This is considered a benefit by your target market Both of these conditions are necessary for a good positioning. So what if you are the only red-haired singer who only knows how to play a G minor chord? Does your target market consider this a good thing? Positioning is important because you are competing with all the noise out there competing for your potential fans
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attention. If you can stand out with a unique benefit, you have a chance at getting their attention. It is important to understand your product from the customer’s point of view relative to the competition. Environment In order to begin positioning a product, two questions need to be answered: 1. What is our marketing environment? 2. What is our competitive advantage? The marketing environment is the external environment. Some things to consider: • How is the market now satisfying the need your software satisfies? • What are the switching costs for potential users for your market? • What are the positions of the competition? The competitive advantage is an internal question. What do you have that gives you advantage over your competitors. Some things to consider: • Is your company small and flexibility? • Do you offer low cost and high quality? • Does your product offer unique benefits? • Are you the first on the market with this product (First mover advantage)? Positioning Strategies There are seven positioning strategies that can be pursued: • Product Attributes: What are the specific products attributes? • Benefits: What are the benefits to the customers? • Usage Occasions: When / how can the product are used? • Users: Identify a class of users. • Against a Competitor: Positioned directly against a competitor. • Away from a Competitor: Positioned away from competitor. • Product Classes: Compared to different classes of products. Segmentation There are three types of segmentation: 1. Mass Marketing or Undifferentiated Marketing: Go after the whole market with one offer and focus on common needs rather than differences 2. Product-variety Marketing or Differentiated Marketing: target several market segments and design separate offers for each 3
3. Target Marketing or Concentrated Marketing: Large share of one or a few sub-markets. Good when company’s resources are limited. To identify a niche market, a series of 2 by 2 matrixes can be used to identify an area that is being overlooked by larger competitors. The competitors are mapped on this matrix and you can see where there may be some opportunities. Positioning Differences The differences that are promoted for a product must be: • Important: The difference delivers a highly valued benefit to the target buyers. • Distinctive: Competitors do not offer the difference, or the company can offer it in a more distinctive way. • Superior: The difference is superior to other ways that the customer might obtain the same benefit. • Communicable: The difference can be explained and communicated to the target buyers. • Preemptive: Competitors cannot easily copy the difference. • Affordable: Buyers can afford to pay the difference. • Profitable: Company can introduce the difference profitably. Place Place, or distribution channel, is the method for making your product available to the consumer. Functions There are eight main functions for distribution channels: 1. Information: gathering and distributing marketing research 2. Promotion: developing and communicating offers 3. Contact: communicating with prospective buyers 4. Matching: fitting the offer to the buyer's needs 5. Negotiation: reaching agreement on price and terms 6. Physical distribution: transporting and storing the goods 7. Financing: getting and using funds to cover the costs of channel work 8. Risk taking: assuming the risks the channel work.
Example - Selling a CD
Place is simply where your fans buy your CD. call it distribution. There are many ways to distribute your CD. You can also
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Retail probably the most difficult is retail (selling your CD in music stores). This is difficult for independent musicians or bands because you usually need to have a relationship with a distributor. Online Isn't the Web wonderful? You can easily and cheaply set up a web page with your information, sample audio files, show dates, and how to order your CD. In Person Whenever you perform, you should sell your CDs. You can mention that you are selling CDs and where to buy them while you are performing. It is easier if you have a friend to help you. This person can collect the money, hand out the CDs, etc. so you don't have to worry about it during a show. In Home There is nothing wrong with telephone orders! Price Price is the amount of money charged for a product or service or the value exchanged for the benefits of the product or service. For a new product, you must understand your positioning before you set a price. Make sure it is not too low, or the product will not be taken seriously. If it is too high, the potential customer will not take the risk. Pricing Strategies There are five general pricing strategies: 1. Product Line: Setting price steps between product line items 2. Optional Product: Pricing optional or accessory products 3. Captive Product: Pricing products that must be used with the main product 4. By-Product: Pricing low value by product to get rid of them 5. Product Bundle: Pricing bundles of products sold together New Product Pricing There are two new product pricing strategies: • Market-Skimming: Initially set high prices to "skim" revenue layer by layer from the market. Works when: Quality and image support the higher price Enough buyers want the product at that price Cost of producing a small volume cannot be high
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Competitors should not be able to enter the market easily • Market Penetration: Set a low initial price in order to penetrate the market quickly and deeply to win a large market share. Works when: Market is highly price sensitive • Production and distribution costs fall as sales volume increases • Low price must help keep out the competition Price Adjustment The following are price adjustments based on changing situations: • Discount & Allowance: reduced prices to reward customer responses such as paying early or promoting the product • Discriminatory: adjusting prices to allow for differences in customers, products, and locations • Psychological: adjusting prices for psychological effects. Ex: $299 vs. $300 • Value: adjusting prices to offer the right combination of quality and service at a fair price • Promotional: temporarily reducing prices to increase short-run sales • Geographical: adjusting prices to account for geographic location of customer. • International: adjusting prices in international markets Promotion Promotion is the specific mix of advertising, personal selling, sales promotion, and public relations a company uses to pursue its advertising and marketing objectives. If you are an entrepreneur, you most likely have limited resources and you are still learning about the market. Information gather is extremely important at this stage of the game. The trick is the start the revenue stream without spending too much money. Objectives The objectives that are met by promoting are to move the target market through the following phases: “It is believed that consumers cannot skip over a phase, but they need to move through them. Promotion is used to move the target market from one phase to another to finally purchase.” The Offer
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The offer needs to be identified before you begin any promoting. What are you offering the target customer? What do you want the target market to do? One mistake that can be made is to create a promotional advertisement and not tell the customer what to do. You should prompt the customer and tell them to "call this number to place an order" or "download this software from our web site". Measuring Response Testing different offers, advertisements, direct mail letters, lists, and promotion techniques can tell you what method is most effective. There is a trade-off. Testing is expensive. You need different versions of promotions, which raises production expense. You need to track the results, which takes time. But the information you gather could help you reduce wasteful, ineffective spending in the future. If you decide to test, make sure you have a method for measuring response. You can do this by first asking the customer where they heard about you when taking the order, if it is a telephone order. If it is an order form that they mail back to you, you can code the order form with a tracking number that lets you know exactly what promotion the customer is responding to. This information can then be entered into the customer database for future analysis. World Wide Web The Web allows for a cheap way of promoting your product. It is a great tool because it allows the target customers to educate themselves about your product by reading about it, seeing a demo, and download a copy (and therefore serve as your distribution channel). Remember, you are trying to reduce the perceive risk of purchasing your product. By providing a Web page, you are moving the target market through the communication cycle from unawareness to purchase. Also, you are trying to reach innovators and early adopters. These people are actively searching for better ways to meet their needs. The Web is a natural place for them to go to look for you. The difficulty with the Web is all of the noise out there. It is very crowded and difficult to be noticed. Register with the entire search engines, such as Yahoo and Alta Vista. Make sure that there are keywords in your web site that will attract your target audience. Direct Mail An average response rate for direct mail is about 1%. This depends on the offer, the mailing list, the target audience, the creative (how the direct mail piece looks),
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and the timing of the mailing. There is a whole industry built around direct mailing. This promotional activity involves many steps. Direct mail is a way of promoting your software product by sending prospects mail. It is a way of directly communicating to a list of people. List Selection A list is the names and addresses that you use to send your direct mail piece. This list is very important to the success of a mailing. Some experts place 40% - 60% of importance to the list and 40% - 60% to other combined factors, such as offer, sales letter, and timing. You rent a list from a company - as opposed to buying a list. You can rent a list for one-time use, n-time use, or unlimited use. However, until you test the list, it would be best to rent it for one-time use. Once you determine which list works for you, then you can start negotiating multi-use lists. Be aware that list rental companies track the use of your list. They include "seed" names that you will not be able to identify. These seed names show if you use the list more times than you rented it for. Once a name on the list contacts you, whether to buy or simply inquire, you can then use that name any way you want. They are considered your customer now. You rent lists from a variety of sources: • Compiled List: Names and addresses from a common source - such as a phone book. These lists are the lease expensive, but have the lowest response rate. • Mail Order Buyer Lists: Names and addresses of people who have responded to direct mail in the past. Lists can be selected by lifestyle or special interests. These lists respond better than compiled lists. • Publication Lists: Names and addresses of people who subscribe to a particular magazine. General interest magazines tend to have a lower response rate than special interest magazines. Special interest newsletters have a small circulation, but if this group is your target market, it can have a better response rate than other lists. • Donor Lists: Names and addresses of people that are of interest to non-profit organizations. • House Lists: Names and addresses owned by a specific company of customers and inquires of their product. You can narrow lists down by demographic information, such as gender, geographic location, income, homeowners,
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frequency of purchase, recency of purchase, and monetary (amount) of purchase. Recency of purchase tends to be a good indicator of response rate. The older the names, the less likely the response - although you must test your lists to determine how old is old. Make sure that the company renting you the list has merged/purged it for duplicate names, has updated the names and addresses using NCOA (National Change of Address), and cleaned the file (removed all non-deliverables from the list). You should have in your contract you get credit for names that are returned for non-delivery. You should merge/purge the file against any customer list you already have, or any other rented lists you have. Prices are usually given in cost per thousand. There is usually a minimum order - such as 5,000 names. There is usually a cost to select based on certain criteria. Price ranges can be from $50/M to $300/M for a base price. Each source varies. However, the cheapest list may not be the most cost effective. You need to look at cost per acquisition once the mailing is complete. Common Measurements • Cost per acquisition = Total Cost of Mailing / Number of Responders (people who ordered). • Cost per piece = Total Cost of Mailing / Number of People Mailed. • Response rate = Number of Responders / Number of People Mailed. Response rates to prospects (non-customers) average around 1%. Response Mechanism One of the most important parts of your direct mail piece is the response mechanism. This is the device that the prospect will use to place the order (or request information). In designing your response mechanism or order form you need use all you have thought about so far - your offer, your product, the benefit it gives your customers, the price, and the risk reducer (such as a money back guarantee or a free trial period). Make it easy for the prospect to place the order. Give them many ways to do it - telephone, e-mail, fax, mail back order form. Tell them exactly how to pay for the order. The response card should be easy to fill out, offer as few choices as possible, be short, and be easy to read and understand.
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Although using a postcard may be cheaper, people will not put confidential information on a postcard. They will not put credit card number or even name and phone number on something everyone can read. Use a business reply envelope, even if it is a little more expensive. You will get a higher response rate. And make sure the response card fits in the envelope without folding it. Involvement devices work. Give the prospect something to do, such as check a box to order or place a sticker or stamp on the order form. Give the order form a look of intrinsic value. Use the bond-like borders, seals, stamps, and other money look alikes. Product Brochure This piece of the direct mail can be made a little more "slick" than the sales letter will be. The brochure will describe your product, the technical specifications, and the benefits to the customer, and testimonials from other customers, any free trial period, and money back guarantee. Include the company's name, address, phone number, fax number, and web address. Sales Letter The first line of a sales letter is a headline. It should give the reader immediately the benefits of the offer being made. This is the first thing a reader will read. The P.S. at the bottom of the letter is the second thing a read will read. Be sure to add a P.S. to your letter, giving the offer, the benefits, the free trial period, and the deadline. The average length of the sales letter is 4 pages long. Two pages long are considered a short length letter and six or more is considered a long length letter. Printing on both sides of a page test as well as one sided print. The use of push dates test better than no push dates. A push date is a deadline for the prospect to order - "PLEASE RESPOND BY MONDAY". If you are going to use a specific date, allow for at lease three weeks for delivery for third class mail. Envelope The first thing the prospect sees is the envelope. Some people use this to print a "teaser" copy on the front of the envelope. This could be used to hint at what great offer lies inside if they just would open the letter. The risk is that the teaser copy immediately tells the prospect that this is another advertisement junk mail piece, and it may not get opened as a result.
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If you do use teaser copy, make sure that whatever is promised on the outside is fulfilled on the insider. Otherwise the person will be angry, and therefore, no sale. Testing and Tracking Response On your response card, you can assign a code so you can keep track of what the customer is responding do. What list did you use, what offer, what sales letter, what brochure, what price, etc. There is no limit to the things you can test via direct mail. For example AA-123-MA-1 could translate to the first mailing of list source AA, sales letter 1, brochure letter 2, and price 3, in Massachusetts. If you are testing price, make sure that everything else is constant. Use the same list and the same direct mail piece, with just the price changed. Some Tricks That Work Remember that direct mail is a personal medium. The more personal you can make your mail look, the better response you will get. Stamps work better than metered mail. Stamps look more like a personal letter. First-class stamps provide a fast delivery, but don't necessarily improve response rate version third-class stamps. Flamboyant color just for the sake of color does not pay off. If you decide to use some color for conservative enhancement, browns and greens do not work as well as aquamarine blues, cold and warm grays, warm reds. Some other successful colors have been bright orange, yellow ochre light and/or a metallic gold. Soft white book and antique-finish papers work better than slick super white paper. Cheap thin paper makes the product look cheap. Address labels perform worse than computer printed addresses directly on the envelope. Make a dummy sample to determine folding of paper, size, and most importantly weight. Postage is very expensive, and if you go over the designated weight set by the post office, you will be paying for it. See the post office for the weight and size limits for first-class and third-class mail. People like to do things. Checking a box, using stickers and stamps and work to improve response. Classified Advertisements Although it may nice to be able to take out a full color, full page advertisement in an industry magazine, it is very expensive and will not reach your target market of the innovators and early adopters. This target market will read
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the classified ads in the magazines looking for and willing to try new things. The key for classified advertisements is frequency. Running an ad once will create awareness, but not necessarily action. Request a media kit from the magazine you are considering. This should contain circulation information, subscriber profiles, and prices. This will help you determine if your target market reads this magazine. Press Releases A press release is an announcement of a new product release. Editors may take this information and publish it as news in their magazine or newspaper. This is a great way to get free publicity. To send a press release, you should prepare a press kit that includes: • Cover letter to the editor Press release product announcement Product features sheet • Corporate background sheet Evaluation product Technical specifications sheet (if any) Reprint of any past articles Names of end user contacts and comments Picture of your product The editor may take your product announcement, make some modifications to it by hand, and send the original to be printed. In general, editors like to have the press releases double spaced with plenty of margin room. There can be a 3-4 month lead time before your press release is published. If possible, tie your press release into current events or human interest. It has a better chance of being published. Don't write your press release like an advertisement. Any claims you make be sure to back them up with user testimonials. Tailor your press release to each publication, or at least each type of publication. Mass mailing press releases don't usually get published. Also, send your press release to one person at each magazine. If you are unsure of the person, contact the magazine for a contact name. Include in your press release the product name, the price, a company contact name, the company name, address, phone number, fax number, and e-mail address. Be prepared to take questions. Your opening sentence should be clear and concise. "The first (product) capable of (doing this benefit) is now 12
available from (your company) for people who need to (this need)". Product Reviews Magazines have product review editors that review it in an article or column. This can provide great exposure. However, it can also be risky. What damage will it do if you get a bad review? Before pursuing this promotional activity, it may be safest to fully complete testing, and have contacted many new customers to get their feedback on the product. Make sure there are no surprises. Choose a magazine your target market is reading. You can always use quotes from the review in your promotional material for other promotions. With more people accepting the product, the faster you will move past the early adopters and innovators. Call the magazine for the name of the correct person to send the product to. Ensure that this person gets a full product. Be available for questions. If a reviewer has problems, there will usually be a phone call to the company first. Example - Promotion Your Music • Shows
Direct Mail Web Page Posters Event Listings Reviews Radio Word of Mouth Press Releases
EFFECTIVE COMMUNCATION
Introduction People in organizations typically spend over 75% of their time in an interpersonal situation; thus it is no surprise to find that at the root of a large number of organizational problems is poor communications. Effective communication is an essential component of organizational success whether it is at the interpersonal, intergroup, intragroup, organizational, or external levels. The Communication Process Although all of us have been communicating with others since our infancy, the process of transmitting information from an individual (or group) to another is a very complex process with many sources of potential error. Consider the simple example:
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Terry: "I won't make it to work again tomorrow; this pregnancy keeps me nauseous and my doctor says I should probably be reduced to part time. Boss: Terry, this is the third day you've missed and your appointments keep backing up; we have to cover for you and this is messing all of us up. In any communication at least some of the "meaning" lost in simple transmission of a message from the sender to the receiver. In many situations a lot of the true message is lost and the message that is heard is often far different than the one intended. This is most obvious in crosscultural situations where language is an issue. But it is also common among people of the same culture. Look at the example. Terry has what appears to be a simple message to convey-she won't make it to work today because of nausea. But she had to translate the thoughts into words and this is the first potential source of error. Was she just trying to convey that she would be late; was she trying to convey anything else. It turns out she was. She was upset because she perceived that her co-workers weren't as sympathetic to her situation as they should be. Her coworkers, however, were really being pressured by Terry's continued absences, and her late calls. They wished she would just take a leave of absence, but Terry refuses because she would have to take it without pay. Thus what appears to be a simple communication is, in reality, quite complex. Terry is communicating far more than that she would miss work; she is conveying a number of complex emotions, complicated by her own complex feelings about pregnancy, work, and her future. She sent a message but the message is more than the words; it includes the tone, the timing of the call, and the way she expressed herself. Similarly, the boss goes through a complex communication process in "hearing" the message. The message that Terry sent had to be decoded and given meaning. There are many ways to decode the simple message that Terry gave and the way the message is heard will influence the response to Terry. In this case the boss heard far more than a simple message that Terry won't be at work today. The boss "heard" hostility from Terry, indifference, lack of consideration, among other emotions. Terry may not have meant this, but this is what the boss heard. Communications is so difficult because at each step in the process there major potential for error. By the time a message gets from a sender to a receiver there are four
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basic places where transmission errors can take place and at each place, there are a multitude of potential sources of error. Thus it is no surprise that social psychologists estimate that there is usually a 40-60% loss of meaning in the transmission of messages from sender to receiver. It is critical to understand this process, understand and be aware of the potential sources of errors and constantly counteract these tendencies by making a conscientious effort to make sure there is a minimal loss of meaning in your conversation. It is also very important to understand that a majoring of communication is non-verbal. This means that when we attribute meaning to what someone else is saying, the verbal part of the message actually means less than the non-verbal part. The non-verbal part includes such things as body language and tone. Barriers to Effective Communication There are a wide number of sources of noise or interference that can enter into the communication process. This can occur when people now each other very well and should understand the sources of error. In a work setting, it is even more common since interactions involve people who not only don't have years of experience with each other, but communication is complicated by the complex and often confliction relationships that exist at work. In a work setting, the following suggests a number of sources of noise: • Language: The choice of words or language in which a sender encodes a message will influence the quality of communication. Because language is a symbolic representation of a phenomenon, room for interpretation and distortion of the meaning exists. In the above example, the Boss uses language (this is the third day you've missed) that is likely to convey far more than objective information. To Terry it conveys indifference to her medical problems. Note that the same words will be interpreted different by each different person. Meaning has to be given to words and many factors affect how an individual will attribute meaning to particular words. It is important to note that no two people will attribute the exact same meaning to the same words. • defensiveness, distorted perceptions, guilt, project, transference, distortions from the past • misreading of body language, tone and other non-verbal forms of communication (see section below)
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noisy transmission (unreliable messages, inconsistency) • receiver distortion: selective hearing, ignoring nonverbal cues • power struggles • self-fulfilling assumptions • language-different levels of meaning • managers hesitation to be candid • Assumptions-eg. assuming others see situation same as you, has same feelings as you • distrusted source, erroneous translation, value judgment, state of mind of two people • Perceptual Biases: People attend to stimuli in the environment in very different ways. We each have shortcuts that we use to organize data. Invariably, these shortcuts introduce some biases into communication. Some of these shortcuts include stereotyping, projection, and self-fulfilling prophecies. Stereotyping is one of the most common. This is when we assume that the other person has certain characteristics based on the group to which they belong without validating that they in fact have these characteristics. • Interpersonal Relationships: How we perceive communication is affected by the past experience with the individual. Perception is also affected by the organizational relationship two people have. For example, communication from a superior may be perceived differently than that from a subordinate or peer • Cultural Differences: Effective communication requires deciphering the basic values, motives, aspirations, and assumptions that operate across geographical lines. Given some dramatic differences across cultures in approaches to such areas as time, space, and privacy, the opportunities for mis-communication while we are in cross-cultural situations are plentiful. Reading Nonverbal Communication Cues A large percentage (studies suggest over 90%) of the meaning we derive from communication, we derive from the non-verbal cues that the other person gives. Often a person says one thing but communicates something totally different through vocal intonation and body language. These mixed signals force the receiver to choose between the verbal and nonverbal parts of the message. Most often, the receiver
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chooses the nonverbal aspects. Mixed messages create tension and distrust because the receiver senses that the communicator is hiding something or is being less than candid. Nonverbal communication is made up of the following parts: 1. Visual 2. Tactile 3. Vocal 4. Use of time, space, and image Visual: This often called body language and includes facial expression, eye movement, posture, and gestures. The face is the biggest part of this. All of us "read" people's faces for ways to interpret what they say and feel. This fact becomes very apparent when we deal with someone with dark sunglasses. Of course we can easily misread these cues especially when communicating across cultures where gestures can mean something very different in another culture. For example, in American culture agreement might be indicated by the head going up and down whereas in India, a side-to-side head movement might mean the same thing. We also look to posture to provide cues about the communicator; posture can indicate self-confidence, aggressiveness, fear, guilt, or anxiety. Similarly, we look at gestures such as how we hold our hands, or a handshake. Many gestures are culture bound and susceptible to misinterpretation Tactile: This involves the use of touch to impart meaning as in a handshake, a pat on the back, an arm around the shoulder, a kiss, or a hug. Vocal: The meaning of words can be altered significantly by changing the intonation of one's voice. Think of how many ways you can say "no"-you could express mild doubt, terror, amazement, anger among other emotions. Vocal meanings vary across cultures. Intonation in one culture can mean support; another anger Use of Time as Nonverbal Communication: Use of time can communicate how we view our own status and power in relation to others. Think about how a subordinate and his/her boss would view arriving at a place for an agreed upon meeting... Physical Space: For most of us, someone standing very close to us makes us uncomfortable. We feel our "space" has been invaded. People 17
seek to extend their territory in many ways to attain power and intimacy. We tend to mark our territory either with permanent walls, or in a classroom with our coat, pen, paper, etc. We like to protect and control our territory. For Americans, the "intimate zone" is about two feet; this can vary from culture to culture. This zone is reserved for our closest friends. The "personal zone" from about 2-4 feet usually is reserved for family and friends. The social zone (4-12 feet) is where most business transactions take place. The "public zone" (over 12 feet) is used for lectures. At the risk of stereotyping, we will generalize and state that Americans and Northern Europeans typify the no contact group with small amounts of touching and relatively large spaces between them during transactions. Arabs and Latin’s normally stand closer together and do a lot of touching during communication. Similarly, we use "things" to communicate. This can involve expensive things, neat or messy things, photographs, plants, etc. Image: We use clothing and other dimensions of physical appearance to communicate our values and expectations Nonverbal Communication: The use of gestures, movements, material things, time, and space can clarify or confuse the meaning of verbal communication. In the above example, factors such as Terry's tone, the time of Terry's call, will probably play a greater role in how the message is interpreted than the actual words themselves. Similarly, the tone of the boss will probably have a greater impact on how his message is interpreted than the actual words. A "majority" of the meaning we attribute to words comes not from the words themselves, but from nonverbal factors such as gestures, facial expressions, tone, body language, etc. Nonverbal cues can play five roles: 1. Repetition: they can repeat the message the person is making verbally 2. Contradiction: they can contradict a message the individual is trying to convey 3. Substitution: they can substitute for a verbal message. For example, a person's eyes can often convey a far more vivid message than words and often do 4. Complementing: they may add to or complement a verbal message. A boss who pats a person on the back in addition to giving praise can increase the impact of the message
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5. Accenting: non-verbal communication may accept or underline a verbal message. Pounding the table, for example, can underline a message. Skillful communicators understand the importance of nonverbal communication and use it to increase their effectiveness, as well as use it to understand more clearly what someone else is really saying. Developing Communication Skills: Listening Skills There are a number of situations when you need to solicit good information from others; these situations include interviewing candidates, solving work problems, seeking to help an employee on work performance, and finding out reasons for performance discrepancies. Skill in communication involves a number of specific strengths. The first we will discuss involves listening skills. The following lists some suggests for effective listening when confronted with a problem at work: • Listen openly and with empathy to the other person • Judge the content, not the messenger or delivery; comprehend before you judge • Use multiple techniques to fully comprehend (ask, repeat, rephrase, etc.) • Active body state; fight distractions • Ask the other person for as much detail as he/she can provide; paraphrase what the other is saying to make sure you understand it and check for understanding • Respond in an interested way that shows you understand the problem and the employee's concern • Attend to non-verbal cues, body language, not just words; listen between the lines • Ask the other for his views or suggestions • State your position openly; be specific, not global • Communicate your feelings but don't act them out (eg. tell a person that his behavior really upsets you; don't get angry) • Be descriptive, not evaluative-describe objectively, your reactions, consequences • Be validating, not invalidating ("You wouldn't understand"); acknowledge other’s uniqueness, importance • Be conjunctive, not disjunctive (not "I want to discuss this regardless of what you want to discuss"); • Don't totally control conversation; acknowledge what was said
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Own up: use "I", not "They"... not "I've heard you are no cooperative" • Don't react to emotional words, but interpret their purpose • Practice supportive listening, not one way listening • Decide on specific follow-up actions and specific follow up dates A major source of problem in communication is defensiveness. Effective communicators are aware that defensiveness is a typical response in a work situation especially when negative information or criticism is involved. Be aware that defensiveness is common, particularly with subordinates when you are dealing with a problem. Try to make adjustments to compensate for the likely defensiveness. Realize that when people feel threatened they will try to protect themselves; this is natural. This defensiveness can take the form of aggression, anger, competitiveness, avoidance among other responses. A skillful listener is aware of the potential for defensiveness and makes needed adjustment. He or she is aware that self-protection is necessary and avoids making the other person spend energy defending the self. In addition, a supportive and effective listener does the following: • Stop Talking: Asks the other person for as much detail as he/she can provide; asks for other's views and suggestions • Looks at the person, listens openly and with empathy to the employee; is clear about his position; be patient • Listen and Respond in an interested way that shows you understand the problem and the other's concern • is validating, not invalidating ("You wouldn't understand"); acknowledge other’s uniqueness, importance • checks for understanding; paraphrases; asks questions for clarification • don't control conversation; acknowledges what was said; let's the other finish before responding • Focuses on the problem, not the person; is descriptive and specific, not evaluative; focuses on content, not delivery or emotion • Attend to emotional as well as cognitive messages (e.g., anger); aware of non-verbal cues, body language, etc.; listen between the lines
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React to the message, not the person, delivery or emotion • Make sure you comprehend before you judge; ask questions • Use many techniques to fully comprehend • Stay in an active body state to aid listening • Fight distractions • ( if in a work situation) Take Notes; Decide on specific follow-up actions and specific follow up dates Constructive Feedback: Developing your Skills "I don't know how to turn her performance around; she never used to have these attendance problems and her work used to be so good; I don't know why this is happening and what to do." This manager is struggling with one of the most important yet trickiest and most difficult management tasks: providing constructive and useful feedback to others. Effective feedback is absolutely essential to organizational effectiveness; people must know where they are and where to go next in terms of expectations and goals-yours, their own, and the organization. Feedback taps basic human needs-to improve, to compete, to be accurate; people want to be competent. Feedback can be reinforcing; if given properly, feedback is almost always appreciated and motivates people to improve. But for many people, daily work is like bowling with a curtain placed between them and the pins; they receive little information. Be aware of the many reasons why people are hesitant to give feedback; they include fear of causing embarrassments, discomfort, fear of an emotional reaction, and inability to handle the reaction. It is crucial that we realize how critical feedback can be and overcome our difficulties; it is very important and can be very rewarding but it requires skill, understanding, courage, and respect for yourself and others. Withholding constructive feedback is like sending people out on a dangerous hike without a compass. This is especially true in today's fast changing and demanding workplace Why managers are often reluctant to provide feedback As important as feedback is, this critical managerial task remains one of the most problematic. Many managers would rather have root canal work than provide feedback to another-especially feedback that might be viewed as
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critical. Why are managers so reluctant to provide feedback? The Reasons are many: Fear of the other person's reaction; people can get very defensive and emotional when confronted with feedback and many managers are very fearful of the reaction the feedback may be based on subjective feeling and the manager may be unable to give concrete information if the other person questions the basis for the feedback the information on which the feedback is based (eg. performance appraisal) may be a very flawed process and the manager may not totally trust the information Many managers would prefer being a coach than "playing God." Other factors get in the way of effective communication or feedback sessions. Some of these reasons are: • defensiveness, distorted perceptions, guilt, project, transference, distortions from the past • misreading of body language, tone • noisy transmission (unreliable messages, inconsistency) • receiver distortion: selective hearing, ignoring nonverbal cues • power struggles • self-fulfilling assumptions • language-different levels of meaning • managers hesitation to be candid • Assumptions-eg. assuming others see situation same as you, has same feelings as you • distrusted source, erroneous translation, value judgment, state of mind of two people Characteristics of Effective Feedback Effective Feedback has most of the following characteristics: • Descriptive (not evaluative) (avoids defensiveness.) By describing one's own reactions, it leaves the individual fee to use it or not to use it as he sees fit... • avoid accusations; present data if necessary • describe your own reactions or feelings; describe objective consequences that have or will occur; focus on behavior and your own reaction, not on other individual or his or her attributes • suggest more acceptable alternative; be prepared to discuss additional alternatives; focus on alternatives • Specific rather than general.
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Focused on behavior not the person. It is important that we refer to what a person does rather than to what we think he is. Thus we might say that a person "talked more than anyone else in this meeting" rather than that he is a "loud-mouth." It takes into account the needs of both the receiver and giver of feedback. It should be given to help, not to hurt. We too often give feedback because it makes us feel better or gives us a psychological advantage. It is directed toward behavior which the receiver can do something about. A person gets frustrated when reminded of some shortcoming over which he has no control. It is solicited rather than imposed. Feedback is most useful when the receiver himself has formulated the kind of question which those observing him can answer or when he actively seeks feedback. Feedback is useful when well-timed (soon after the behavior-depending, of course, on the person's readiness to hear it, support available from others, and so forth). Excellent feedback presented at an inappropriate time may do more harm than good. Sharing of information, rather than giving advice allows a person to decide for himself, in accordance with his own goals and needs. When we give advice we tell him what to do, and to some degree take away his freedom to do decide for himself. It involves the amount of information the receiver can use rather than the amount we would like to give. To overload a person with feedback is to reduce the possibility that he may be able to use what he receives effectively. When we give more than can be used, we are more often than not satisfying some need of our own rather than helping the other person. It concerns what is said and done, or how, not why. The "why" involves assumptions regarding motive or intent and this tends to alienate the person generate resentment, suspicion, and distrust. If we are uncertain of his motives or intent, this uncertainty itself is feedback, however, and should be revealed. It is checked to insure clear communication. One way of doing this is to have the receiver try to rephrase the feedback. No matter what the intent, feedback is often threatening and thus subject to considerable distortion or misinterpretation.
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It is checked to determine degree of agreement from others. Such "consensual validation" is of value to both the sender and receiver. • It is followed by attention to the consequences of the feedback. The supervisor needs to become acutely aware of the effects of his feedback. • It is an important step toward authenticity. Constructive feedback opens the way to a relationship which is built on trust, honest, and genuine concern and mutual growth. Part of the feedback process involves understanding and predicting how the other person will react. Or in the case of our receiving feedback, we need to understand ways that we respond to feedback, especially threatening feedback. People often react negatively to threatening feedback. This reaction can take a number of forms including: • selective reception and selective perception • doubting motive of the giver • denying validity of the data • rationalizing • attack the giver of the data Following the guidelines to effective feedback can go a long way to limit these kinds of reactions but we need to be conscious of them nonetheless and be ready to react appropriately. When we are on the receiving end of feedback we should be careful to avoid these pitfalls. Try to keep these points in mind. • try not to be defensive • check on possible misunderstanding ("Let me restate what I am hearing") • gather information from other sources • don't overreact • ask for clarification A Planning Form for Constructive Feedback Instructions: Before the feedback session, answer these questions: • what is your purpose in giving the feedback • What specific actions do you want to reinforce or correct? What are the consequences of the action? • what do you want to accomplish in this discussion • what specific information do you need to learn; what questions do you need answered
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what issues of timing, location, advance preparation, or other logistics do you need to consider to get the most out of the discussion Observe the basic principles of communication • use open ended and close ended questions appropriately • use eye contact, encouraging gestures • focus on the situation, issue, behavior, not the person • maintain the self-confidence and self-esteem of others • maintain constructive relationships with your employees, peers, managers • use active listening techniques such as stating your understanding of what you are hearing • make sure you summarize • lead by example What pitfalls do you need to watch out for and how will these be overcome: from your experience, what potential pitfalls will you need to overcome in order to achieve success in giving constructive feedback? How will you overcome these pitfalls? Evaluating the Feedback Session State the constructive purpose of your feedback • describe specifically what you have observed • describe your reactions • give the other person an opportunity to respond • offer specific suggestions • summarize and express your support How well did the manager: • focus on the situation, • issue or behavior, not on the person • maintain the self-confidence • and self-esteem of the other • maintain constructive relationships • with your employees, peers, and managers • take initiative to make things better • lead by example Three Kinds of Interviews 1. Tell and Sell: • Fits when judgment of superior acceptable to subordinate, when sub. has ability to change and desired objectives are obtainable • most effective for new employees
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objectives-communicate employee's evaluation as accurately as possible; gain employee acceptance of evaluation; • most important skill is persuasion • can expect some defensive reaction • can be difficult if inappropriate behavior is attractive to subordinate • often ineffective approach • This method encourages behavior focused toward pleasing supervisor rather than best thinking. 2. Tell and Listen • fits same conditions as left • objective is to communicate accurately; give chance to respond • there will be defensiveness; listening skills critical; active listening needed; defensive behavior is reduced; if boss is effective motivator, can induce feelings of acceptance • can be joint problem solving; • supervisor may change • risk that subordinate may be satisfied but with no plan to improve job Problem Solving • supervisor no longer judge, but helper; not diagnosing and supplying remedies • Sup. must be willing to accept ideas for job improvement • must concentrate on situation, not individual • goal is to develop employee • skills needed- skillful questioning; skillful communicator • employee will think constructively if he perceives opportunity to influence process • subordinate will likely feel some increased job satisfaction; but superior may sacrifice some control • Failure if subordinate doesn't respond to this method. Consumer Behavior and Marketing Strategy The study of consumers helps firms and organizations improve their marketing strategies by understanding issues such as how • The psychology of how consumers think, feel, reason, and select between different alternatives (e.g., brands, products); 26
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The psychology of how the consumer is influenced by his or her environment (e.g., culture, family, signs, media); • The behavior of consumers while shopping or making other marketing decisions; • Limitations in consumer knowledge or information processing abilities influence decisions and marketing outcome; • How consumer motivation and decision strategies differ between products that differ in their level of importance or interest that they entail for the consumer; and • How marketers can adapt and improve their marketing campaigns and marketing strategies to more effectively reach the consumer. Understanding these issues helps us adapt our strategies by taking the consumer into consideration. For example, by understanding that a number of different messages compete for our potential customers’ attention, we learn that to be effective, advertisements must usually be repeated extensively. We also learn that consumers will sometimes be persuaded more by logical arguments, but at other times will be persuaded more by emotional or symbolic appeals. By understanding the consumer, we will be able to make a more informed decision as to which strategy to employ. One "official" definition of consumer behavior is "The study of individuals, groups, or organizations and the processes they use to select, secure, use, and dispose of products, services, experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer and society." Although it is not necessary to memorize this definition, it brings up some useful points: • Behavior occurs either for the individual, or in the context of a group (e.g., friend’s influence what kinds of clothes a person wears) or an organization (people on the job make decisions as to which products the firm should use). • Consumer behavior involves the use and disposal of products as well as the study of how they are purchased. Product use is often of great interest to the marketer, because this may influence how a product is best positioned or how we can encourage increased consumption. Since many environmental problems result from product disposal (e.g., motor oil being sent into sewage systems to save the recycling fee, or garbage
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piling up at landfills) this is also an area of interest. • Consumer behavior involves services and ideas as well as tangible products. • The impact of consumer behavior on society is also of relevance. For example, aggressive marketing of high fat foods, or aggressive marketing of easy credit, may have serious repercussions for the national health and economy. There are four main applications of consumer behavior: • The most obvious is for marketing strategy—i.e., for making better marketing campaigns. For example, by understanding that consumers are more receptive to food advertising when they are hungry, we learn to schedule snack advertisements late in the afternoon. By understanding that new products are usually initially adopted by a few consumers and only spread later, and then only gradually, to the rest of the population, we learn that (1) companies that introduce new products must be well financed so that they can stay afloat until their products become a commercial success and (2) it is important to please initial customers, since they will in turn influence many subsequent customers’ brand choices. • A second application is public policy. In the 1980s, Accutane, a near miracle cure for acne, was introduced. Unfortunately, Accutane resulted in severe birth defects if taken by pregnant women. Although physicians were instructed to warn their female patients of this, a number still became pregnant while taking the drug. To get consumers’ attention, the Federal Drug Administration (FDA) took the step of requiring that very graphic pictures of deformed babies be shown on the medicine containers. • Social marketing involves getting ideas across to consumers rather than selling something. Marty Fishbein, a marketing professor, went on sabbatical to work for the Centers for Disease Control trying to reduce the incidence of transmission of diseases through illegal drug use. The best solution, obviously, would be if we could get illegal drug users to stop. This, however, was deemed to be infeasible. It was also determined that the practice of sharing needles was too ingrained in the drug culture to be stopped. As a result, using knowledge of consumer attitudes, Dr. Fishbein created a campaign that
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encouraged the cleaning of needles in bleach before sharing them, a goal that was believed to be more realistic. • As a final benefit, studying consumer behavior should make us better consumers. Common sense suggests, for example, that if you buy a 64 liquid ounce bottle of laundry detergent, you should pay less per ounce than if you bought two 32 ounce bottles. In practice, however, you often pay a size premium by buying the larger quantity. In other words, in this case, knowing this fact will sensitize you to the need to check the unit cost labels to determine if you are really getting a bargain. Research Methods There are two main categories of research methods. Secondary research uses research that has already been done by someone else. For example, marketers often find information compiled by the U.S. Census very useful. However, in some cases, information specific enough to satisfy a firm’s needs is not publicly available. For example, a firm will have to run its own research to find out whether consumers would prefer that more vanilla taste be added to its soft drink brand. Original research that a firm does for it is known as primary research. There is no one perfect primary research method. Each has strengths and weaknesses, and thus the appropriate method must be selected based on research needs. Surveys are useful for getting a great deal of specific information. Surveys can contain open-ended questions (e.g., "In which city and state were you born? (_") or closed-ended, where the respondent is asked to select answers from a brief list (e.g., "_Male _ Female.") Open ended questions have the advantage that the respondent is not limited to the options listed, and that the respondent is not being influenced by seeing a list of responses. However, open-ended questions are often skipped by respondents, and coding them can be quite a challenge. In general, for surveys to yield meaningful responses, sample sizes of over 100 are usually required because precision is essential. For example, if a market share of twenty percent would result in a loss while thirty percent would be profitable, a confidence interval of 20-35% is too wide to be useful. Surveys come in several different forms. Mail surveys are relatively inexpensive, but response rates are typically quite low—typically from 5-20%. Phone-surveys get somewhat higher response rates, but not many questions can be asked 29
because many answer options have to be repeated and few people are willing to stay on the phone for more than five minutes. Mall intercepts are a convenient way to reach consumers, but respondents may be reluctant to discuss anything sensitive face-to-face with an interviewer. Surveys, as any kind of research, are vulnerable to bias. The wording of a question can influence the outcome a great deal. For example, more people answered no to the question "Should speeches against democracy be allowed?" than answered yes to "Should speeches against democracy be forbidden?" For face-to-face interviews, interviewer bias is a danger, too. Interviewer bias occurs when the interviewer influences the way the respondent answers. For example, unconsciously an interviewer that works for the firm manufacturing the product in question may smile a little when something good is being said about the product and frown a little when something negative is being said. The respondent may catch on and say something more positive than his or her real opinion. Finally, a response bias may occur—if only part of the sample responds to a survey, the respondents’ answers may not be representative of the population. The case of "The Pentagon Declares War on Rush Limbaugh" illustrated that biased surveys are often taken at face value. It was reported in the national media, without question of the validity of the research, that only 3.8% of listeners to the Armed Forces Network wanted to listen to Rush Limbaugh. It turned out, however, that this inference was based on the question "What single thing can we do to improve programming?" Only if a respondent wrote in an answer mentioning Rush Limbaugh were he or she counted as wanting to listen to Rush. Experiments are used when the researcher wants to rule out all but one explanation for a particular observation. Suppose, for example, that we observe that sales of our brand increase when we send out coupons. However, retailers may also give us better shelf space when the coupon is out; thus, we can’t tell if it was the coupon or the shelfplacement that caused sales to increase—the two variables are confounded. In an experiment, we carefully control what varies. In this case, we invite in one hundred people and ask them to shop in a simulated store. Half of the respondents are randomly selected and get a coupon; the others do not. Since the only difference here was whether the subjects got a coupon or not, we can be more confident that differences in brand choice were due to the coupon. Experiments do, however, have a serious drawback in that
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the consumer is removed from his or her natural surroundings. For example, if we pay some consumers to come into a lab and watch TV "as you normally would," these consumers, figuring that they are being paid, may give more attention to the advertisements than they would at home. Focus groups involve getting a group of 6-12 consumers together to discuss product usage. Focus groups are especially useful if we do not have specific questions to ask yet, since we don’t know what consumers’ concerns might be. We start out talking broadly about the need that a product might serve, and only gradually move toward the product itself. For example, a firm considering the marketing of sugar free cookies might start out its group talking about snacks—why people consume them and the benefits they expect. Gradually, we then move toward concerns people have about snacks. Eventually, we address sugar content and concerns that consumers have about that. Only toward the end of the session do we show consumers the actual product we are considering and ask for feedback. We postpone our consideration of the actual product toward the end because we want to be sure that we find out about the consumer’s needs and desires rather than what he or she thinks about the specific product we have on the drawing board right now (that product can be changed, and it can be repositioned). Drawbacks of focus groups include high costs and the fact that generalization toward the entire population is difficult for such small sample sizes. The fact that focus groups involve social interaction also means that participants may say what they think will make they look good rather than what they really believe (the social desirability bias). Personal interviews involve in-depth questioning of an individual about his or her interest in or experiences with a product. The benefit here is that we can get really into depth (when the respondent says something interesting, we can ask him or her to elaborate), but this method of research is costly and can be extremely vulnerable to interviewer bias. Projective techniques are used when a consumer may feel embarrassed to admit to certain opinions, feelings, or preferences. For example, many older executives may not be comfortable admitting to being intimidated by computers. It has been found that in such cases, people will tend to respond more openly about "someone else." Thus, we may ask them to explain reasons why a friend has not yet bought a computer, or to tell a story about a person in a picture
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who is or is not using a product. The main problem with this method is that it is difficult to analyze responses. Observation of consumers is often a powerful tool. Looking at how consumers select products may yield insights into how they make decisions and what they look for. For example, some American manufacturers were concerned about low sales of their products in Japan. Observing Japanese consumers, it was found that many of these Japanese consumers scrutinized packages looking for a name of a major manufacturer—the product specific-brands that are common in the U.S. (e.g., Tide) were not impressive to the Japanese, who wanted a name of a major firm like Mitsubishi or Proctor & Gamble. Observation may help us determine how much time consumers spend comparing prices, or whether nutritional labels are being consulted. Physiological measures are occasionally used to examine consumer response. For example, advertisers may want to measure a consumer’s level of arousal during various parts of an advertisement. Segmentation Segmentation is important in consumer analysis because understanding the consumer will allow us segment the market more meaningfully. Segmentation basically involves dividing consumers into groups such that members of a group (1) are as similar as possible to members of that same group but (2) differ as much as possible from members other segments. This enables us then to "treat" each segment differently—e.g., by: • Providing different products (e.g., some consumers like cola taste, while others prefer lime) • Offering different prices (some consumers will take the cheapest product available, while others will pay for desired features) • Distributing the products where they are likely to be bought by the targeted segment. In order for a segment structure to be useful: • Each segment must have an identity—i.e., it must contain members that can be described in some way (e.g., price sensitive) that behave differently from another segment. • Each segment must engage in systematic behaviors (e.g., a price sensitive segment should consistently prefer the low price item rather than randomly switching between high and low priced brands). • Each segment must offer marketing mix efficiency potential—i.e., it must be profitable to serve. For
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example, a large segment may be profitable even though the competition it attracts tends to keep prices down. A smaller segment may be profitable if, for example, it is price insensitive or can be targeted efficiently (e.g., if its members consistently subscribe to one magazine where all the company’s advertising can be put). Some segments are not cost effective. For example, a small group of consumers would love to have a no-sports news channel (similar to CNN), but we are just too small a group to profitable. There are three "levels" of segmentation. Levels here refer to the tradeoff between the difficulty of implementing a segmentation scheme and the benefits that result. The first level of segmentation involves personal characteristics—e.g., demographics. This is a fairly easy method of segmentation to employ because (1) we have a good idea of who is in each segment and (2) we can easily target these segments. For example, if we want to reach male’s ages fifteen through thirty-five, we can find out which TV shows they watch from firms such as Nielsen (similar services exist for newspapers and magazines). The trouble with this method of segmentation, however, is that there is often not a good correlation between personal characteristics of consumers and what they want to buy. Perhaps males may want more flavors, and be willing to settle for more calories, in a soft drink than women do, but there is a great deal of within group variation. Interestingly, it has been found that people who live in the same area, as operational zed by their zip-codes, tend to share a many consumption relevant characteristics. Firms such as Claritas will sell profiles of zip-code based communities that can be used in aiming messages at particularly receptive residents. For example, the U.S. Army aggressively targets communities dubbed "Guns and Pickups." Psychographics includes a bit more information about the consumer than his or her mere descriptive characteristics. For example, two men could both be plumbers, aged 45, married with two children, and have annual incomes of $45,000. However, one could be couch potato who comes home and eats fast food while watching television. The other could be a health enthusiast who spends his time exercising. Several firms have tried to come up with psychographic profiles of consumers. One is the VALS project from the Stanford Research Institute (SRI). Since most of these programs are proprietary, there is not a lot of published research on their usefulness. However, some
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firms are paying a great deal of money for these firms’ consulting. For example, Merrill Lynch used VALS to change its advertising strategy. The firm had seen a disappointing response to its advertising campaign featuring a herd bulls used to symbolize the bull market. A lot of consumers responded, but not the wealthier ones the firm had hoped for. By making a very simple change—substituting a lone bull for the herd—based on advice from SRI, the wealthier group, which wanted to "stand apart" from the crowd, was attracted. The second level is benefit desired—that is, segmenting on what someone wants rather than who he or she is. Implementing segmentation on benefit desired is more difficult since we have to research for each product category. The benefit, however, is that we can now make product that matches more closely a particular segment’s specific desires, and we can promote, price, and distribute it according to the desires of the segment. This method, then, lends itself extremely well to strong product positioning—we make a product that offers specific benefits, and we aggressively promote this fact to interested consumers. A drawback, however, is some efficiency is lost in marketing communication. While we can look up which television programs male’s ages twenty to thirty watch, we do not have this information for the segment of consumers that prefers scented over unscented hand soap. The third level is segmentation based on behavior. Behavior here refers to a person’s response (or lack of response) to a given treatment. For example, some consumers will switch from their preferred brand to another one that happens to be on sale (the "switchers,") while others will stay with the preferred brand (the "loyals.") The trick, then, is to get as many switchers as possible to switch to your brand (which will take some incentive, such as a cents off coupon) while not giving this incentive to the brand loyals (who would have bought your brand even without the discount). In practice, segmenting on behavior can be very difficult. For example, supermarkets spend a great deal of money to establish the "clubs" that give price sensitive customers who are willing to go through with the required paperwork discounts not available to the "lazier" ones that end up paying full price. Despite this difficulty, the rewards are often great, because we can tailor the kind of deal we give a consumer to the minimum concession needed to get that consumer to buy our (as opposed to a competing) product.
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Direct marketing offers exceptional opportunities for segmentation because marketers can buy lists of consumer names, addresses, and phone-numbers that indicate their specific interests. For example, if we want to target auto enthusiasts, we can buy lists of subscribers to auto magazines and people who have bought auto supplies through the mail. We can also buy lists of people who have particular auto makes registered. No one list will contain all the consumers we want, and in recent years technology has made it possible, through the "merge-purge" process, to combine lists. For example, to reach the above-mentioned auto-enthusiasts, we buy lists of subscribers to several different car magazines, lists of buyers from the Hot Wheels and Wiring catalog, and registrations of Porsche automobiles in several states. We then combine these lists (the merge part). However, there will obviously be some overlap between the different lists— some people subscribe to more than one magazine, for example. The purge process, in turn, identifies and takes out as many duplicates as possible. This is not as simple task as it may sound up front. For example, the address "123 Main Street, Apartment 45" can be written several ways —e.g., 123 Main St., #123, or 123-45 Main Str. Similarly, John J. Jones could also be written as J. J. Jones, or it could be misspelled Jon J.Jonnes. Software thus "standardizes" addresses (e.g., all street addresses would be converted into the format "123 Main St #45" and even uses phonetic analysis to identify a likely alternative spelling of the same name. Response rates for "good" lists—lists that represent a logical reason why consumer would be interested in a product—are typically quite low, hovering around 2-3%. Simply picking a consumer out of the phone-book would yield even lower responses—much less than one percent. Keep in mind that a relevant comparison here is to conventional advertising. The response rate to an ad placed in the newspaper or on television is usually well below one percent (frequently more like one-tenth of one percent). (More than one percent of people who see an ad for Coca Cola on TV will buy the product, but most of these people would have bought Coke anyway, so the marginal response is low). Culture Culture is part of the external influences that impact the consumer. That is, culture represents influences that are imposed on the consumer by other individuals.
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The definition of culture offered in the text is "That complex whole which includes knowledge, belief, art, morals, custom, and any other capabilities and habits acquired by man person as a member of society." From this definition, we make the following observations: • Culture, as a "complex whole," is a system of interdependent components. • Knowledge and beliefs are important parts. In the U.S., we know and believe that a person who is skilled and works hard will get ahead. In other countries, it may be believed that differences in outcome result more from luck. "Chunking," the name for China in Chinese literally means "The Middle Kingdom." The belief among ancient Chinese that they were in the center of the universe greatly influenced their thinking. • Other issues are relevant. Art, for example, may be reflected in the rather arbitrary practice of wearing ties in some countries and wearing turbans in others. Morality may be exhibited in the view in the United States that one should not be naked in public. In Japan, on the other hand, groups of men and women may take steam baths together without perceived as improper. On the other extreme, women in some Arab countries are not even allowed to reveal their faces. Notice, by the way, that what at least some countries view as moral may in fact be highly immoral by the standards of another country. For example, the law that once banned interracial marriages in South Africa was named the "Immorality Act," even though in most civilized countries this law, and any degree of explicit racial prejudice, would itself be considered highly immoral. Culture has several important characteristics: (1) Culture is comprehensive. This means that all parts must fit together in some logical fashion. For example, bowing and a strong desire to avoid the loss of face are unified in their manifestation of the importance of respect. (2) Culture is learned rather than being something we are born with. We will consider the mechanics of learning later in the course. (3) Culture is manifested within boundaries of acceptable behavior. For example, in American society, one cannot show up to class naked, but wearing anything from a suit and tie to shorts and a T-shirt would usually be acceptable. Failure to behave within the prescribed norms may lead to sanctions, ranging from being hauled off by the police for indecent exposure to being laughed at by others 36
for wearing a suit at the beach. (4) Conscious awareness of cultural standards is limited. One American spy was intercepted by the Germans during World War II simply because of the way he held his knife and fork while eating. (5) Cultures fall somewhere on a continuum between static and dynamic depending on how quickly they accept change. For example, American culture has changed a great deal since the 1950s, while the culture of Saudi Arabia has changed much less. It should be noted that there is a tendency of outsiders to a culture to overstate the similarity of members of that culture to each other. In the United States, we are well aware that there is a great deal of heterogeneity within our culture; however, we often underestimate the diversity within other cultures. For example, in Latin America, there are great differences between people who live in coastal and mountainous areas; there are also great differences between social classes. Cultural rules can be categorized into three types. Formal rules carry relatively explicit standards as to how one should behave, and violations often carry severe sanctions. For example, in many countries, two forms of the second pronoun (you) exist, with different levels of deference associated with each (e.g., tú and usted in Spanish and tu and vous in Spanish—German even has three levels!) In Japan, senior executives will enter and leave a meeting room before subordinates in a very deliberate manner. Informal rules, on the other hand, are less explicit and may not carry sanctions for violation. For example, in the U.S., most people would consider eating dinner at 10:00 p.m. weird, while this is perfectly normal in parts of Latin American and Southern Europe. Finally, technical cultural rules involve implicit standards as to what constitutes a good product. For example, in India, a movie must have at least seven songs to be successful; in the U.S., preempting the soundtrack for that amount of time would not be desirable. Language is an important element of culture. It should be realized that regional differences may be subtle. For example, one word may mean one thing in one Latin American country, but something off-color in another. It should also be kept in mind that much information is carried in nonverbal communication. In some cultures, we nod to signify "yes" and shake our heads to signify "no;" in other cultures, the practice is reversed. Different perspectives exist in different cultures on several issues; e.g.:
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Monochromic cultures tend to value precise scheduling and doing one thing at a time; in polychromic cultures, in contrast, promptness is valued less, and multiple tasks may be performed simultaneously. (See text for more detail). • Space is perceived differently. Americans will feel crowded where people from more densely populated countries will be comfortable. • Symbols differ in meaning. For example, while white symbols purity in the U.S., it is a symbol of death in China. Colors that are considered masculine and feminine also differ by culture. • Americans have a lot of quite shallow friends toward whom little obligation is felt; people in European and some Asian cultures have fewer, but more significant friends. For example, one Ph.D. student from India, with limited income, felt obligated to try buying an airline ticket for a friend to go back to India when a relative had died. • In the U.S. and much of Europe, agreements are typically rather precise and contractual in nature; in Asia, there is a greater tendency to settle issues as they come up. As a result, building a relationship of trust is more important in Asia, since you must be able to count on your partner being reasonable. • In terms of etiquette, some cultures have more rigid procedures than others. In some countries, for example, there are explicit standards as to how a gift should be presented. In some cultures, gifts should be presented in private to avoid embarrassing the recipient; in others, the gift should be made publicly to ensure that no perception of secret bribery could be made. The United States has undergone some changes in its predominant culture over the last several decades. Again, however, it should be kept in mind that there are great variations within the culture. For example, on the average, Americans have become less materialistic and have sought more leisure; on the other hand, the percentage of people working extremely long hours has also increased. The text discusses changes in values in more detail. Significant changes have occurred in gender roles in American society. One of the reasons for this is that more women work outside the home than before. However, women still perform a disproportionate amount of housework, and men who participate in this activity tend to do so
•
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reluctantly. In general, commercials tend to lag somewhat behind reality—e.g., few men are seen doing housework, and few women are seen as buyers and decision makers on automobile purchases. Subculture refers to a culture within a culture. For example, African Americans are, as indicated in the group name, Americans; however, a special influence of the African American community is often also present. For example, although this does not apply to everyone, African Americans tend to worship in churches that have predominantly African American membership, and church is often a significant part of family life. Different perspectives on the diversity in U.S. culture exist. The "melting pot" metaphor suggests that immigrants gradually assimilate after they arrive. Therefore, in the long run, there will be few differences between ethnic groups and instead, one mainstream culture that incorporates elements from each will result. The "salad bowl" metaphor, in contrast, suggests that although ethnic groups will interact as a whole (through the whole mix of salad) and contains some elements of the whole (through the dressing); each group will maintain its own significant traits (each vegetable is different from the others). The "melting pot" view suggests that one should run integrated promotions aimed at all groups; the "salad bowl" approach suggests that each group should be approached separately. Subculture is often categorized on the basis of demographics. Thus, for example, we have the "teenage" subculture and the "Cuban-American" subculture. While part of the overall culture, these groups often have distinguishing characteristics. An important consequence is that a person who is part of two subcultures may experience some conflict. For example, teenage Native Americans experience a conflict between the mainstream teenage culture and traditional Indian ways. Values are often greatly associated with age groups because people within an age-group have shared experiences. For example, it is believed that people old enough to have experienced the American Depression are more frugal because of that experience. Regional influence, both in the United States and other areas, is significant. Many food manufacturers offer different product variations for different regions. Joel Garreau, in his book The Nine Nations of North America, proposed nine distinct regional subcultures that cut across state lines. Although significant regional differences
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undoubtedly exist, research has failed to support Garreau’s specific characterizations Demographics and Social Stratification Demographics are clearly tied to subculture and segmentation. Here, however, we shift our focus from analyzing specific subcultures to trying to understand the implications for an entire population of its makeup. Several issues are useful in the structure of a population. For example, in some rapidly growing countries, a large percentage of the population is concentrated among younger generations. In countries such as Korea, China, and Taiwan, this has helped stimulate economic growth, while in certain poorer countries; it puts pressures on society to accommodate an increasing number of people on a fixed amount of land. Other countries such as Japan and Germany, in contrast, experience problems with a "graying" society, where fewer non-retired people are around to support an increasing number of aging seniors. Because Germany actually hovers around negative population growth, the German government has issued large financial incentives, in the forms of subsidies, for women who have children. In the United States, population growth occurs both through births and immigration. Since the number of births is not growing, problems occur for firms that are dependent on population growth (e.g., Gerber, a manufacturer of baby food). Social class is a somewhat nebulous subject that involves stratifying people into groups with various amounts of prestige, power, and privilege. In part because of the pioneering influence in American history, status differentiations here are quite vague. We cannot, for example, associate social class with income, because a traditionally low status job as a plumber may today come with as much income as a traditionally more prestigious job as a school teacher. In certain other cultures, however, stratification is more clear-cut. Although the caste system in India is now illegal, it still maintains a tremendous influence on that society. While some mobility exists today, social class awareness is also somewhat greater in Britain, where social status is in part reinforced by the class connotations of the accent with which one speaks. The text speaks of several indices that have been used to "compute" social class in the United States, weighing factors such as income, the nature of one’s employment, and level of education. Taken too literally, these indices are not very meaningful; more broadly speaking, they illustrate the reality that social status is a complex variable that
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is determined, not always with consensus among observers, by several different variables. Family Decision Making
The Family Life Cycle. Individuals and families tend to go through a "life cycle." The simple life cycle goes from Child/teenager ---> young single ---> young couple* ---> full nest ---> Empty nest ---> widow(er).
*
For purposes of this discussion, a "couple" may either be married or merely involve living together. The breakup of a non-marital relationship involving cohabitation is similarly considered equivalent to a divorce. In real life, this situation is, of course, a bit more complicated. For example, many couples undergo divorce. Then we have the scenario: Full nest ---> single parent This situation can result either from divorce or from the death of one parent. Divorce usually entails a significant change in the relative wealth of spouses. In some cases, the non-custodial parent (usually the father) will not pay the required child support, and even if he or she does, that still may not leave the custodial parent and children as well off as they were during the marriage. On the other hand, in some cases, some non-custodial parents will be called on to pay a large part of their income in child support. This is particularly a problem when the noncustodial parent remarries and has additional children in the second (or subsequent marriages). In any event, divorce often results in a large demand for: • low cost furniture and household items • time-saving goods and services Divorced parents frequently remarry, or become involved in other non-marital relationships; thus, we may see Full nest ---> single parent ---> blended family Another variation involves Young single ---> single parent Here, the single parent who assumes responsibility for one or more children may not form a relationship with the other parent of the child. Generally, there are two main themes in the Family Life Cycle, subject to significant exceptions: As a person gets older, he or she tends to advance in his or her career and tends to get greater income (exceptions: maternity leave, divorce, retirement). Unfortunately, obligations also tend to increase with time (at least until one’s mortgage has been paid off). Children and paying for one’s house are two of the greatest expenses.
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Note that although a single person may have a lower income than a married couple, the single may be able to buy more discretionary items. Family Decision Making: Individual members of families often serve different roles in decisions that ultimately draw on shared family resources. Some individuals are information gatherers/holders, who seek out information about products of relevance. These individuals often have a great deal of power because they may selectively pass on information that favors their chosen alternatives. Influencers do not ultimately have the power decide between alternatives, but they may make their wishes known by asking for specific products or causing embarrassing situations if their demands are not met. The decision maker(s) have the power to determine issues such as: • whether to buy; • Which product to buy (pick-up or passenger car?); • which brand to buy; • where to buy it; and • When to buy. Note, however, that the role of the decision maker is separate from that of the purchaser. From the point of view of the marketer, this introduces some problems since the purchaser can be targeted by point-of-purchase (POP) marketing efforts that cannot be aimed at the decision maker. Also note that the distinction between the purchaser and decision maker may be somewhat blurred: • the decision maker may specify what kind of product to buy, but not which brand; • the purchaser may have to make a substitution if the desired brand is not in stock; • The purchaser may disregard instructions (by error or deliberately). It should be noted that family decisions are often subject to a great deal of conflict. The reality is that few families are wealthy enough to avoid a strong tension between demands on the family’s resources. Conflicting pressures are especially likely in families with children and/or when only one spouse works outside the home. Note that many decisions inherently come down to values, and that there is frequently no "objective" way to arbitrate differences. One spouse may believe that it is important to save for the children’s future; the other may value spending now (on private schools and computer equipment) to help prepare the children for the future. Who is right? There is no clear answer here. The situation becomes even 42
more complex when more parties—such as children or other relatives—are involved. Some family members may resort to various strategies to get their way. One is bargaining—one member will give up something in return for someone else. For example, the wife says that her husband can take an expensive course in gourmet cooking if she can buy a new pickup truck. Alternatively, a child may promise to walk it every day if he or she can have a hippopotamus. Another strategy is reasoning—trying to get the other person(s) to accept one’s view through logical argumentation. Note that even when this is done with a sincere intent, its potential is limited by legitimate differences in values illustrated above. Also note that individuals may simply try to "wear down" the other party by endless talking in the guise of reasoning (this is a case of negative reinforcement as we will see subsequently). Various manipulative strategies may also be used. One is impression management, where one tries to make one’s side look good (e.g., argue that a new TV will help the children see educational TV when it is really mostly wanted to see sports programming, or argue that all "decent families make a contribution to the church"). Authority involves asserting one’s "right" to make a decision (as the "man of the house," the mother of the children, or the one who makes the most money). Emotion involves making an emotional display to get one’s way (e.g., a man cries if his wife will not let him buy a new rap album). Group Influences Humans are inherently social animals, and individuals greatly influence each other. A useful framework of analysis of group influence on the individual is the so called reference group—the term comes about because an individual uses a relevant group as a standard of reference against which oneself is compared. Reference groups come in several different forms. The inspirational reference group refers to those others against whom one would like to compare oneself. For example, many firms use athletes as spokespeople, and these represent what many people would ideally like to be. Associative reference groups include people who more realistically represent the individuals’ current equals or near-equals—e.g., coworkers, neighbors, or members of churches, clubs, and organizations. Finally, the dissociative reference group includes people that the individual would not like to be like. For example, the store literally named The Gap came about because many
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younger people wanted to actively dissociate from parents and other older and "uncool" people. The Quality Paperback Book specifically suggests in its advertising that its members are "a breed apart" from conventional readers of popular books. Reference groups come with various degrees of influence. Primary reference groups come with a great deal of influence—e.g., members of a fraternity/sorority. Secondary reference groups tend to have somewhat less influence—e.g., members of a boating club that one encounter only during week-ends are likely to have their influence limited to consumption during that time period. Another typology divides reference groups into the informational kind (influence is based almost entirely on members’ knowledge), normative (members influence what is perceived to be "right," "proper," "responsible," or "cool"), or identification. The difference between the latter two categories involves the individual’s motivation for compliance. In case of the normative reference group, the individual tends to comply largely for utilitarian reasons—dressing according to company standards is likely to help your career, but there is no real motivation to dress that way outside the job. In contrast, people comply with identification groups’ standards for the sake of belonging—for example, a member of a religious group may wear a symbol even outside the house of worship because the religion is a part of the person’s identity. Diffusion of Innovation The diffusion of innovation refers to the tendency of new products, practices, or ideas to spread among people. Usually, when new products or ideas come about, they are only adopted by a small group of people initially; later, many innovations spread to other people. The bell shaped curve frequently illustrates the rate of adoption of a new product. Cumulative adoptions are reflected by the S-shaped curve. The saturation point is the maximum proportion of consumers likely to adopt a product. In the case of refrigerators in the U.S., the saturation level is nearly one hundred percent of households; it well below that for video games that, even when spread out to a large part of the population, will be of interest to far from everyone. Several specific product categories have case histories that illustrate important issues in adoption. Until some time in the 1800s, few physicians bothered to scrub prior to surgery, even though new scientific theories predicted that small microbes not visible to the naked eye could cause infection. Younger and more progressive physicians
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began scrubbing early on, but they lacked the stature to make their older colleagues follow. ATM cards spread relatively quickly. Since the cards were used in public, others who did not yet hold the cards could see how convenient they were. Although some people were concerned about security, the convenience factors seemed to be a decisive factor in the "tug-of-war" for and against adoption. The case of credit cards was a bit more complicated and involved a "chicken-and-egg" paradox. Accepting credit cards was not a particularly attractive option for retailers until they were carried by a large enough number of consumers. Consumers, in contrast, were not particularly interested in cards that were not accepted by a large number of retailers. Thus, it was necessary to "jump start" the process, signing up large corporate accounts, under favorable terms, early in the cycle, after which the cards became worthwhile for retailers to accept. Rap music initially spread quickly among urban youths in large part because of the low costs of recording. Later, rap music became popular among a very different segment, suburban youths, because of its apparently authentic depiction of an exotic urban lifestyle. Hybrid corn was adopted only slowly among many farmers. Although hybrid corn provided yields of about 20% more than traditional corn, many farmers had difficulty believing that this smaller seed could provide a superior harvest. They were usually reluctant to try it because a failed harvest could have serious economic consequences, including a possible loss of the farm. Agricultural extension agents then sought out the most progressive farmers to try hybrid corn, also aiming for farmers who were most respected and most likely to be imitated by others. Few farmers switched to hybrid corn outright from year to year. Instead, many started out with a fraction of their land, and gradually switched to 100% hybrid corn when this innovation had proven itself useful. Several forces often work against innovation. One is risk, which can be either social or financial. For example, early buyers of the CD player risked that few CDs would be recorded before the CD player went the way of the 8 track player. Another risk is being perceived by others as being weird for trying a "fringe" product or idea. For example, Barbara Mandrell sings the song "I Was Country When Country Wasn’t Cool." Other sources of resistance include the initial effort needed to learn to use new products (e.g., it takes time to learn to meditate or to learn how to use a
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computer) and concerns about compatibility with the existing culture or technology. For example, birth control is incompatible with strong religious influences in countries heavily influenced by Islam or Catholicism, and a computer database is incompatible with a large, established card file. Innovations come in different degrees. A continuous innovation includes slight improvements over time. Very little usually changes from year to year in automobiles and even automobiles of the 1990s are driven much the same way that automobiles of the 1950 were driven. A dynamically continuous innovation involves some change in technology, although the product is used much the same way that its predecessors were used—e.g., jet vs. propeller aircraft. A discontinuous innovation involves a product that fundamentally changes the way that things are done—e.g., the fax and photocopiers. In general, discontinuous innovations are more difficult to market since greater changes are required in the way things are done, but the rewards are also often significant. Several factors influence the speed with which an innovation spreads. One issue is relative advantage (i.e., the ratio of risk or cost to benefits). Some products, such as cellular phones, fax machines, and ATM cards, have a strong relative advantage. Other products, such as automobile satellite navigation systems, entail some advantages, but the cost ratio is high. Lower priced products often spread more quickly, and the extent to which the product is trial able (farmers did not have to plant all their land with hybrid corn at once, while one usually has to buy a cellular phone to try it out) influence the speed of diffusion. Finally, the extent of switching difficulties influences speed—many offices were slow to adopt computers because users had to learn how to use them. Some cultures tend to adopt new products more quickly than others, based on several factors: • Modernity: The extent to which the culture is receptive to new things. In some countries, such as Britain and Saudi Arabia, tradition is greatly valued— thus, new products often don’t fare too well. The United States, in contrast, tends to value progress. • Homophily: The more similar to each other that members of a culture are, the more likely an innovation is to spread—people are more likely to imitate similar than different models. The two most rapidly adopting countries in the World are the U.S. and Japan. While
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the U.S. interestingly scores very low, Japan scores high. • Physical distance: The greater the distance between people, the less likely innovation is to spread. • Opinion leadership: The more opinion leaders are valued and respected, the more likely an innovation is to spread. The style of opinion leaders moderates this influence, however. In less innovative countries, opinion leaders tend to be more conservative, i.e., to reflect the local norms of resistance. It should be noted that innovation is not always an unqualifiedly good thing. Some innovations, such as infant formula adopted in developing countries, may do more harm than good. Individuals may also become dependent on the innovations. For example, travel agents who get used to booking online may be unable to process manual reservations. Sometimes innovations are disadopted. For example, many individuals disadopted cellular phones if they find out that they don’t end up using them much.
Perception
Background.Our perception is an approximation of reality. Our brain attempts to make sense out of the stimuli to which we are exposed. This works well, for example, when we "see" a friend three hundred feet away at his or her correct height; however, our perception is sometimes "off"— for example, certain shapes of ice cream containers look like they contain more than rectangular ones with the same volume. Factors in perception.Several sequential factors influence our perception. Exposure involves the extent to which we encounter a stimulus. For example, we are exposed to numerous commercial messages while driving on the freeway: bill boards, radio advertisements, bumper-stickers on cars, and signs and banners placed at shopping malls that we pass. Most of this exposure is random—we don’t plan to seek it out. However, if we are shopping for a car, we may deliberately seek out advertisements and "tune in" when dealer advertisements come on the radio. Exposure is not enough to significantly impact the individual—at least not based on a single trial (certain advertisements, or commercial exposures such as the "Swoosh" logo, are based on extensive repetition rather than much conscious attention). In order for stimuli to be consciously processed, attention is needed. Attention is actually a matter of degree—our attention may be quite high when we read directions for getting an income tax refund, but low when commercials come on during a television 47
program. Note, however, that even when attention is low, it may be instantly escalated—for example, if an advertisement for a product in which we are interested comes on. Interpretation involves making sense out of the stimulus. For example, when we see a red can, we may categorize it as a Coke. Weber’s Law suggests that consumers’ ability to detect changes in stimulus intensity appear to be strongly related to the intensity of that stimulus to begin with. That is, if you hold an object weighing one pound in your hand, you are likely to notice it when that weight is doubled to two pounds. However, if you are holding twenty pounds, you are unlikely to detect the addition of one pound—a change that you easily detected when the initial weight was one pound. You may be able to eliminate one ounce from a ten ounce container, but you cannot as easily get away with reducing a three ounce container to two (instead, you must accomplish that gradually—e.g., 3.0 --> 2.7 --> 2.5 --> 2.3 --> 2.15 –> 2.00). Several factors influence the extent to which stimuli will be noticed. One obvious issue is relevance. Consumers, when they have a choice, are also more likely to attend to pleasant stimuli (but when the consumer can’t escape, very unpleasant stimuli are also likely to get attention—thus, many very irritating advertisements are remarkably effective). Surprising stimuli are likely to get more attention— survival instinct requires us to give more attention to something unknown that may require action. A greater contrast (difference between the stimulus and its surroundings) as well as greater prominence (e.g., greater size, center placement) also tend to increase likelihood of processing.
Learning and Memory
Background. Learning involves "a change in the content or organization of long term memory and/or behavior." The first part of the definition focuses on what we know (and can thus put to use) while the second focuses on concrete behavior. For example, many people will avoid foods that they consumed shortly before becoming ill. Learning is not all knowledge based. For example, we may experience the sales people in one store being nicer to us than those in the other. We thus may develop a preference for the one store over the other; however, if pressed, we may not be able to give a conscious explanation as to the reason for our preference.
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Much early work on learning was actually done on rats and other animals (and much of this research was unjustifiably cruel, but that is another matter). Classical conditioning. Pavlov’s early work on dogs was known as classical conditioning. Pavlov discovered that when dogs were fed meat powder they salivated. Pavlov then discovered that if a bell were rung before the dogs were fed, the dogs would begin salivating in anticipation of being fed (this was efficient, since they could then begin digesting the meat powder immediately). Pavlov then found that after the meat had been "paired" with the meat powder enough times, Pavlov could ring the bell without feeding the dogs and they would still salivate. In the jargon of classical conditioning, the meat powder was an unconditioned stimulus (US) and the salivation was, when preceded by the meat powder, an unconditioned response (UR). That is, it is a biologically "hard-wired" response to salivate when you are fed. By pairing the bell with the unconditioned stimulus, the bell became a conditioned stimulus (CS) and salivation in response to the bell (with no meat powder) became a conditioned response (CR). Many modern day advertisers use classical conditioning in some way. Consider this sequence: Beautiful woman (US) ---> emotional arousal (UR) in males Beautiful woman (US) + automobile (not yet CS) ---> arousal (US) [repeated many times] Automobile (CS) ---> arousal (CR) (For the exam, you should be able to diagram an example given). Operant conditioning. Instrumental, or operant, conditioning, involves a different series of events, and this what we usually think of as learning. The general pattern is: Behavior ---> consequences ---> behavior is more or less likely to be repeated There are three major forms of operant learning. In positive reinforcement, an individual does something and is rewarded. He or she is then more likely to repeat the behavior. For example, you eat a candy bar (behavior), it tastes good (consequence), and you are thus more likely to eat a similar candy bar in the future (behavioral change). Punishment is the opposite. You eat what looks like a piece of candy (behavior), only to discover that it is a piece of soap with a foul taste (consequences), and subsequently you are less likely to eat anything that looks remotely like that thing ever again (changed behavior).
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It should be noted that negative reinforcement is very different from punishment. An example of negative reinforcement is an obnoxious sales person who calls you up on the phone, pressuring you into buying something you don’t want to do (aversive stimulus). You eventually agree to buy it (changed behavior), and the sales person leaves you alone (the aversive stimulus is terminated as a result of consequences of your behavior). Please note the examples of reinforcement, punishment, and negative reinforcement on the notes handout. In general, marketers usually have relatively little power to use punishment or negative reinforcement. However, parking meters are often used to discourage consumers from taking up valuable parking space, and manufacturers may void warranties if the consumers take their product to nonauthorized repair facilities. Several factors influence the effectiveness of operant learning. In general, the closer in time the consequences are to the behavior, the more effective the learning. That is, electric utilities would be more likely to influence consumers to use less electricity at peak hours if the consumers actually had to pay when they used electricity (e.g., through a coin-slot) rather than at the end of the month. Learning is also more likely to occur when the individual can understand a relationship between behavior and consequences (but learning may occur even if this relationship is not understood consciously). Another issue is schedules of reinforcement and extinction. Extinction occurs when behavior stops having consequences and the behavior then eventually stops occurring. For example, if a passenger learns that yelling at check-in personnel no longer gets her upgraded to first class, she will probably stop that behavior. Sometimes, an individual is rewarded every time a behavior is performed (e.g., a consumer gets a soft drink every time coins are put into a vending machine). However, it is not necessary to reward a behavior every time for learning to occur. Even if a behavior is only rewarded some of the time, the behavior may be learned. Several different schedules of reinforcement are possible: • Fixed interval: The consumer is given a free dessert on every Tuesday when he or she eats in a particular restaurant. • Fixed ratio: Behavior is rewarded (or punished) on every nth occasion that it is performed. (E.g., every tenth time a frequent shopper card is presented, a free product is provided). 50
Variable ratio: Every time an action is performed, there is a certain percentage chance that a reward will be given. For example, every time the consumer enters the store, he or she is given a lottery ticket. With each ticket, there is a 20% chance of getting a free hamburger. The consumer may get a free hamburger twice in a row, or he or she may go ten times without getting a hamburger even once. Variable ratio reinforcement is least vulnerable to extinction. Sometimes, shaping may be necessary to teach the consumer the desired behavior. That is, it may be impossible to teach the consumer to directly perform the desired behavior. For example, a consumer may first get a good product for free (the product itself, if good, is a reward), then buy it with a large cents off coupon, and finally buy it at full price. Thus, we reinforce approximations of the desired behavior. Rather than introducing Coca Cola directly in Indonesia, fruit flavored soft drinks were first introduced, since these were more similar to beverages already consumed. Vicarious learning. The consumer does not always need to go through the learning process him or herself—sometimes it is possible to learn from observing the consequences of others. For example, stores may make a big deal out of prosecuting shop lifters not so much because they want to stop that behavior in the caught, but rather to deter the behavior in others. Similarly, viewers may empathize with characters in advertisements that experience (usually positive) results from using a product. The Head ‘n’ Shoulders advertisement, where a poor man is rejected by women until he treats his dandruff with an effective cure, is a good example of vicarious learning. Memory. There are two kinds of memory. When you see an ad on TV for a mail order product you might like to buy, you only keep the phone number in memory until you have dialed it. This is known as short term memory. In order for something to enter into long term memory, which is more permanent, you must usually "rehearse" it several times. For example, when you move and get a new phone number, you will probably repeat it to yourself many times. Alternatively, you get to learn your driver’s license or social security numbers with time, not because you deliberately memorize them, but instead because you encounter them numerous times as you look them up. Special issues in memory are so called "scripts," or procedures we remember for doing things. Scripts involve a 51
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series of steps for doing various things (e.g., how to send a package). In general, it is useful for firms to have their brand names incorporated into scripts (e.g., to have the consumer reflexively ask the pharmacist for Bayer rather than an unspecified brand of aspirin).
Motivation, Personality, and Emotion
Perspectives on Consumer Behavior and Motivation. We considered several perspectives on behavior as a way to understand what motivates the consumer. Each of these perspectives suggests different things as to what the marketer should do and what can (and cannot) be controlled. Note that each perspective tends to contain a "grain" of truth and that one should not be too dogmatic in emphasizing one over the others. • The Hard Core Behavioral perspective is based on learning theories such as operant and classical conditioning. These theories suggest that consumers must learn from their own experiences--i.e., in order to avoid getting sick from overeating, a consumer must experience the stomach and other ailments resulting from gluttony rather than merely observing other people who overeat and get sick. This suggests, then, that it is important to reward good behavior (e.g., buying our brand) to the extent possible. Money spent on advertising is seen as less useful. Hard core behaviorists tend to look at observable behavior (e.g., buying our brand or buying another) rather than trying to find out what is going on inside the heads of consumers--i.e., hard core behaviorists do not like to mess with "mushy" things like attitudes. • The Social Learning Perspective, in contrast, allows for vicarious learning--i.e., learning obtained by watching others getting good or bad consequences for behavior. The models that may be observed and imitated include peers and family members as well as relevant others that may be observed in advertising. From our study of social influences, we know that certain people are more likely to be imitated than others-e.g., those that are more similar to ourselves based on relevant factors such as age, social status, or ethnic group. Consider, for example, the poor man who is rejected by women because of his dandruff until he gets "with it" and uses Head ‘n’ Shoulders shampoo. Other dandruff sufferers are likely to learn from the model’s experience. Generally, observations are made of overt behavior, but some room is made for individual reasoning in learning from others. This 52
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perspective is clearly more realistic than that of the "Hard Core" view, but it should be noted that the strength of learning tends to be greater for that gained from own experience. The Cognitive approach emphasizes consumer thinking rather than mere behavior--we will encounter this to a great extent when we study decision making and attitudes. Here, the emphasis is on how people reason themselves to the consequences of their behavior. Note that it is often somewhat more difficult to attempt to "get into" a consumer’s head than it is to merely observe his or her behavior, and what we "observe" is somewhat more subjective. Note also that a wealth of different factors influence people’s thinking, and some expectations and assumptions that we hold tend to be culturally influenced (e.g., an American assumes that hard work will tend to lead to a promotion, while members of certain other cultures believe that personal relationships, and perhaps even luck, tend to be more important). The Biological approach suggests that most behavior is determined by genetics or other biological bases. By this perspective, it is suggested that consumers eat the foods they eat in large part because the body craves these foods. Note that although craving for fatty foods seems quite maladaptive in today’s society, it could have been very adaptive earlier in human history where food was scarce and obtaining as many calories as possible helped ensure survival. Clearly, this perspective is very misleading when one takes it as the only explanation of behavior--for example, people in different cultures learn to enjoy various kinds of foods. The main implication of biological determinism is that the marketer must adapt--for example, food advertisements are more likely to be effective when people are hungry, and thus they might better be run in the late afternoon rather than in the late morning. The Rational Expectations perspective is based on an economic way of looking at the World. Economists assume that people think rationally and have perfect information, even though they know very well that these assumptions are often unrealistic. However, despite the unrealistic assumptions made, economists often make relatively accurate predictions of human behavior. (The Cognitive perspective, however, is able
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to identify certain significant exceptions to rational behavior, however). • The Psychoanalytic perspective is based on the work of historical psychologists such as Sigmund Freud who suggest that (1) much behavior has a biological basis which is (2) often sexual in nature, and (3) that early experiences in childhood will have a profound, but unconscious effect on later life--e.g., people who are rejected in an early, "oral" phase of development may become "oral retentive" and end up as wine connoisseurs later in life. Because of societal injunctions against explicit discussion of sexuality in Western society at Freud’s time [late 1800s to mid 1900s], many objects were thought to take on seemingly unrelated symbolic meanings--e.g., a tie might become a symbol of a male reproductive organ. Although modern psychologists certainly recognize that early experiences may influence later psychological well being, the psychoanalytic view has largely been discredited today as being much too centered on the issue of sex. However, this perspective enjoys a great deal of popularity among many advertising executives. It should be noted that Freudian psychology tends to violate the cherished scientific ideal of parsimony, where a scientist is expected to propose the simplest theory that will account for observed phenomena. Maslow’s Hierarchy of Needs. The late Abraham Maslow suggested the intuitively appealing notion that humans must satisfy the most basic objectives before they can move onto "higher level" ones. Thus, an individual must satisfy physiological needs (such as food and liquid) before he or she will be able to expend energy on less fundamental objectives such as safety. Only when basic objectives have been met will a person move on to seek such objectives as love and belonging, and only a small minority of people make it as far as seeking self-actualization. Maslow’s Hierarchy is useful in understanding different needs of consumers across the World. However, one must be careful not to take it too literally, since people may occasionally "swing" between needs. For example, a homeless person who currently does not have shelter may seek that out even though he or she is hungry. Properties of motivation. Motivation is described through several properties: • Motivation is composed of energy and direction. A person may or may not have enough motivation to engage in a given activity. For example, a person may be 54
motivated enough to go and shop for food, but not enough to engage in a comprehensive exercise program. • Motives may be overt, hidden, and multiple. Some motivations are publicly expressed (e.g., the desire to buy an energy efficient house), while others (e.g., the desire to look wealthy by buying a fancy car) are not. Individuals may also hold multiple motivations (e.g., buy a car and save money for retirement) which may conflict. • Many motivations are driven by the desire for tension reduction (e.g., eliminate thirst or hunger). • Motivations can be driven by both internal and external factors. That is, a person may want a painting either because he or she likes it (internal motivation) or because this will give her status among the artistic elite (external). • Motivations may have either a positive or negative valence--people may either be motivated to achieve something (e.g., get a promotion at work) or avoid something (e.g., being hospitalized without having adequate insurance). • Consumers are motivated to achieve goals. Achieving these goals may require sustained activity over time (e.g., exercising every day for months or years) as opposed to just taking some action once. • Consumers maintain a balance between the desires for stability and variety. Most consumers want some variety (e.g., they do not want to eat the same meal every day), but also want a certain stability (they do not want to try an entirely new food every day). • Motivation reflects individual differences. Different consumers are motivated to achieve different things, and it may be difficult to infer motivations from looking at actual behavior without understanding these differences in desired outcomes. The reality that consumers are frequently motivated by multiple motives suggests a possibility that motives may conflict. Three main types of conflict exist: • Approach-avoidance. One alternative has both positive consequences (that one wishes to seek out) and negative consequences (that one wants to avoid). For example, eating a large banana split is an enjoyable experience ("approach"), but is contains a lot of calories ("avoidance") and may make one feel ill later (another avoidance).
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Approach-approach. A consumer wants to do two incompatible things at the same time. A classic example is "Rainman’s" desire both to stay with his brother and stay at the institution. Another example is a consumer who only has one week’s vacation but wants equally to go to Hawaii and Greenland, but has time and money only for one of the two. • Avoidance-avoidance. A consumer does not want to go for either of two alternatives, but must choose the lesser of two evils. For example, the consumer does not want to pay for car insurance, but does not want to get into an accident or get caught by the police without it. A "work ethic disadvantaged" student does not want to study, but does not want to fail his or her courses, either. The Means-End chain. Consumers often buy products not because of their attributes but rather because of the ultimate benefits that these attributes provide, in turn leading to the satisfaction of ultimate values. For example, a consumer may not be particularly interested in the chemistry of plastic roses, but might reason as follows: Highly reliable synthetic content of roses ---> Roses will stay in original condition for a long time ---> Significant other will appreciate the roses longer ---> Significant other will continue to love one ---> Self esteem. The important thing in a means-end chain is to start with an attribute, a concrete characteristic of the product, and then logically progress to a series of consequences (which tend to become progressively more abstract) that end with a value being satisfied. Thus, each chain must start with an attribute and end with a value. An important implication of means-end chains is that it is usually most effective in advertising to focus on higher level items. For example, in the flower example above, an individual giving the flowers to the significant other might better be portrayed than the flowers alone. Personality and consumer behavior. Traditional research in marketing has not been particularly successful in finding a link between personality and consumer behavior. Part of the problem here is that much of the theory has been developed by clinical psychologists who have tended to work with maladjusted people. Not surprisingly, research that sought to predict, based on standard personality inventories, which kinds of consumers would buy Chevrolets as opposed to Fords was not successful.
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Emotion. Emotion impacts marketing efforts in several ways. One purpose is to get attention to a stimulus (since emotionally charged individuals tend to be less predictable than calmer ones, there has been an evolutionary advantage in paying attention to emotion). Secondly, emotion influences information processing. In general, happy people tend to scrutinize arguments given (e.g., purported benefits of using a product) somewhat less, since they do not want to lose their happy moods by doing too much thinking. In general, happy ads are somewhat better liked, and may be better remembered. Empathy may also increase liking for the ad and the sponsoring product.
Attitudes
Definition. Consumer attitudes are a composite of a consumer’s (1) beliefs about, (2) feelings about, (3) and behavioral intentions toward some object--within the context of marketing, usually a brand or retail store. These components are viewed together since they are highly interdependent and together represent forces that influence how the consumer will react to the object. Beliefs. The first component is beliefs. A consumer may hold both positive beliefs toward an object (e.g., coffee tastes good) as well as negative beliefs (e.g., coffee is easily spilled and stains papers). In addition, some beliefs may be neutral (coffee is black), and some may be differ in valance depending on the person or the situation (e.g., coffee is hot and stimulates--good on a cold morning, but not well on a hot summer evening when one wants to sleep). Note also that the beliefs that consumers hold need not be accurate (e.g., that pork contains little fat), and some beliefs may, upon closer examination, be contradictory (e.g., that a historical figure was a good person but also owned slaves). Since a consumer holds many beliefs, it may often be difficult to get down to a "bottom line" overall belief about whether an object such as McDonald’s is overall good or bad. The Multiattribute (also sometimes known as the Fishbein) Model attempts to summarize overall attitudes into one score using the equation: That is, for each belief, we take the weight or importance (Wi) of that belief and multiply it with its evaluation (Xib). For example, a consumer believes that the taste of a beverage is moderately important, or a 4 on a scale from 1 to 7. He or she believes that coffee tastes very good, or a 6 on a scale from 1 to 7. Thus, the product here is 4(6) 57
=24. On the other hand, he or she believes that the potential of a drink to stain is extremely important (7), and coffee fares moderately badly, at a score -4, on this attribute (since this is a negative belief, we now take negative numbers from -1 to -7, with -7 being worst). Thus, we now have 7(-4) =-28. Had these two beliefs been the only beliefs the consumer held, his or her total, or aggregated, attitude would have been 24+ (-28) =-4. In practice, of course, consumers tend to have many more beliefs that must each be added to obtain an accurate measurement. Affect. Consumers also hold certain feelings toward brands or other objects. Sometimes these feelings are based on the beliefs (e.g., a person feels nauseated when thinking about a hamburger because of the tremendous amount of fat it contains), but there may also be feelings which are relatively independent of beliefs. For example, an extreme environmentalist may believe that cutting down trees is morally wrong, but may have positive affect toward Christmas trees because he or she unconsciously associates these trees with the experience that he or she had at Christmas as a child. Behavioral intention. The behavioral intention is what the consumer plans to do with respect to the object (e.g., buy or not buy the brand). As with affect, this is sometimes a logical consequence of beliefs (or affect), but may sometimes reflect other circumstances--e.g., although a consumer does not really like a restaurant, he or she will go there because it is a hangout for his or her friends. Attitude-Behavior Consistency. Consumers often do not behave consistently with their attitudes for several reasons: • Ability. He or she may be unable to do so. Although junior high school student likes pick-up trucks and would like to buy one, she may lack a driver’s license. • Competing demands for resources. Although the above student would like to buy a pickup truck on her sixteenth birthday, she would rather have a computer, and has money for only one of the two. • Social influence. A student thinks that smoking is really cool, but since his friends think it’s disgusting, he does not smoke. • Measurement problems. Measuring attitudes is difficult. In many situations, consumers do not consciously set out to enumerate how positively or negatively they feel about mopeds, and when a market researcher asks them about their beliefs about mopeds, 58
how important these beliefs are, and their evaluation of the performance of mopeds with respect to these beliefs, consumers often do not give very reliable answers. Thus, the consumers may act consistently with their true attitudes, which were never uncovered because an erroneous measurement was made. Attitude Change Strategies. Changing attitudes is generally very difficult, particularly when consumers suspect that the marketer has a self-serving agenda in bringing about this change (e.g., to get the consumer to buy more or to switch brands). Changing affect. One approach is to try to change affect, which may or may not involve getting consumers to change their beliefs. One strategy uses the approach of classical conditioning try to "pair" the product with a liked stimulus. For example, we "pair" a car with a beautiful woman. Alternatively, we can try to get people to like the advertisement and hope that this liking will "spill over" into the purchase of a product. For example, the Pillsbury Doughboy does not really emphasize the conveyance of much information to the consumer; instead, it attempts to create a warm, fuzzy image. Although Energizer Bunny ads try to get people to believe that their batteries last longer, the main emphasis is on the likeable bunny. Finally, products which are better known, through the mere exposure effect, tend to be better liked--that is, the more a product is advertised and seen in stores, the more it will generally be liked, even if consumers to do not develop any specific beliefs about the product. Changing behavior. People like to believe that their behavior is rational; thus, once they use our products, chances are that they will continue unless someone is able to get them to switch. One way to get people to switch to our brand is to use temporary price discounts and coupons; however, when consumers buy a product on deal, they may justify the purchase based on that deal (i.e., the low price) and may then switch to other brands on deal later. A better way to get people to switch to our brand is to at least temporarily obtain better shelf space so that the product is more convenient. Consumers are less likely to use this availability as a rationale for their purchase and may continue to buy the product even when the product is less conveniently located. (Notice, by the way, that this represents a case of shaping). Changing beliefs. Although attempting to change beliefs is the obvious way to attempt attitude change, particularly when consumers hold unfavorable or inaccurate ones, this is
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often difficult to achieve because consumers tend to resist. Several approaches to belief change exist: • Change currently held beliefs. It is generally very difficult to attempt to change beliefs that people hold, particularly those that are strongly held, even if they are inaccurate. For example, the petroleum industry advertised for a long time that its profits were lower than were commonly believed, and provided extensive factual evidence in its advertising to support this reality. Consumers were suspicious and rejected this information, however. • Change the importance of beliefs. Although the sugar manufacturers would undoubtedly like to decrease the importance of healthy teeth, it is usually not feasible to make beliefs less important--consumers are likely to reason, why, then, would you bother bringing them up in the first place? However, it may be possible to strengthen beliefs that favor us--e.g., a vitamin supplement manufacturer may advertise that it is extremely important for women to replace iron lost through menstruation. Most consumers already agree with this, but the belief can be made stronger. • Add beliefs. Consumers are less likely to resist the addition of beliefs so long as they do not conflict with existing beliefs. Thus, the beef industry has added beliefs that beef (1) is convenient and (2) can be used to make a number of creative dishes. Vitamin manufacturers attempt to add the belief that stress causes vitamin depletion, which sounds quite plausible to most people. • Change ideal. It usually difficult, and very risky, to attempt to change ideals, and only few firms succeed. For example, Hard Candy may have attempted to change the ideal away from traditional beauty toward more unique self expression. One-sided vs. two-sided appeals. Attitude research has shown that consumers often tend to react more favorably to advertisements which either (1) admit something negative about the sponsoring brand (e.g., the Volvo is a clumsy car, but very safe) or (2) admits something positive about a competing brand (e.g., a competing supermarket has slightly lower prices, but offers less service and selection). Two-sided appeals must, contain overriding arguments why the sponsoring brand is ultimately superior-that is, in the above examples, the "but" part must be emphasized.
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The Elaboration Likelihood Model (ELM) and Celebrity Endorsements. The ELM suggests that consumers will scrutinize claims more in important situations than in unimportant ones. For example, we found that in the study of people trying to get ahead of others in a line to use photo copiers, the compliance rate was about fifty percent when people just asked to get ahead. However, when the justification "... because I have to make copies" was added, compliance increased to 80%. Since the reason offered really did not add substantive information, we conclude that it was not extensively analyzed--in the jargon of the theory, "elaboration" was low. The ELM suggests that for "unimportant" products, elaboration will be low, and thus Bill Cosby is able to endorse Coke and Jell-O without having any special credentials to do so. However, for products which are either expensive or important for some other reason (e.g., a pain reliever given to a child that could be harmed by using dangerous substances), elaboration is likely to be more extensive, and the endorser is expected to be "congruent," or compatible, with the product. For example, a basket ball player is likely to be effective in endorsing athletic shoes, but not in endorsing automobiles. On the other hand, a nationally syndicated auto columnist would be successful in endorsing cars, but not athletic shoes. All of them, however, could endorse fast food restaurants effectively. Appeal approaches. Several approaches to appeal may be used. The use of affect to induce empathy with advertising characters may increase attraction to a product, but may backfire if consumers believe that people’s feelings are being exploited. Fear appeals appear to work only if (1) an optimal level of fear is evoked--not so much that people tune it out, but enough to scare people into action and (2) a way to avoid the feared stimulus is explicitly indicated--e.g., gingivitis and tooth loss can be avoided by using this mouth wash. Humor appears to be effective in gaining attention, but does not appear to increase persuasion in practice. In addition, a more favorable attitude toward the advertisement may be created by humorous advertising, which may in turn result in increased sales. Comparative advertising, which is illegal in many countries, often increases sales for the sponsoring brand, but may backfire in certain cultures. Self-Concept, Situational Influences, and Lifestyle The self-concept. The consumer faces several possible selves. The actual self reflects how the individual
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actually is, although the consumer may not be aware of that reality (e.g., many anorexic consumers who are dangerously thin believe that they are in fact fat). In contrast, the ideal self reflects a self that a person would like to have, but does not in fact have. For example, a couch potato may want to be a World famous athlete, but may have no actual athletic ability. The private self is one that is not intentionally exposed to others. For example, a police officer may like and listen to rap music in private, but project a public self-image of a country music enthusiast, playing country songs at work where police officers are portrayed as heroes. The key here is to keep in mind which kind of self we are trying to reach in promotional messages. If we appeal to the hidden self, for example, we must be careful to make our appeals subtle and hint, if appropriate, on how the individual’s confidentiality and privacy can be enhanced. Individuals will often seek to augment and enhance their self concepts, and it may be possible to market products that help achieve this goal. For example, a successful attorney may want to wear (in politically correct terms) cow child boots and a cow child hat to bring home an image as a ranch enthusiast. Lifestyles. Self-concept often translates into a person’s lifestyle, or the way that he or she lives his or her life. For example, a person may be very materialistic; preferring to wear flashy clothes and drive expensive cars, or prefer instead a simpler life with fewer visible status symbols. Attempts have been made to classify consumers into various segments based on their lifestyles. The Values and Lifestyle (VALS) Project, developed by the Stanford Research Institute (SRI), attempts to classify people based on a combination of values and resources. Thus, for example, both "Achievers" and "Strivers" want public recognition, but only the Achievers have the resources to bring this about. A global analogue is the Global Scan. Situational influences. Specific circumstances often influence consumer behavior. For example, consumers in a rush are likely to take the most convenient product available. Consumers whose attention is demanded elsewhere are likely to disregard commercial messages. Consumers shopping for a special occasion (e.g., a wedding) may buy different products.
Consumer Decision Making
Definitions. Consumer decision making comes about as an attempt to solve consumer problems. A problem refers to "a discrepancy between a desired state and an ideal state
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which is sufficient to arouse and activate a decision process." Thus, problems can be major (e.g., a consumer has been fired and is without a job) or minor (e.g., the consumer lacks an eraser necessary to take an exam the next day), and the broader and more ambiguous a problem is, the more potential solutions are generally available (see class slides for examples). Consumer Problem Recognition. Consumers often note problems by comparing their current, or actual, situation, explicitly or implicitly, to some desired situation. In terms of the "big picture," what is compared may be the totality of one’s lifestyle. Once a discrepancy is found, a determination is found as to whether this is large enough to warrant action, in which case a search for solutions is initiated. Problems come in several different types. A problem may be an active one (e.g., you have a headache and would like as quick a solution as possible) or inactive-- you are not aware that your situation is a problem (e.g., a consumer is not aware that he or she could have more energy with a new vitamin). Problems may be acknowledged (e.g., a consumer is aware that his or her car does not accelerate well enough or unacknowledged (e.g., a consumer will not acknowledge that he or she consumes too much alcohol). Finally, needs can be relatively specific (generic), as in the need for enjoyment (which can be satisfied many different ways), or specific, as in the need for professional attire to wear at a new job. Creating problems for consumers is a way to increase sales, albeit a questionably ethical one. One way to create new problems, and resultant needs, is to create a new ideal state. This is often done quite arbitrarily in the fashion industry, as skirt lengths and the appropriate number of buttons on a suit often change arbitrarily up and down. It may also be possible to create dissatisfaction with current states--e.g., a firm may publicize current crime statistics to increase the sales of handguns and alarms. Many vocational training schools advertise that better careers than the consumer’s current one are available upon graduation (a promise on which, by the way, they may not deliver in the end). There are two main approaches to search. Internal searches are based on what consumers already know. Thus, it may be important for certain firms to advertise to consumers before they actually need the product. For example, one bail bond company advertised its existence to people "in case you ever find yourself in jail." As another example,
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if you decide to go out for fast food, you may not consult any directories, but instead search your memory for fast food restaurants conveniently located. A problem is that some excellent ones which are not remembered, or have never been heard of, are not considered. External searches get people to either speak to others (getting information by word of mouth) or use other sources (such as advertisements now sought out or yellow page listings). Because the yellow pages are often the first place to which people turn, this medium is able to charge very large advertising rates. Consumers often do not consider all alternatives. Some are not known (the "unawareness" set), some were once known but are not readily accessible in memory (the "inert" set), others are ruled out as unsatisfactory (the "inept" set-e.g., Glad bags attempts to get "bargain bags" into that set), and those that are considered represent the "evoked" set, from which one alternative is likely to be purchased. The amount of effort a consumer puts into searching depends on a number of factors such as the market (how many competitors are there, and how great are differences between brands expected to be?), product characteristics (how important is this product? How complex is the product? How obvious are indications of quality?), consumer characteristics (how interested is a consumer, generally, in analyzing product characteristics and making the best possible deal?), and situational characteristics (as previously discussed). Two interesting issues in decisions are variety seeking (where consumers seek to try new brands not because these brands are expected to be "better" in any way, but rather because the consumer wants a "change of pace," and "impulse" purchases. Impulse purchases are, generally speaking, unplanned, but represent a somewhat fuzzy group. For example, a shopper may plan to buy vegetables but only decide in the store to actually buy broccoli and corn. Alternatively, a person may buy an item which is currently on sale, or one that he or she remembers that is needed only once inside the store (remember the Wal-Mart article).
Consumer Outlet Selection
Retail evolution and consumer choice. For many products, consumers frequently have numerous choices as to where they are going to actually obtain the product. Although we are used to thinking of buying automobiles only from dealerships, for example, it is today possible to buy them through brokers or fleet sales organizations that may both (1) offer a lower price and/or (2) provide the help of a
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neutral third party which does not have a vested interest in the sales of one make over the other. In general, the evolution of diversity in the retail scene has provided consumers with more choice. In the old days, most consumers had access only to "general" stores for most products. Gradually, in urban environments, specialty and discount stores evolved. Today, a consumer may generally choose to buy most products either at a relatively high price, frequently with a significant amount of service, in a specialty store, or with lower service in a discount store. A special case of the discount store is the category killer--a store that tends to specialize in some limited area (e.g., electronics), lacking the breadth of a traditional discount store often undercutting the traditional discount store on price (which they are able to do because of the bargaining power that results from high buying volumes of a narrow assortment of merchandise from the same manufacturer). "At home" shopping and electronic commerce. During the last several decades, the incidence of "at home" shopping has increased. The growth of catalog sales can be traced to advances in computer technology and subsequent list availability (as we discussed in the section of direct marketing segmentation methods). A more recent development is Internet based marketing. Although sales are modest in this domain at the moment, it is too early to judge the total potential of this medium. Although many of the concerns that consumers hold about computer crime tend to be exaggerated and/or largely unwarranted, public fears are a major holdback. Another problem is the demographics of computer and Internet use--the majority of U.S. consumers, and certainly the great majority of residents of even highly industrialized countries, are not regular Internet users. Certain products specifically aimed at heavy Internet users (e.g., records, software) and products/services that require a high level of customization (e.g., airline tickets) may find good opportunities. An interesting problem with Internet commerce, which may well have spillover effects outside the realm of the Net, is the relative ease with which consumers may compare prices of different retailers, resulting in intense price competition. Note that recent legislation has limited taxation of Internet sales in the U.S., in a sense attempting to "jump start" this innovation. Store positioning. Positioning of retail stores is essential. In general, stores which excel on a significant dimension seem to perform better--for example, Nordstrom’s
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excels through its intense customer service, while Wal-Mart excels through its efficiency and low prices. (In a course on marketing strategy or retailing, you will probably discuss the issue of the importance of balanced markets--it is healthier if different firms have different strategies, so that everyone will not be competing intensely on the same variables). Stores which fall somewhere in between-e.g., Sears--tend to do less well since they get "stuck in the middle" and have to compete against both. Obviously, there is a limit to how strongly you can move toward one extreme. For example, if Nordstrom were to double its prices and even double its service, that position would be untenable, and certain extreme discount stores that offer lower prices than Wal-Mart tend not to be successful because they are ultimately not satisfactory to consumers. The buzzworfd in the world of marketing communication is 360-degree communication. The fundamental assumption behind this strategy is that the human brain is like a sponge that is willing to absorb all information that is even cursorily thrown at it. Proponents of the 360-degree communication strategy believe, that the consumer’s brain is waiting for marketing information right from the moment she wake up in the morning, as she goes about her life till the time she goes to sleep and may be even in her dreams! So mass media advertisers strongly belive that the consumer is more interested in watching ads than watching her favourite programmes,seeing hoardings on the road than negotiating city traffic jams and reading what’s at the back of the school bus than waving goodbye to her little one catching that bus. Is the marketer’s money well spent by inundating the consumer’s brain with marketing messages from all quarters at all times of the day or is there a case for more focused, cost effective communication strategy? Even when a person is resting, the human brain consumes more than 20% of all energy production to maintain normal body functions. What happens when the human brain is involved in doing a cross-word puzzle? It burs up 1.5 calories per minute. Compare that to the fact that a minute of kickboxing burns up only 10 calories per minute and you will realize that the human brain consumes far more energy and at a rate faster than any other part of the body. The human brain manages its energy consumption by optimizing the amount of stimuli that it processes at any time. Those trying to communicate to the human brain should undersatand this truth. So it should not come as a surprise that the conscious part of the human brain has not been
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made to do two things at the same time. The brain has created a situation where there is a time for everything. There is a timewhen the brain sends its ‘I am hungry’ signals or ‘I am feeling sleepy’ signals. These signals don’t happen at the wrong time, nor do they happen right through the day. If any of us were to feel hungry throughout the day, we know that we need a doctor’s advice. How then, does the brain cope with the numerous stimuli bombarding our senses and hence our brain? Given the restriction of the conscious mind to process only one stimulus at any given time, the non-conscious part of the brain is choosy. It analyses in terms of priority-stimuli that has immediate relevance for our survival (even if few marketing messages are actually processed by the consumer’s non-conscious brain,most of today’s consumer research techniques are not equipped to delve into consumers’nonconscious brain). This frugal nature of the human brain has huge new learning for all marketers. The human brain is very reluctant to take notice of new information. Neurological studies have shown that the brain accepts new information far more effectively if it is provided at a time and place when the conscious part of the brain is actually seeking the information. What is the place and time when the consumer’s frugal brain is actually seeking information on brands? The consumer is actively seeking information on brands while she is in the retail outlet. This is the time and place where the conscious part of the human brain is single mindedly focused on collecting information on brands. Even the nonconscious part of the human brain is far more focused on collecting information on brands. The neural connections regarding a brand are stronger when the consumer is actively seeking information on the brand and even touching and feeling the brand, compared to just reading a message at the back of the school bus. That is why neurology suggests that the retail outlet should be the most important medium of communication for any intelligent marketer will get far better returns for his spends, if he focuses his communication at the point of purchase.
Public Policy Issues
Throughout the term, we have considered marketing practices which may harm consumers. Two main issues are (1) deceptive marketing practices (such as misleading advertising) and (2) the marketing of dangerous or otherwise harmful products (e.g., tobacco). The following are some ethical
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problems that occur in marketing, and the question arises as to which, if any, kind of government intervention is appropriate: • Marketing efforts may encourage excess consumption (e.g., products that consumers cannot afford and do not really need). Note, however, that there are many gray areas--e.g., cosmetics, video games, and even something as politically correct as a gourmet coffee houses. A special case involves marketing to children, whose parents may be coerced, often out of guilt, to buy questionable items aimed at children. • Resource depletion and waste disposal issues associated with the above consumption. Some European countries have mandated that manufacturers be required to take back packaging materials for their products. • Deceptive marketing practices: Products claim benefits which really do not result from use of the product (as is done by numerous manufacturers of nutritional supplements); advertising may be misleading (may not indicate the true cost of a product up front or may contain "fine print" that the consumer is unlikely to see or understand) • Products are unhealthy (e.g., many children’s foods contain excessive fat) Government action is often considered, although it may not always be effective. For example, although the government requires the use of warning labels on some products, manufacturers will often try to "water down" the warnings as much as possible. Further, the prevalence of warning labels today may desensitize consumers since reading all of them carefully would provide the consumer with information overload. Another issue is anti-competitive behavior. Antitrust laws are generally aimed at prohibiting firms from conspiring to "fix" prices or collectively drop service levels. Antitrust law is, however, a "thorny" area. Consumers may benefit, for example, as some less efficient firms are driven out of business, and may benefit from the efficiencies which may or may not materialize when large firms "gobble up" smaller ones--a defense used in the Microsoft trial.
Introduction to Retail
What is retailing? Retailing involves selling products and services to consumers for their personal or family use. Department stores, like Burdines and Macy's, discount stores like WalMart and K-Mart, and specialty stores like The Gap, Zales
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Jewelers and Toys 'R' us, are all examples of retail stores. Service providers, like dentists, hotels and hair salons, and on-line stores, like Amazon.com, is also retailers. Many businesses, like Home Depot, are both wholesalers and retailers because they sell to consumers and building contractors. Other businesses, like The Limited, are both manufactures and retailers. Regardless of other functions these businesses perform, they are still retailers when they interact with the final user of the product or service. Why is Retailing Important? As the final link between consumers and manufacturers, retailers are a vital part of the business world. Retailers add value to products by making it easier for manufactures to sell and consumers to buy. It would be very costly and time consuming for you to locate, contact and make a purchase from the manufacturer every time you wanted to buy a candy bar, a sweater or a bar of soap. Similarly, it would be very costly for the manufactures of these products to locate and distribute them to consumers individually. By bringing multitudes of manufacturers and consumers together at a single point, retailers make it possible for products to be sold, and, consequently, business to be done. Retailers also provide services that make it less risky and more fun to buy products. They have salespeople on hand who can answer questions, may offer credit, and display products so that consumers know what is available and can see it before buying. In addition, retailers may provide many extra services, from personal shopping to gift wrapping to delivery, that increase the value of products and services to consumers. The Future of Retailing Advances in technology, like the Internet, have helped make retailing an even more challenging and exciting field in recent years. The nature of the business and the way retailing is done are currently undergoing fundamental changes. However, retailing in some form will always be necessary. For example, even though the Internet is beginning to make it possible for manufacturers to sell directly to consumers, the very vastness of cyberspace will still make it very difficult for a consumer to purchase every product he or she uses directly. On-line retailers, like Amazon.com, bring together assortments of products for consumers to buy in the same way that bricks-and-mortar retailers do.
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In addition, traditional retailers with physical stores will continue to be necessary. Of course, retailers who offer personal services, like hair styling, will need to have face-to-face interaction with the consumer. But even with products, consumers often want to see, touch and try them before they buy. Or, they may want products immediately and won't want to wait for them to be shipped. Also, and perhaps most importantly, in many cases the experience of visiting the retailer is an important part of the purchase. Everything that the retailer can do to make the shopping experience pleasurable and fun can help ensure that customers come back.
Retail Strategy Planning
Why Strategy? To define the business idea and validate the same through: • Market entry strategy • Market positioning strategy • New concept development • Business feasibility analysis For Whom? Strategy planning service caters to the needs of: • • • • Entrepreneurial retail venture Organizations planning to foray into the retail arena Manufacturing companies with retail business ideas Existing traditional retail businesses trying to reinvent themselves
How? A series of activities are required to frame a strategy. These include: • Management interviews • Organization assessment • Segment analysis • Competitive performance analysis • Customer research • Capturing target segments ‘Share of Mind’ • Analysis of different format options • Analysis of merchandise mix • Analysis of various price points • Rollout plan • Business feasibility plan
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Why Integrated Retail? Integrated Retail carries out Strategy Planning based on the following strengths: • • • • • Large team with over 200 man-years of retail operations and business experience Successful implementation track record of similar projects Constantly updated repository of best business practices in retail from across the world Data bank of benchmark retail performance data Access to macro-economic data impacting overall retail and consumer businesses.
Marketing research
Research is the search for and retrieval of existing, discovery or creation of new information or knowledge for a specific purpose. Research has many categories, from medical research to literary research. 'Marketing research is a form of business research. and Business-to-Business (B2B)Marketing Research, or Business Marketing Research, previously known as Industrial Marketing Research. B2B Marketing Research investigates the markets for products sold by one business to another, rather than to consumers. Consumer Marketing Research is a form of applied sociology which concentrates on understanding the behaviours, whims and preferences, of consumers in a market-based economy. The field of consumer marketing research as a statistical
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science was pioneered by Arthur Nielsen with the founding of the ACNielsen Company in 1923. In addition to marketing research, other forms of business research include: Market research is broader in scope and examines all aspects of a business environment. It asks questions about competitors, market structure, government regulations, economic trends, technological advances, and numerous other factors that make up the business environment. (See Environmental scanning.) Sometimes the term refers more particularly to the financial analysis of companies, industries, or sectors. In this case, financial analysts usually carry out the research and provide the results to investment advisors and potential investors. Product research - This looks at what products can be produced with available technology, and what new product innovations near-future technology can develop. (See New Product Development) Advertising research - This attempts to assess the likely impact of an advertising campaign in advance, and also measure the success of a recent campaign.. Types of marketing research Marketing research techniques come in many forms, including: test marketing - a small-scale product launch used to determine the likely acceptance of the product when it is introduced into a wider market. concept testing - to test the acceptance of a concept by target consumers. mystery shopping - An employee or representative of the market research firm anonymously contacts a salesperson and indicates he or she is shopping for a product. The shopper then records the entire experience. This method is often used for quality control or for researching competitors' products. store audit - to measure the sales of a product or product line at a statistically selected store sample in order to determine market share, or to determine whether a retail store provides adequate service demand estimation - to determine the approximate level of demand for the product. Commercial eye tracking research - examine advertisements, package designs, websites, etc by analyzing visual behavior of the consumer. sales forecasting - to determine the expected level of sales given the level of demand. With respect to other factors like Advertising expenditure and sales promotion etc.
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customer satisfaction studies - exit interviews or surveys that determine a customer's level of satisfaction with the quality of the transaction. distribution channel audits - to assess distributors’ and retailers’ attitudes toward a product, brand, or company. price elasticity testing - to determine how sensitive customers are to price changes. segmentation research - to determine the demographic, psychographic, and behavioral characteristics of potential buyers. consumer decision process research - to determine what motivates people to buy and what decision-making process they use. positioning research - how does the target market see the brand relative to competitors? - What does the brand stand for? brand name testing - what do consumers feel about the names of the products? brand equity research - how favorably do consumers view the brand? advertising and promotion research - how effective are ads - do potential customers recall the ad, understand the message, and does the ad influence consumer purchasing behavior? Internet Strategic Intelligence - searching for customer opinions in the Internet: chats, forums, web pages, blogs... Where people express freely about their experiences with products, becoming strong "opinion formers" Marketing Effectiveness and analytics - Building models and measuring results to determine the effectiveness of individual marketing activities All of these forms of marketing research can be classified as either problem-identification research or as problemsolving research. A company collects primary research by gathering original data. Secondary research is conducted on data published previously and usually by someone else. Secondary research costs far less than primary research, but seldom comes in a form that exactly meets the needs of the researcher. A similar distinction exists between exploratory research and conclusive research. Exploratory research provides insights into and comprehension of an issue or situation. It should draw definitive conclusions only with extreme caution. Conclusive research draws conclusions: the results of the study can be generalized to the whole population. Exploratory research is conducted to explore a problem to get some basic idea about the solution at the preliminary
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stages of research. It may serve as the input to conclusive research. Exploratory research information is collected by focus group interviews, reviewing literature or books, discussing with experts, etc. This is unstructured and qualitative in nature. If a secondary source of data is unable to serve the purpose, a convenience sample of small size can be collected. Conclusive research is conducted to draw some conclusion about the problem. It is essentially, structured and quantitative research, and the output of this research is the input to Management information systems (MIS). Exploratory research is also conducted to simplify the findings of the conclusive/ descriptive research, if the findings are very hard to interpret for Marketing Manager. Some times it may happen to conduct conclusive research with out followed by a exploratory research. e.g. Consumer satisfaction Study. Because every year this study conducted by some one and initial ideas concern to the study may readily available. Marketing research methods Methodologically, marketing research uses the following types of research designs: A-BASED ON QUESTIONING: Qualitative marketing research - generally used for exploratory purposes - small number of respondents - not generalizable to the whole population - statistical significance and confidence not calculated - examples include focus groups, in-depth interviews, and projective techniques Quantitative marketing research - generally used to draw conclusions - tests a specific hypothesis - uses random sampling techniques so as to infer from the sample to the population - involves a large number of respondents examples include surveys and questionnaires B-BASED ON OBSERVATIONS: Ethnographic studies -, by nature qualitative, the researcher observes social phenomena in their natural setting - observations can occur cross-sectionally (observations made at one time) or longitudinally (observations occur over several time-periods) - examples include product-use analysis and computer cookie traces Experimental techniques -, by nature quantitative, the researcher creates a quasi-artificial environment to try to control spurious factors, then manipulates at least one of the variables - examples include purchase laboratories and test markets
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Researchers often use more than one research design. They may start with secondary research to get background information, then conduct a focus group (qualitative research design) to explore the issues. Finally they might do a full nation-wide survey (quantitative research design) in order to devise specific recommendations for the client. Business to business market research Business to business (b2b) research is inevitably more complicated than consumer research. The researchers need to know what type of multi-faceted approach will answer the objectives, since seldom is it possible to find the answers using just one method. Finding the right respondents is crucial in b2b research since they are often busy, and may not want to participate. Encouraging them to “open up” is yet another skill required of the b2b researcher. Last, but not least, most business research leads to strategic decisions and this means that the business researcher must have expertise in developing strategies that are strongly rooted in the research findings and acceptable to the client. There are four key factors that make b2b market research special and different to consumer markets: The decision making unit is far more complex in b2b markets than in consumer markets B2b products and their applications are more complex than consumer products. B2b marketers address a much smaller number of customers who are very much larger in their consumption of products than is the case in consumer markets. Personal relationships are of critical importance in b2b markets.
Commonly used marketing research terms
Market research techniques resemble those used in political polling and social science research. Meta-analysis (also called the Schmidt-Hunter technique) refers to a statistical method of combining data from multiple studies or from several types of studies. Conceptualization means the process of converting vague mental images into definable concepts. Operationalization is the process of converting concepts into specific observable behaviors that a researcher can measure. Precision refers to the exactness of any given measure. Reliability refers to the likelihood that a given operationalized construct will yield the same results if re-measured. Validity refers to the extent to which a measure provides data that captures the meaning of the operationalized construct as defined in the study. It asks, “Are we measuring what we intended to measure?”
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Applied research sets out to prove a specific hypothesis of value to the clients paying for the research. For example, a cigarette company might commission research that attempts to show that cigarettes are good for one's health. Many researchers have ethical misgivings about doing applied research. Sugging (or Selling Under the Guise of market research) forms a sales technique in which sales people pretend to conduct marketing research, but with the real purpose of obtaining buyer motivation and buyer decision-making information to be used in a subsequent sales call. Frugging comprises the practice of soliciting funds under the pretense of being a research organization.
Market research
Market research is the process of systematic gathering, recording and analyzing of data about customers, competitors and the market. Market research can help create a business plan, launch a new product or service, fine tune existing products and services, expand into new markets etc. It can be used to determine which portion of the population will purchase the product/service, based on variables like age, gender, location and income level. It can be found out what market characteristics your target market has. With market research, companies can learn more about current and potential customers. The purpose of market research is to help companies make better business decisions about the development and marketing of new products. Market research represents the voice of the consumer in a company. A list of questions that can be answered through market research: • What is happening in the market? What are the trends? Who are the competitors? How do consumers talk about the products in the market? • Which needs are important? Are the needs being met by current products? A simple example of what market research can do for a business is the following. At the company Chevrolet they brought several disciplines together in a cross-functional team to develop a concept for a completely new Corvette. This team enabled the marketers to come up with an alternative concept, one that balanced 4 attributes: comfort and convenience, quality, styling, and performance. This was considered radical because comfort and convenience were not traditional Corvette values. However, market research demonstrated that consumers supported the alternative concept. As a result the new Corvette was a 76
huge success in the market. There are two types of Market research, Primary and Secondary. [Burns 2001] With market research you can get some kind of confirmation that there is a market for your idea, and that a successful launch and growth are possible. Market research for business planning Market research is discovering what people want, need, or believe. It can also involve discovering how they act. Once that research is complete it can be used to determine how to market your specific product. Whenever possible, try to reduce risks at the earliest possible stage. For example you could carry out market research early on and not wait until you are almost ready to enter the market. If early market research reveals that your business idea has real potential, you can use this information in planning the build-up of your business. For starting up a business there are a few things should be found out through market research in order to know if your business is feasible. These are things like: Market information Market information is making known the prices of the different commodities in the market, the supply and the demand. Information about the markets can be obtained in several different varieties and formats. The most basic form of market information is the best quotation and last sale data, including the number of shares, with respect to a particular security at a given time. Examples of market information questions are: • Who are the customers? • Where are they located and how can they be contacted? • What quantity and quality do they want? • What is the best time to sell? • What is the long-term or historical price data over a number of years? • What is the expected production in the country? • Is there more demand for one product or another? Etc. Market segmentation Market segmentation is the division of the market or population into subgroups with similar motivations. Widely used bases for segmenting include geographic differences, personality differences, demographic differences, use of product differences, and psychographic differences. Market trends
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The upward or downward movements of a market, during a period of time. The market size is more difficult to estimate if you are starting with something completely new. In this case, you will have to derive the figures from the number of potential customers or customer segments. [Ilar 1998] But besides information about the target market you also need information about your competitor, your customers, products etc. A few techniques are: • Customer analysis • Competitor analysis • Risk analysis • Product research • Advertising research How to perform market research, with interviews and questionnaires, but there is already a lot of information available. Market research firms and industry experts publish much of their information on websites, and in trade and business magazines. Reference sites index these magazines, many offer the texts online and if not the libraries stock them. Trade associations publish many listings and statistics on their websites as well as in hard copy publications. So there is already a lot of information available. Perform market research These steps include: • Defining the research problem • Establishing the research design • Collecting and analysing data • Formulate findings Market information Market information is making known the prices of the different commodities in the market, the supply and the demand. Information about the markets can be obtained in several different varieties and formats. The most basic form of market information is the best quotation and last sale data, including the number of shares, with respect to a particular security at a given time. Examples of market information questions are: • Who are the customers? • Where are they located and how can they be contacted? • What quantity and quality do they want? • What is the best time to sell? • What is the long-term or historical price data over a number of years? 78
• What is the expected production in the country? • Is there more demand for one product or another? Etc. Market segmentation Market segmentation is the division of the market or population into subgroups with similar motivations. Widely used bases for segmenting include geographic differences, personality differences, demographic differences, use of product differences, and psychographic differences. Market trends The upward or downward movements of a market, during a period of time. The market size is more difficult to estimate if you are starting with something completely new. In this case, you will have to derive the figures from the number of potential customers or customer segments. But besides information about the target market you also need information about your competitor, your customers, products etc. A few techniques are: • Customer analysis • Competitor analysis • Risk analysis • Product research • Advertising research Market research firms and industry experts publish much of their information on websites, and in trade and business magazines. Reference sites index these magazines, many offer the texts online and if not the libraries stock them. Trade associations publish many listings and statistics on their websites as well as in hard copy publications. So there is already a lot of information available.
Perform market research
The market research process has 4 basic steps. These steps include: • Defining the research problem • Establishing the research design • Collecting and analysing data • Formulate findings
Defining the research problem
The step defining the research problem exists of 2 main steps: (1) formulating the problem and (2) establishing research objectives. Defining the problem is the single most important step in the market research process. A clear statement of the problem is a key to a good research. A firm may spend 79
hundreds or thousands of dollars doing market research, but if it has not correctly identified the problem, those dollars are wasted. In our case it is obvious that the problem here is setting up a business. But even if this is clear, you still need to know what exactly you need to know to make the new business a success and what specific related to the product is difficult to find out. Problems that may be encountered are: it is unknown what potential markets there are, what customer groups are interested in your products, who the competitors are? After formulating your problem, you need to formulate your research questions. What questions need to be answered and which possible sub-questions do you have. With the problem or opportunity defined, the next step is to set objectives for your market research operations. Research objectives, related to and determined by the problem formulation, are set so that when achieved they provide the necessary information to solve the problem. A good way of setting research objectives is to ask, “What information is needed in order to solve the problem?" Your objective might be to explore the nature of a problem so you may further define it, or perhaps it is to determine how many people will buy your product packaged in a certain way and offered at a certain price. Your objective might even be to test possible cause and effect relationships. For example, if you lower your price, how much will it increase your sales volume? And what impact will it have on your profit? Clear objectives can lead to clear results. An example of this is a situation at Camaro/Firebird. Auto manufacturers are sometimes criticized for creating expensive vehicles with unwanted features and technologies that do not meet the needs of the target market. To avoid this trap engineering team of this company turned to market research to evaluate how changes in performance and fuel economy would affect sales volume and customer satisfaction. It turned out that customers were willing to pay more for greater performance if the car also offered simultaneous increases in fuel economy. The problem description, the research question, sub questions and the research objectives are part of an overall document problem description. After describing and formulating the problem and the objectives, the next step is to prepare a detailed and realistic time frame to complete all steps of the market research process. If your business operates in cycles, establish target dates that will allow the best
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accessibility to your market. For example, a holiday greeting card business may want to conduct research before or around the holiday season buying period, when their customers are most likely to be thinking about their purchases. Selecting and establishing research design The step selecting and establishing research design consists of 3 main steps: (1) select the research design, (2) identify information types and sources and (3) determine and design research instrument. Select the research design Every research project and every business is different. Still, there are enough commonalities among research projects to categorize them by research methods and procedures used to collect and analyze data. There are three types of research design: • Exploratory research design • Descriptive research • Causal research Exploratory research is defined as collecting information in an unstructured and informal way. For example if the owners of a new restaurant often eat out at competitor’s restaurants in order to gather information about menu selections, prices and service quality. Descriptive research refers to a set of methods and procedures that describe marketing variables. Descriptive studies portray these variables by answering who, what, why and how questions. These types of research studies may describe such things as consumers’ attitudes, intentions, and behaviours, or the number of competitors and their strategies. Causal research design is conducted by controlling various factors to determine which factor is causing the problem. It allows you to isolate causes and effects. By changing one factor, say price you can monitor its effects on a key consequence such as sales. Although causal research can give you a high level of understanding of the variable you are studying, the designs often require experiments that are complex and expensive. Identify information types and sources There are two types of information available to a market researcher: primary data and secondary data. Primary data is original information gathered for a specific purpose. Secondary data refers to information that already exists somewhere and has been collected for some other purpose. 81
Both types of research have a number of activities and methods of conducting associated with them. Secondary research is usually faster and less expensive to obtain than primary research. Gathering secondary research may be as simple as making a trip to a local library or business information center or browsing the Internet. There is already a lot of statistics about different businesses that can be used for this research. Information source Secondary data help identify the problem; better define problem; develop an approch to problem; fomulate an appropriate research design; answer certain research questions and test some research hyotheses; Interpret primary data more insightfully. Determining and design research instrument After determining which type(s) of information are needed, the methods of accessing data must be determined. There are several different methods of collecting data. These methods include telephone surveys, mail surveys, personal interviews or group surveys. The actual design of the research instrument, the data collection form that is used to ask and record the information is critical to the success of the project. There are two basic methods to collect information: by asking questions or by observing. The most common research instrument is the questionnaire. There are two types of forms: structured and unstructured. Structured questionnaires list close-end questions. These include multiple choice questions which offer respondents the ability to answer "yes" or "no" or choose from a list of several answer choices. Close-end questions also include scales refer to questions that ask respondents to rank their answers at a particular point on a scale. Unstructured questionnaires have open-ended questions. Respondents can answer in their own words. Collecting and analyzing data Data collection is usually done by students . They are employed by field data collection companies to collect primary data. A choice has to be made between collecting the data yourself or hiring an external office who are specialized in interviews. Data analysis is needed to give the raw data any meaning. The first step in analyzing the data is cleaning the data. This is the process of checking the raw data to verify that the data has been correctly entered into the files from the data collection form. After that the data have to be coded. This is the process of assigning all response categories a 82
numerical value. For example males = 1, females = 2. After that the data can be tabulated, which refers to the actual counting of the number of observations that fall in to each possible response category. Data can also be collected on a smaller scale to obtain more qualitative data. One frequently used form of qualitative data collection is the focus group. Focus Groups are generally comprised of a small selection of the target audience. The participants are then queried and the discussions are guided by a moderator. The group is often recorded and/or viewed by the marketing team or others via a two-way mirror or closed circuit system. Focus group companies exist worldwide. Some specialize in certain industries, such as the legal community, while others provide more general services. Market segment Market segmentation is the process in marketing of dividing a market into distinct subsets (segments) that behave in the same way or have similar needs. Because each segment is fairly homogeneous in their needs and attitudes, they are likely to respond similarly to a given marketing strategy. That is, they are likely to have similar feelings and ideas about a marketing mix comprised of a given product or service, sold at a given price, distributed in a certain way, and promoted in a certain way. Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private sector. Small segments are often termed niche markets or specialty markets. However, all segments fall into either consumer or industrial markets. Although it has similar objectives and it overlaps with consumer markets in many ways, the process of Industrial market segmentation is quite different. The process of segmentation is distinct from targeting (choosing which segments to address) and positioning (designing an appropriate marketing mix for each segment). The overall intent is to identify groups of similar customers and potential customers; to prioritise the groups to address; to understand their behaviour; and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues are thus improved. Improved segmentation can lead to significantly improved marketing effectiveness. With the right segmentation, the right lists can be purchased, advertising results can be improved and customer satisfaction can be increased. The requirements for successful segmentation are: 83
• homogeneity within the segment • heterogeneity between segments • segments are measurable and identifiable • segments are accessible and actionable • segment is large enough to be profitable These criteria can be summarized by the word DAMAS: D Differential: it must respond differently to a different marketing mix A Actionable: you must have a product for this segment M Measurable: size and purchasing power can be measured A Accessible: it must be possible to reach it efficiently S Substantial: the segment has to be large and profitable enough Currently a college student studying the marketing mix is introduced to the Four Ps of the Marketing Mix; Product, Place, Promotion, Price. Product (service) is whatever it may be that is being sold/marketed. Price refers to not only the actual price but also price elasticity. Place has evidently replaced distribution simply by where or what area the marketing campaign is going to cover, as well as what types of distribution channel (retail, wholesale, online, etc) will be used. Today the idea of place is not limited to geographic profiling but also demographics and other categorizing variables. This has only occurred over the last ten years with the expansion of internet use and its ability to target specific types of people and not just people in a geographic area. Promotion simply refers to what medium will deliver the message and what the overall marketing strategy is offering as a benefit.
The variables used for segmentation include:
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Geographic variables region of the world or country, East, West, South, North, Central, coastal, hilly, etc. country size/country size : Metropolitian Cities, small cities, towns. Density of Area Urban, Semi-urban, Rural. climate Hot, Cold, Humid, Rainy. Demographic variables age gender Male and Female sexual orientation family size 84
family life cycle Education Primary, High School, Secondary, College, Universities. • income • occupation • education • socioeconomic status • religion • nationality/race • language • Psychographic variables • personality • life style • value • attitude • Behavioural variables • benefit sought • product usage rate • brand loyalty • product end use • readiness-to-buy stage • decision making unit When numerous variables are combined to give an in-depth understanding of a segment, this is referred to as depth segmentation. When enough information is combined to create a clear picture of a typical member of a segment, this is referred to as a buyer profile. When the profile is limited to demographic variables it is called a demographic profile (typically shortened to "a demographic"). A statistical technique commonly used in determining a profile is cluster analysis.
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Top-down and bottom-up
George Day (1980) describes model of segmentation as the top-down approach: You start with the total population and divide it into segments. He also identified an alternative model which he called the bottom-up approach. In this approach, you start with a single customer and build on that profile. This typically requires the use of customer relationship management software or a database of some kind. Profiles of existing customers are created and analysed. Various demographic, behavioural, and psychographic patterns are built up using techniques such as cluster analysis. This process is sometimes called
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database marketing or micro-marketing. Its use is most appropriate in highly fragmented markets. McKenna (1988) claims that this approach treats every customer as a "micromajority". Pine (1993) used the bottom-up approach in what he called "segment of one marketing". Through this process mass customization is possible. Sandeep Soor. Price discrimination Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits for the seller. These profits can be increased further if the market can be segmented with different prices charged to different segments (referred to as price discrimination), charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to create rate fences that will prevent members of a higher price segment from purchasing at the prices available to members of a lower price segment. This behaviour is rational on the part of the monopolist, but is often seen by competition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned...
Positioning (marketing)
A product's position is how potential buyers see the product. Positioning is expressed relative to the position of competitors. The term was coined in 1969 by Al Ries and Jack Trout in the paper "Positioning" is a game people play in today’s me-too market place" in the publication Industrial Marketing. It was then expanded into their ground-breaking first book, "Positioning: The Battle for Your Mind". Positioning is something (perception) that happens in the minds of the target market. It is the aggregate perception the market has of a particular company, product or service in relation to their perceptions of the competitors in the same category. It will happen whether or not a company's management is proactive, reactive or passive about the ongoing process of evolving a position. But a company can positively influence the perceptions through enlightened strategic actions. In marketing, positioning has come to mean the process by which marketers try to create an image or identity in the minds of their target market for its product, brand, or organization. It is the 'relative competitive comparison' their product occupies in a given market as perceived by the target market.
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Re-positioning involves changing the identity of a product, relative to the identity of competing products, in the collective minds of the target market. De-positioning involves attempting to change the identity of competing products, relative to the identity of your own product, in the collective minds of the target market.
Product positioning process
Generally, the product positioning process involves: • Defining the market in which the product or brand will compete (who the relevant buyers are) • Identifying the attributes (also called dimensions) that define the product 'space' • Collecting information from a sample of customers about their perceptions of each product on the relevant attributes • Determine each product's share of mind • Determine each product's current location in the product space • Determine the target market's preferred combination of attributes (referred to as an ideal vector) • Examine the fit between: • The position of your product • The position of the ideal vector Position. The process is similar for positioning your company's services. Services, however, don't have the physical attributes of products - that is, we can't feel them or touch them or show nice product pictures. So you need to ask first your customers and then yourself, what value do clients get from my services? How are they better off from doing business with me? Also ask: is there a characteristic that makes my services different? Write out the value customers derive and the attributes your services offer to create the first draft of your positioning. Test it on people who don't really know what you do or what you sell, watch their facial expressions and listen for their response. When they want to know more because you've piqued their interest and started a conversation, you'll know you're on the right track. Positioning concepts More generally, there are three types of positioning concepts: • Functional positions • Solve problems • Provide benefits to customers 87
Get favorable perception by investors (stock profile) and lenders • Symbolic positions • Self-image enhancement • Ego identification • Belongingness and social meaningfulness • Affective fulfillment • Experiential positions • Provide sensory stimulation • Provide cognitive stimulation Business plan A business plan is a summary of how a business or entrepreneur intends to organize an entrepreneurial endeavor and implement activities necessary and sufficient for the venture to succeed. It is a written explanation of the company's business model for the venture in question. Business plans are developed for ventures in both business and government. Business plans are used internally for management and planning and are also used to convince outsiders such as banks or venture capitalists to invest money into a venture.
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Types of Plan
Business plans can be divided roughly into three separate types. They require very different amounts of labor and not always with proportionately different results. The Miniplan. A miniplan, better known as the Executive Summary, may consist of one to 10 pages and should include at least cursory attention to such key matters as business concept, financing needs, marketing plan and financial statements, especially cash flow, income projection and balance sheet. It's a great way to quickly test a business concept or measure the interest of a potential partner or minor investor. It can also serve as a valuable prelude to a full-length plan later on. The Working Plan. A working plan is used to operate the business. It has to be long on detail but may be short on presentation. As with a miniplan, one can probably afford a somewhat higher degree of candor and informality when preparing a working plan. The Presentation Plan. A presentation plan differs from a working plan in that more attention is paid to attractive formatting, formal language, and conciseness. This type of plan is intended to be suitable for showing to bankers, investors and others outside the company. Example of the content of a business plan
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A business plan can be seen as a collection of sub-plans including a marketing plan, financial plan, production plan, and human resource plan.The business plan has many forms. There is however a format that is typical: • Executive summary • Explains the basic business model • Gives rationale for the strategy • Background • Gives short history of company (unless it is a new company) • Provides background details such as: • Age of company • Number of employees • Annual sales figures • Location of facilities • form of ownership including • Sole proprietor • Partnership • Entrepreneurial startup • Private corporate startup • Publicly traded corporation • Limited liability company • Public utility • Non-profit organization • Background of key personnel including • Owners • Senior managers • Managing partners • Head scientists and researchers • Marketing • The macroenvironment • Industry Assessment • Customer Strategy & Market Analysis • Product strategy • Pricing strategy • Promotion strategy • Distribution strategy • Production and manufacturing • Describe all processes • Production facility requirements - size, layout, capacity, location
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Inventory requirements - raw materials inventory, finished goods inventory, warehouse space requirements • Equipment requirements • Supply chain requirements • Fixed cost allocation • Finance • Source of funds • Existing loans and liabilities • Projected sales and costs • Break even analysis • Expected return • Monthly pro-forma cash flow statement • risk evaluation and risk management • Human resources • Assign responsibilities • Training required • Skills required • Union issues • Compensation • Skills availability • New hiring Specialized sections such as product research and development, legal strategies, marketing research, or inter-company collaborations, are added to deal with unique features or characteristics of the business or its markets. Cost overruns and revenue shortfalls Cost and revenue estimates are central to any business plan for deciding the viability of the planned venture. But costs are often underestimated and revenues overestimated resulting in later cost overruns, revenue shortfalls, and possibly non-viability. During the dot-com bubble 1997-2001 this was a problem for many technology start-ups. However, the problem is not limited to technology or the private sector; public works projects also routinely suffer from cost overruns and/or revenue shortfalls. The main causes of cost overruns and revenue shortfalls are optimism bias and strategic misrepresentation. Focus group Focus group is a form of qualitative research in which a group of people are asked about their attitude towards a product, service, concept, advertisement, idea, or packaging. Questions are asked in an interactive group setting where participants are free to talk with other group members.
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In the world of marketing, focus groups are an important tool for acquiring feedback regarding new products, as well as various topics. In particular, focus groups allow companies wishing to develop, package, name, or test market a new product, to discuss, view, and/or test the new product before it is made available to the public. This can provide invaluable information about the potential market acceptance of the product. In the social sciences and urban planning, focus groups allow interviewers to study people in a more natural setting than a one-to-one interview. In combination with participant observation, they can be used for gaining access to various cultural and social groups, selecting sites to study, sampling of such sites, and raising unexpected issues for exploration. Focus groups have a high apparent validity - since the idea is easy to understand, the results are believable. Also, they are low in cost, one can get results relatively quickly, and they can increase the sample size of a report by talking with several people at once. However, focus groups also have disadvantages: The researcher has less control over a group than a one-on-one interview, and thus time can be lost on issues irrelevant to the topic; the data are tough to analyze because the talking is in reaction to the comments of other group members; observers/ moderators need to be highly trained, and groups are quite variable and can be tough to get together. (Ibid.) Moreover, the number of members of a focus group is not large enough to be a representative sample of a population; thus, the data obtained from the groups is not necessarily representative of the whole population, unlike in opinion polls. A fundamental difficulty with focus groups (and other forms of qualitative research) is the issue of observer dependency: the results obtained are influenced by the researcher, raising questions of validity. The issue evokes associations with Heisenberg’s famous Uncertainty Principle. As Heisenberg said, "What we observe is not nature itself, but nature exposed to our method of questioning." Indeed, the design of the focus group study (e.g. respondent selection, the questions asked, how they are phrased, how they are posed, in what setting, by whom, and so on) affects the answers obtained from respondents. In focus groups, researchers are not detached observers but always participants. Researchers must take this into account when making their analysis. Traditional focus groups
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In traditional focus groups, a screened (qualified) group of respondents gathers in the same room. They are screened to ensure that they are part of the relevant target market and that the group is a representative subgroup of this market segment. There are usually 6 to 10 members in the group, and the session usually lasts for 1 to 2 hours. A moderator guides the group through a discussion that probes attitudes about a client's proposed products or services. The discussion is loosely structured, and the moderator encourages the free flow of ideas. The moderator is typically given a list of objectives or an anticipated outline. He/she will generally have only a few specific questions prepared prior to the focus group. These questions will serve to initiate open-ended discussions. Client representatives observe the discussion from behind a one-way mirror. Participants cannot see out, but the researchers and their clients can see in. Usually, a video camera records the meeting so that it can be seen by others who were not able to travel to the site. Transcripts can be created from the video tape. If the participants speak a different language than the clients, a simultaneous interpreter may be used. Researchers examine more than the spoken words. They also try to interpret facial expressions, body language, and group dynamics. Moderators may use straight questioning or various projective techniques, including fixed or free association, story-telling and role-playing. Focus groups are often used to garner reaction to specific stimuli such as concepts, prototypes and advertising. It is often suggested that respondents feel group pressure to conform and this can contaminate the results. Others hold that by using trained and experienced moderators who appropriately manage the discussion, this potential problem can be mitigated. Further, despite the potential for (groupthink), marketers and sociologists find that group dynamics are useful in developing new streams of thought and covering an issue thoroughly. Types of focus groups Variants of focus groups include: • Two-way focus group - one focus group watches another focus group and discusses the observed interactions and conclusions • Dual moderator focus group - one moderator ensures the session progresses smoothly, while another ensures that all the topics are covered
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Dueling moderator focus group - two moderators deliberately take opposite sides on the issue under discussion • Respondent moderator focus group - one or more of the respondents are asked to act as the moderator temporarily • Client participant focus groups - one or more client representatives participate in the discussion, either covertly or overtly • Mini focus groups - groups are comprised of 4 or 5 members rather than 8 to 12 Teleconference focus groups - telephone network is used Online focus groups - computers and internet network is used Traditional focus groups can provide accurate information, and are less expensive than other forms of traditional marketing research. There can be significant costs however : if a product is to be marketed on a nationwide basis, it would be critical to gather respondents from various locales throughout the country since attitudes about a new product may vary due to geographical considerations. This would require a considerable expenditure in travel and lodging expenses. Additionally, the site of a traditional focus group may or may not be in a locale convenient to a specific client, so client representatives may have to incur travel and lodging expenses as well. The use of focus groups has steadily evolved over time and is becoming increasingly more widespread. Online focus groups With the advent of large scale computer networks, such as the Internet, it is now possible to link respondents electronically. Respondents share images, data, and their responses on their computer screens. This avoids a significant amount of travel expenses. It allows respondents from all over the country to gather, electronically, while avoiding countless logistical headaches. Like in-person focus groups, online groups are usually limited to 8-10 participants. Such a system eliminates the logistical headaches and travel expenses associated with conducting focus groups. Many platforms even allow for a 'back room', so that clients can observe and talk among each other and with the moderator as the group proceeds, just like in-person focus groups, even though they are physically apart from the moderator. In this way, questions can be added in real time to further probe a particular response. Such a system prohibits participation on the different chat discussions 93
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based on the class of the participant (moderator, observer, participant). In addition to the savings on travel, online focus groups often can be accomplished faster than traditional groups because respondents are recruited from online panel members who are often qualified to match research criteria. Marketing Fast Moving Consumer Goods Fast Moving Consumer Goods (FMCG), also known as Consumer Packaged Goods (CPG), are products that have a quick turnover, and relatively low cost. Consumers generally put less thought into the purchase of FMCG than they do for other products. Though the absolute profit made on FMCG products is relatively small, they generally sell in large numbers and so the cumulative profit on such products can be large. Examples of FMCG generally includes a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, teeth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, condoms, rizlas, batteries, paper products and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products and drinks, although these are often categorized separately. FMCG products can be thought of in contrast with consumer durables, which are generally replaced less than once a year (e.g. kitchen appliances). Three of the largest and best known examples of Fast Moving Consumer Goods companies are Nestlé, Unilever and Procter & Gamble. Examples of FMCGs are soft drinks, tissue paper, and chocolate bars. Examples of FMCG brands are Coca-Cola, Kleenex, Pepsi and the Mars Bar. A subset of FMCGs are Fast Moving Consumer Electronics which contain innovative electronic products such as mobile phones, MP3 players, digital cameras, GPS Systems, cell phones and Laptops which are replaced more frequently than other electronic products. White goods in FMCG refers to house hold electronic items such as Refrigerator, T.V, Music Systems etc. FMCG industry is innovative, full of rich experience, reaches world wide, people working with FMCG may get frequent opportunity to travel meet new culture, gets experience very quickly and chances to rise in status is much easier.
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Unlike other sectors FMCG shares float in a steady manner irrespective of market dip world wide. So basically, fast moving consumer goods are pretty awesome. Retailing Retailing consists of the sale of goods or merchandise, from a fixed location such as a department store or kiosk, in small or individual lots for direct consumption by the purchaser.Retailing may include subordinated services such as delivery. Purchasers may be individuals or businesses. In commerce, a retailer buys goods or products in large quantities from manufacturers or importers, either directly or through a wholesaler, and then sells smaller quantities to the end-user. Retail establishments are often called shops or stores. Retailers are at the end of the supply chain. Manufacturing marketers see the process of retailing as a necessary part of their overall distribution strategies. Shops may be on residential streets, or in shopping streets with few or no houses, or in a shopping center or mall. Shopping streets may or may not be for pedestrians only. Sometimes a shopping street has a partial or full roof to protect customers from precipitation. Retailers often provided boardwalks in front of their stores to protect customers from the mud. Online retailing, also known as ecommerce is the latest form of non-shop retailing. Shopping generally refers to the act of buying products. Sometimes this is done to obtain necessities such as food and clothing; sometimes it is done as a recreational activity. Recreational shopping often involves window shopping (just looking, not buying) and browsing and does not always result in a purchase. Most retailers have employees learn facing; a hyperreal tool used to create the look of a perfectly-stocked store (even when it's not). Retail pricing The pricing technique used by most retailers is cost-plus pricing. This involves adding a markup amount (or percentage) to the retailers cost. Another common technique is suggested retail pricing. This simply involves charging the amount suggested by the manufacturer and usually printed on the product by the manufacturer. In Western countries, retail prices are often so-called psychological prices or odd prices: a little less than a round number, e.g. $6.95. In Chinese societies, prices are generally either a round number or sometimes a lucky number. This creates price points.
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Often prices are fixed and displayed on signs or labels. Alternatively, there can be price discrimination for a variety of reasons. The retailer charges higher prices to some customers and lower prices to others. For example, a customer may have to pay more if the seller determines that he or she is willing to. The retailer may conclude this due to the customer's wealth, carelessness, lack of knowledge, or eagerness to buy. Price discrimination can lead to a bargaining situation often called haggling — a negotiation about the price. Economists see this as determining how the transaction's total surplus will be divided into consumer and producer surplus. Neither party has a clear advantage, because the threat of no sale exists, whence the surplus vanishes for both. Retailers who are overstocked, or need to raise cash to renew stocks may resort to "Sales", where prices are "marked down", often by advertised percentages - "50% off" for example."Sales" are often held at fixed times of the year, for example January sales, or end-of-season sales, or Blue Cross Sale. Etymology Retail comes from the French word retaillier which refers to "cutting off, clip and divide" in terms of tailoring (1365). It first was recorded as a noun with the meaning of a "sale in small quantities" in 1433 (French). Its literal meaning for retail was to "cut off, shred, paring". Like the French, the word retail in both Dutch and German (detailhandel and Einzelhandel respectively) also refer to sale of small quantities or items. Retail types There are three major types of retailing. The first is the market, a physical location where buyers and sellers converge. Usually this is done on town squares, sidewalks or designated streets and may involve the construction of temporary structures (market stalls). The second form is shop or store trading. Some shops use counter-service, where goods are out of reach of buyers, and must be obtained from the seller. This type of retail is common for small expensive items (e.g. jewelry) and controlled items like medicine and liquor. Self-service, where goods may be handled and examined prior to purchase, has become more common since the Twentieth Century. A third form of retail is virtual retail, where products are ordered via mail, telephone or online without having been examined physically but instead in a catalog, on television or on a website. Sometimes this kind of retailing replicates existing retail
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types such as online shops or virtual marketplaces such as eBay. Buildings for retail have changed considerably over time. Market halls were constructed in the Middle Ages, which were essentially just covered marketplaces. The first shops in the modern sense used to deal with just one type of article, and usually adjoined the producer (baker, tailor, cobbler). In the nineteenth century, in France, arcades were invented, which were a street of several different shops, roofed over. From this there soon developed, still in France, the notion of a large store of one ownership with many counters, each dealing with a different kind of article was invented; it was called a department store. One of the novelties of the department store was the introduction of fixed prices, making haggling unnecessary, and browsing more enjoyable. This is commonly considered the birth of consumerism. In cities, these were multi-story buildings which pioneered the escalator. In the 1920's the first supermarket opened in the United States, heralding in a new era of retail: self-service. Around the same time the first shopping mall was constructed which incorporated elements from both the arcade and the department store. A mall consists of several department stores linked by arcades (many of whose shops are owned by the same firm under different names). The design was perfected by the Austrian architect Victor Gruen. All the stores rent their space from the mall owner. By mid-century, most of these were being developed as single enclosed, climate-controlled, projects in suburban areas. The mall has had a considerable impact on the retail structure and urban development in the United States. In addition to the enclosed malls, there are also strip malls which are 'outside' malls (in Britain they are called retail parks. These are often connected to supermarkets or big box stores. Also, in high traffic areas, other businesses may lease space from the supermarket or big box store to sell their goods or services from. A recent development is a very large shop called a superstore. These are sometimes located as stand-alone outlets, but more commonly are part of a strip mall or retail park. Local shops can be known as brick and mortar stores in the United States. Many shops are part of a chain: a number of similar shops with the same name selling the same products in different locations. The shops may be owned by one company, or there may be a franchising company that has franchising agreements with the shop owners (see also restaurant chain).
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Some shops sell second-hand goods. Often the public can also sell goods to such shops, sometimes called 'pawn' shops. In other cases, especially in the case of a nonprofit shop, the public donates goods to the shop to be sold (see also thrift store). In give-away shops goods can be taken for free. There are also 'consignment' shops, which is where a person can place an item in a store, and if it sells the person gives the shop owner a percentage of the sale price. The advantage of selling an item this way is that the established shop give the item exposure to more potential buyers. The term retailer is also applied where a service provider services the needs of a large number of individuals, such as with telephone or electric power. Supply chain management Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption. The term supply chain management was coined by consultant Keith Oliver, of strategy consulting firm Booz Allen Hamilton in 1982. The definition one America professional association put forward is that Supply Chain Management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies. Supply chain event management (abbreviated as SCEM) is a consideration of all possible occurring events and factors that can cause a disruption in a supply chain. With SCEM possible scenarios can be created and solutions can be planned. Some experts distinguish supply chain management and logistics, while others consider the terms to be interchangeable.Supply chain management is also a category of software products. Supply chain management problems Supply chain management must address the following problems:
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Distribution Network Configuration: Number and location of suppliers, production facilities, distribution centers, warehouses and customers. • Distribution Strategy: Centralized versus decentralized, direct shipment, Cross docking, pull or push strategies, third party logistics. • Information: Integrate systems and processes through the supply chain to share valuable information, including demand signals, forecasts, inventory and transportation etc. • Inventory Management: Quantity and location of inventory including raw materials, work-in-process and finished goods. • Supply chain execution is managing and co ordinating the movement of materials information and funds across the supply chain. The flow is bi directional. Activities/Functions Supply chain management is a cross-functional approach to managing the movement of raw materials into an organization and the movement of finished goods out of the organization toward the end-consumer. As corporations strive to focus on core competencies and become more flexible, they have reduced their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other corporations that can perform the activities better or more cost effectively. The effect has been to increase the number of companies involved in satisfying consumer demand, while reducing management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and improving inventory velocity. Several models have been proposed for understanding the activities required to manage material movements across organizational and functional boundaries. SCOR is a supply chain management model promoted by the Supply-Chain Management Council. Another model is the SCM Model proposed by the Global Supply Chain Forum (GSCF). Supply chain activities can be grouped into strategic, tactical, and operational levels of activities. Strategic • Strategic network optimization, including the number, location, and size of warehouses, distribution centers and facilities.
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Strategic partnership with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third-party logistics. • Product design coordination, so that new and existing products can be optimally integrated into the supply chain, load management • Information Technology infrastructure, to support supply chain operations. • Where to make and what to make or buy decisions • Align Overall Organizational Strategy with supply strategy. Tactical • Sourcing contracts and other purchasing decisions. • Production decisions, including contracting, locations, scheduling, and planning process definition. • Inventory decisions, including quantity, location, and quality of inventory. • Transportation strategy, including frequency, routes, and contracting. • Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise. • Milestone Payments. • Operational • Daily production and distribution planning, including all nodes in the supply chain. • Production scheduling for each manufacturing facility in the supply chain (minute by minute). • Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers. • Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers. • Inbound operations, including transportation from suppliers and receiving inventory. • Production operations, including the consumption of materials and flow of finished goods. • Outbound operations, including all fulfillment activities and transportation to customers.
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Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities. distribution centers, and other customers. • Performance tracking of all activities. Supply Chain Management Organizations increasingly find that they must rely on effective supply chains, or networks, to successfully compete in the global market and networked economy. In Peter Drucker's (1998) management's new paradigms, this concept of business relationships extends beyond traditional enterprise boundaries and seeks to organize entire business processes throughout a value chain of multiple companies. During the past decades, globalization, outsourcing and information technology have enabled many organizations such as Dell and Hewlett Packard, to successfully operate solid collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities. This inter-organizational supply network can be acknowledged as a new form of organization. However, with the complicated interactions among the players, the network structure fits neither "market" nor "hierarchy" categories. It is not clear what kind of performance impacts different supply network structures could have on firms, and little is known about the coordination conditions and trade-offs that may exist among the players. From a system's point of view, a complex network structure can be decomposed into individual component firms. Traditionally, companies in a supply network concentrate on the inputs and outputs of the processes, with little concern for the internal management working of other individual players. Therefore, the choice of internal management control structure is known to impact local firm performance In the 21st century, there have been few changes in business environment that have contributed to the development of supply chain networks. First, as an outcome of globalization and proliferation of multi-national companies, joint ventures, strategic alliances and business partnerships were found to be significant success factors, following the earlier "Just-In-Time", "Lean Management" and "Agile Manufacturing" practices. Second, technological changes, particularly the dramatic fall in information communication costs, a paramount component of transaction costs, has led to changes in coordination among the members of the supply chain network. Many researchers have recognized these kinds of supply network structure as a new organization form, using terms 101
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such as "Keiretsu", "Extended Enterprise", "Virtual Corporation", Global Production Network", and "Next Generation Manufacturing System". In general, such a structure can be defined as "a group of semi-independent organizations, each with their capabilities, which collaborate in ever-changing constellations to serve one or more markets in order to achieve some business goal specific to that collaboration" Supply Chain Business Process Integration Successful SCM requires a change from managing individual functions to integrating activities into key supply chain processes. An example scenario: the purchasing department places orders as requirements become appropriate. Marketing, responding to customer demand, communicates with several distributors and retailers, and attempts to satisfy this demand. Shared information between supply chain partners can only be fully leveraged through process integration. Supply chain business process integration involves collaborative work between buyers and suppliers, joint product development, common systems and shared information.Operating an integrated supply chain requires continuous information flows, which in turn assist to achieve the best product flows. However, in many companies, management has reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business. The key supply chain processes are: • Customer relationship management • Customer service management • Demand management • Order fulfillment • Manufacturing flow management • Supplier relationship management • Product development and commercialization • Returns management One could suggest other key critical supply business processes combining these processes such as: • Customer service Management • Procurement • Product development and Commercialization Manufacturing flow management/support • Physical Distribution • Outsourcing/ Partnerships • Performance Measurement 102
a) Customer service management process Customer service provides the source of customer information. It also provides the customer with real-time information on promising dates and product availability through interfaces with the company's production and distribution operations. b) Procurement process Strategic plans are developed with suppliers to support the manufacturing flow management process and development of new products. In firms where operations extend globally, sourcing should be managed on a global basis. The desired outcome is a win-win relationship, where both parties benefit, and reduction times in the design cycle and product development is achieved. Also, the purchasing function develops rapid communication systems, such as electronic data interchange (EDI) and Internet linkages to transfer possible requirements more rapidly. Activities related to obtaining products and materials from outside suppliers. This requires performing resource planning, supply sourcing, negotiation, order placement, inbound transportation, storage and handling and quality assurance. Also, includes the responsibility to coordinate with suppliers in scheduling, supply continuity, hedging, and research to new sources or programmes. c) Product development and commercialization Here, customers and suppliers must be united into the product development process, thus to reduce time to market. As product life cycles shorten, the appropriate products must be developed and successfully launched in ever shorter time-schedules to remain competitive. Managers of the product development and commercialization process must: • coordinate with customer relationship management to identify customer-articulated needs; • select materials and suppliers in conjunction with procurement, and • develop production technology in manufacturing flow to manufacture and integrate into the best supply chain flow for the product/market combination. d) Manufacturing flow management process The manufacturing process is produced and supplies products to the distribution channels based on past forecasts. Manufacturing processes must be flexible to respond to market changes, and must accommodate mass customization. Orders are processes operating on a just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow process lead to shorter cycle times, meaning improved responsiveness and efficiency of demand to 103
customers. Activities related to planning, scheduling and supporting manufacturing operations, such as work-inprocess storage, handling, transportation, and time phasing of components, inventory at manufacturing sites and maximum flexibility in the coordination of geographic and final assemblies postponement of physical distribution operations. e) Physical Distribution This concerns movement of a finished product/service to customers. In physical distribution, the customer is the final destination of a marketing channel, and the availability of the product/service is a vital part of each channel participant's marketing effort. It is also through the physical distribution process that the time and space of customer service become an integral part of marketing, thus it links a marketing channel with its customers (e.g. links manufacturers, wholesalers, retailers). f) Outsourcing/Partnerships This is not just outsourcing the procurement of materials and components, but also outsourcing of services that traditionally have been provided in-house. The logic of this trend is that the company will increasingly focus on those activities in the value chain where it has a distinctive advantage and everything else it will outsource. This movement has been particularly evident in logistics where the provision of transport, warehousing and inventory control is increasingly subcontracted to specialists or logistics partners. Also, to manage and control this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally with the monitoring and control of supplier performance and day-today liaison with logistics partners being best managed at a local level. g) Performance Measurement Experts found a strong relationship from the largest arcs of supplier and customer integration to market share and profitability. By taking advantage of supplier capabilities and emphasizing a long-term supply chain perspective in customer relationships can be both correlated with firm performance. As logistics competency becomes a more critical factor in creating and maintaining competitive advantage, logistics measurement becomes increasingly important because the difference between profitable and unprofitable operations becomes more narrow. A.T. Kearney Consultants (1985) noted that firms engaging in comprehensive performance measurement realized improvements in overall productivity. According to experts internal
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measures are generally collected and analyzed by the firm including • Cost • Customer Service • Productivity measures • Asset measurement, and • Quality. External performance measurement is examined through customer perception measures and "best practice" benchmarking, and includes 1) Customer perception measurement, and 2) Best practice benchmarking. Components of Supply Chain Management are 1. Standardisation 2. Postponement 3. Customisation. Supply Chain Management Components Integration The management components of SCM The SCM management components are the third element of the four-square circulation framework. The level of integration and management of a business process link is a function of the number and level, ranging from low to high, of components added to the link. Consequently, adding more management components or increasing the level of each component can increase the level of integration of the business process link. The literature on business process reengineering, buyer-supplier relationships, and SCM suggests various possible components that must receive managerial attention when managing supply relationships. the following components which are: • Planning and control • Work structure • Organization structure • Product flow facility structure • Information flow facility structure • Management methods • Power and leadership structure • Risk and reward structure • Culture and attitude However, a more careful examination of the existing literature] will lead us to a more comprehensive structure of what should be the key critical supply chain components, the "branches" of the previous identified supply chain business processes, that is what kind of relationship the components may have that are related with suppliers and customers accordingly. Bowersox and Closs states that the emphasis on cooperation represents the synergism leading to the highest level of joint achievement. A primary level 105
channel participant is a business that is willing to participate in the inventory ownership responsibility or assume other aspects financial risk, thus including primary level components. A secondary level participant (specialized), is a business that participates in channel relationships by performing essential services for primary participants, thus including secondary level components, which are supporting the primary ones. Also, third level channel participants and components may be included, that will support the primary level channel participants, and which are the fundamental branches of the secondary level components. Consequently, Lambert and Cooper's framework of supply chain components, does not lead us to the conclusion about what are the primary or secondary (specialized) level supply chain components, that is what supply chain components should be viewed as primary or secondary, and how should these components be structured in order to have a more comprehensive supply chain structure and to examine the supply chain as an integrative one. For Customer Service Management: Includes the primary level component of customer relationship management, and secondary level components such as benchmarking and order fulfillment. For Product Development and Commercialization: Includes the primary level component of Product Data Management (PDM), and secondary level components such as market share, customer satisfaction, profit margins, and returns to stakeholders. For Physical Distribution, Manufacturing support and Procurement: Includes the primary level component of Enterprise Resource Planning (ERP), with secondary level components such as warehouse management, material management, manufacturing planning, personnel management, and postponement (order management). For Performance Measurement: This includes the primary level component of logistics performance measurement, which is correlated with the information flow facility structure within the organization. Secondary level components may include four types of measurement such as: variation, direction, decision and policy measurements. More specifically, in accordance with these secondary level components total cost analysis (TCA), customer profitability analysis (CPA), and Asset management could be concerned as well. In general, information flow facility structure is regarded by two important requirements, which
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are a) planning and Coordination flows, and b)operational requirements. For Outsourcing: This includes the primary level component of management methods and the company's cutting-edge strategy and its vital strategic objectives that the company will identify and adopt for particular strategic initiatives in key the areas of technology information, operations, manufacturing capabilities, and logistics (secondary level components). Procurement Procurement is the acquisition of goods or services at the best possible total cost of ownership, in the right quantity and quality, at the right time, in the right place for the direct benefit or use of governments, corporations, or individuals generally via, a contract. Simple procurement may involve nothing more than repeat purchasing. Complex procurement could involve finding long term partners – or even 'co-destiny' suppliers that might fundamentally commit one organisation to another. Even simple purchasing can involve trade-offs. What is the quality required? Are there advantages buying fewer or more items? The timing can be critical. Each supplier may have different attributes, capabilities and values. The total cost of acquisition should be considered alongside the total lifetime cost, not just the purchase price. The physical handling of any products should be considered, with links to methods of transport, logistics and warehousing. A key question in procurement is what to buy, given a limited budget. A manager in a health service may have a large choice of possible health technologies which could be purchased. Is it better to buy an MRI scanner for a hospital or an advertising campaign to encourage parents to have their children vaccinated? A military officer may wish to choose between buying more fighter aircraft or more trucks. If good data is available it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis. An important distinction is between analyses made without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of expected value should be employed. Procurement Types Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct,
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Direct procurement and indirect procurement TYPES Direct Indirect Procurement Procurement Raw Material Maintenance, Capital and Repair and Good and Production Operating (MRO) Services Goods Supplies Quantity Large Low Low F High Relatively high Low E Frequency A Industry Value Low High T specific U Nature Operational Clerical Strategic R Crude oil in E Lubricants, Machinery, Petroleum S Examples spare parts computers industry production-related procurement and the second being indirect, non-production-related procurement.
Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement activities concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardised low value items like office supplies and machine lubricants to complex and costly products and services like heavy equipment and consulting services. 108
Procurement Systems Another common procurement issue is the 'timing' of purchases. Kanban or Just In Time is a system (commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards) of timing the purchases of consumables so as to keep inventory costs low.
Shared Services In order to achieve greater economies of scale an organisation’s procurement functions may be joined up into shared services. This results in rather than a number of small procurement agents, one centralized procurement system... Procurement Process Procurement may also involve a bidding process. A company may want to purchase a given product or service. If the cost for that product/service is over the threshold that has been established (eg: Company X policy: "any product/service desired that is over $1,000 requires a bidding process"), depending on policy or legal requirements, Company X is required to state the product/service desired and make the contract open to the bidding process. Company X may have ten submitters that state the cost of the product/service they are willing to provide. Then, Company X will usually select the lowest bidder. If the lowest bidder is deemed incompetent to provide the desired product/service, Company X will then select the submitter who has the next best price, and is competent to provide the product/service. Procurement Steps Procurement life cycle in modern businesses usually consists of seven steps: Information Gathering: If the potential customer does not already have an established relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary to search for suppliers who can satisfy the requirements. Supplier Contact: When one or more suitable suppliers have been identified, Requests for Quotation (RFQ), Requests for Proposals (RFP), Requests for Information (RFI) or Requests for Tender (RFT) may be advertised, or direct contact may be made with the suppliers. Background Review: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are
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investigated. Samples of the P/S being considered may be examined, or trials undertaken. Negotiation: Negotiations are undertaken, and price, availability, and customisation possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed. Fulfillment: Supplier preparation, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included. Consumption, Maintenance and Disposal: During this phase the company evaluates the performance of the P/S and any accompanying service support, as they are consumed. Renewal: When the P/S has been consumed and/or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier. Distribution Distribution is one of the four aspects of marketing. A distributor is the middleman between the manufacturer and retailer. After a product is manufactured it is typically shipped (and usually sold) to a distributor. The distributor then sells the product to retailers or customers. The other three parts of the marketing mix are product management, pricing, and promotion. Traditionally, distribution has been seen as dealing with logistics: how to get the product or service to the customer. It must answer questions such as: • Should the product be sold through a retailer? • Should the product be distributed through wholesale? • Should multi-level marketing channels be used? • How long should the channel be (how many members)? • Where should the product or service be available? • When should the product or service be available? • Should distribution be exclusive, selective or extensive? • Who should control the channel (referred to as the channel captain)? • Should channel relationships be informal or contractual? • Should channel members share advertising (referred to as co-op ads)? • Should electronic methods of distribution be used?
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Are there physical distribution and logistical issues to deal with? • What will it cost to keep an inventory of products on store shelves and in channel warehouses (referred to as filling the pipeline)? The distribution channel Frequently there may be a chain of intermediaries, each passing the product down the chain to the next organization, before it finally reaches the consumer or end-user. This process is known as the 'distribution chain' or the 'channel.' Each of the elements in these chains will have their own specific needs, which the producer must take into account, along with those of the all-important enduser. Channels • A number of alternate 'channels' of distribution may be available: • Selling direct, such as via mail order, Internet and telephone sales • Agent, who typically sells direct on behalf of the producer • Distributor (also called wholesaler), who sells to retailers • Retailer (also called dealer), who sells to end customers • Advertisement typically used for consumption goods Distribution channels may not be restricted to physical products alone. They may be just as important for moving a service from producer to consumer in certain sectors, since both direct and indirect channels may be used. Hotels, for example, may sell their services (typically rooms) directly or through travel agents, tour operators, airlines, tourist boards, centralized reservation systems, etc. There have also been some innovations in the distribution of services. For example, there has been an increase in franchising and in rental services - the latter offering anything from televisions through tools. There has also been some evidence of service integration, with services linking together, particularly in the travel and tourism sectors. For example, links now exist between airlines, hotels and car rental services. In addition, there has been a significant increase in retail outlets for the service sector. Outlets such as estate agencies and building society offices are crowding out traditional grocers from major shopping areas.. Channel members 111
•
Distribution channels can thus have a number of levels. Kotler defined the simplest level, that of direct contact with no intermediaries involved, as the 'zero-level' channel. The next level, the 'one-level' channel, features just one intermediary; in consumer goods a retailer, for industrial goods a distributor, say. In small markets (such as small countries) it is practical to reach the whole market using just one- and zero-level channels. In large markets (such as larger countries) a second level, a wholesaler for example, is now mainly used to extend distribution to the large number of small, neighbourhood retailers. In Japan the chain of distribution is often complex and further levels are used, even for the simplest of consumer goods. Channel structure To the various `levels' of distribution, which they refer to as the `channel length', Lancaster and Massingham also added another structural element, the relationship between its members: • 'Conventional or free-flow - This is the usual, widely recognized, channel with a range of `middle-men' passing the goods on to the end-user. • Single transaction - A temporary `channel' may be set up for one transaction; for example, the sale of property or a specific civil engineering project. This does not share many characteristics with other channel transactions, each one being unique. • Vertical marketing system (VMS) - In this form, the elements of distribution are integrated. The internal market Many of the marketing principles and techniques which are applied to the external customers of an organization can be just as effectively applied to each subsidiary's, or each department's, 'internal' customers. In some parts of certain organizations this may in fact be formalized, as goods are transferred between separate parts of the organization at a `transfer price'. To all intents and purposes, with the possible exception of the pricing mechanism itself, this process can and should be viewed as a normal buyer-seller relationship. The fact that this is a captive market, resulting in a `monopoly price', should not discourage the participants from employing marketing techniques. Less obvious, but just as practical, is the use of `marketing' by service and administrative departments; to 112
optimize their contribution to their `customers' (the rest of the organization in general, and those parts of it which deal directly with them in particular). In all of this, the lessons of the non-profit organizations, in dealing with their clients, offer a very useful parallel. Channel Decisions • Overall strategy • Channel strategy • Product (or service)<>Cost<>Consumer location
Channel management
The channel decision is very important. In theory at least, there is a form of trade-off: the cost of using intermediaries to achieve wider distribution is supposedly lower. Indeed, most consumer goods manufacturers could never justify the cost of selling direct to their consumers, except by mail order. In practice, if the producer is large enough, the use of intermediaries (particularly at the agent and wholesaler level) can sometimes cost more than going direct. Many of the theoretical arguments about channels therefore revolve around cost. On the other hand, most of the practical decisions are concerned with control of the consumer. The small company has no alternative but to use intermediaries, often several layers of them, but large companies 'do' have the choice. However, many suppliers seem to assume that once their product has been sold into the channel, into the beginning of the distribution chain, their job is finished. Yet that distribution chain is merely assuming a part of the supplier's responsibility; and, if he has any aspirations to be market-oriented, his job should really be extended to managing, albeit very indirectly, all the processes involved in that chain, until the product or service arrives with the end-user. This may involve a number of decisions on the part of the supplier: • Channel membership • Channel motivation • Monitoring and managing channels Channel membership 1. Intensive distribution - Where the majority of resellers stock the `product' (with convenience products, for example, and particularly the brand leaders in consumer goods markets) price competition may be evident.
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2. Selective distribution - This is the normal pattern (in both consumer and industrial markets) where `suitable' resellers stock the product. 3. Exclusive distribution - Only specially selected resellers (typically only one per geographical area) are allowed to sell the `product'. Channel motivation It is difficult enough to motivate direct employees to provide the necessary sales and service support. Motivating the owners and employees of the independent organizations in a distribution chain requires even greater effort. There are many devices for achieving such motivation. Perhaps the most usual is `bribery': the supplier offers a better margin, to tempt the owners in the channel to push the product rather than its competitors; or a competition is offered to the distributors' sales personnel, so that they are tempted to push the product. At the other end of the spectrum is the almost symbiotic relationship that the all too rare supplier in the computer field develops with its agents; where the agent's personnel, support as well as sales, are trained to almost the same standard as the supplier's own staff. Monitoring and managing channels In much the same way that the organization's own sales and distribution activities need to be monitored and managed, so will those of the distribution chain. In practice, of course, many organizations use a mix of different channels; in particular, they may complement a direct salesforce, calling on the larger accounts, with agents, covering the smaller customers and prospects. Vertical marketing This relatively recent development integrates the channel with the original supplier - producer, wholesalers and retailers working in one unified system. This may arise because one member of the chain owns the other elements (often called `corporate systems integration'); a supplier owning its own retail outlets, this being 'forward' integration. It is perhaps more likely that a retailer will own its own suppliers, this being 'backward' integration. (For example, MFI, the furniture retailer, owns Hygena which makes its kitchen and bedroom units.) The integration can also be by franchise (such as that offered by McDonald's hamburgers and Benetton clothes) or simple cooperation (in the way that Marks & Spencer co-operates with its suppliers). Alternative approaches are `contractual systems', often led by a wholesale or retail co-operative, and `administered
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marketing systems' where one (dominant) member of the distribution chain uses its position to co-ordinate the other members' activities. This has traditionally been the form led by manufacturers. The intention of vertical marketing is to give all those involved (and particularly the supplier at one end, and the retailer at the other) 'control' over the distribution chain. This removes one set of variables from the marketing equations. Other research indicates that vertical integration is a strategy which is best pursued at the mature stage of the market (or product). At earlier stages it can actually reduce profits. It is arguable that it also diverts attention from the real business of the organization. Suppliers rarely excel in retail operations and, in theory, retailers should focus on their sales outlets rather than on manufacturing facilities ( Marks & Spencer, for example, very deliberately provides considerable amounts of technical assistance to its suppliers, but does not own them). Horizontal marketing A rather less frequent example of new approaches to channels is where two or more non-competing organizations agree on a joint venture - a joint marketing operation because it is beyond the capacity of each individual organization alone. In general, this is less likely to revolve around marketing synergy. Wholesale Wholesaling consists of the sale of goods/merchandise to retailers, to industrial, commercial, institutional, or other professional business users or to other wholesalers and related subordinated services. According to the United Nations Statistics Division, Wholesale is the resale (sale without transformation) of new and used goods to retailers, to industrial, commercial, institutional or professional users, or to other wholesalers, or involves acting as an agent or broker in buying merchandise for, or selling merchandise, to such persons or companies. Wholesalers frequently physically assemble, sort and grade goods in large lots, break bulk, repack and redistribute in smaller lots, for example pharmaceuticals; store, refrigerate, deliver and install goods, engage in sales promotion for their customers and label design." Multi-level marketing In a typical multi-level marketing or network marketing arrangement, individuals associate with a parent company as
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an independent contractor or franchisee and are compensated based on their sales of products or service, as well as the sales achieved by those they bring into the business. This is like many franchise companies where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager. In a legitimate MLM company, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"). One must analyze the compensation plan to determine whether participants are paid from actual sales to customers and not from money received from new recruits. If participants are paid primarily from money received from new recruits, then the company is an illegal pyramid or Ponzi scheme. Some less legitimate companies produce revenues primarily by attracting new participants with the hope of reward and selling them products or services of dubious value at inflated prices, as opposed to selling products or services consumers would purchase at the given price without regard to the opportunity attached. One must evaluate the products or services and determine if a significant percentage of consumers would continue to purchase them if the participants do not make money from the underlying opportunity. If the products or services have dubious value or if the participants must purchase excessive quantities without reasonable intent to use or resell said items, then the company is likely a thinly veiled illegal pyramid scheme. Multi-level marketing has a recognized image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal scams such as pyramid or Ponzi schemes. MLM businesses operate legitimately in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses. History The 1980s saw a major shift as companies began managing the stocking and distribution of products as well as commission payments to their members. This allowed members to focus on selling. Today, most MLM companies act as logistics companies that take orders, ship products and calculate and pay commissions. With the arrival of the Internet, MLM companies have started to go online. Many established MLM companies began
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to use the Internet to promote their products. At the same time, many other new MLM companies started their businesses using the Internet, which is generally called online MLM Compensation plans Companies have devised various MLM compensation plans over the decades. Unilevel or Stairstep Breakaway plans are the oldest and most popular. They feature two types of distributors -managers and non-managers -- and three types of pay: Baseshop overrides are overrides of managers from their subordinate non-managers, collectively called a baseshop. This is the same as any other sales organisation. Generational overrides are overrides of managers from the baseshop of managers who were previously their subordinate. Most plans compensate at least three generations of such managers. Executive bonuses are commissions for managers who exceed a sales quota. For example, 2% of the total company sales revenue may go to a bonus pool that is shared monthly pro rata to managers who exceed $10,000 in that month. Matrix Plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them. Binary plans limit the width of each level to two legs. Commissions are based on "cycles," where a distributor is paid a fixed amount whenever both legs achieve a certain number of sales units each. Commissions are paid incrementally when the sales volume in each leg matches. Elevator or Matrix schemes feature a game board or a list on which each distributor pays in one or more product units to participate. When a certain number of units have been paid in, the structure splits and the earlier participant receives consideration. The Matrix scheme article discusses the legality of this plan. You must do your own research as with any other investment. Criticism of MLM The FTC issued a decision, In re. Amway Corp. in 1979, which indicated that multi-level marketing was not illegal. In this case Amway was however found guilty of price-fixing (by requiring "independent" distributors to sell at the same price) and making exaggerated income claims. Amway has been a target for critics because some high-level Independent Business Owners (IBOs) have setup separate companies for selling instructional and motivational materials to Amway IBOs. In some cases this generates more revenue for them than their Amway distributorships.
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Fraudulent MLM schemes can usually be identified by high entrance fees or requirements to purchase expensive inventories. They often collapse quickly when the merchandise cannot be resold, leaving all but those at the top of the pyramid with financial losses. Multi-level marketing companies • ACN Inc. • Amsoil • Amway • Avon Products • DXN • Exit Realty Corp. International • Forever Living Products • Herbalife (health and wellness products) • Mannatech • Mary Kay Cosmetics • Neways • Nouveau Riche University • Pre-Paid Legal Services, Inc. • Primerica Financial Services • Quixtar • Sunrider • Tahitian Noni • Tupperware • Vector Marketing (sellers of Cutco knives) • World Financial Group • XanGo Warehouse A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities and towns. They come equipped with loading docks to load and unload trucks; or sometimes are loaded directly from railways, airports, or seaports. They also often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets. Some warehouses are completely automated, with no workers working inside. The pallets and product are moved with a system of automated conveyors and automated storage and retrieval machines coordinated by programmable logic controllers and computers running logistics automation software. These systems are often installed in refrigerated warehouses where temperatures are kept very cold to keep 118
the product from spoiling, and also where land is expensive, as automated storage systems can use vertical space efficiently. These high-bay storage areas are often more than 10 meters high, with some over 20 meters high. The direction and tracking of materials in the warehouse is coordinated by the WMS, or Warehouse Management System, a database driven computer program. The WMS is used by logistics personnel to improve the efficiency of the warehouse by directing putaways and to maintain accurate inventory by recording warehouse transactions. Traditional warehousing has been declining since the last decades of the 20th century with the gradual introduction of Just In Time (JIT) techniques designed to improve the return on investment of a business by reducing in-process inventory. The JIT system promotes the delivery of product directly from the factory to the retail merchant, or from parts manufacturers directly to a large scale factory such as an automobile assembly plant, without the use of warehouses. However, with the gradual implementation of offshore outsourcing and offshoring in about the same time period, the distance between the manufacturer and the retailer (or the parts manufacturer and the industrial plant) grew considerably in many domains, necessitating at least one warehouse per country or per region in any typical supply chain for a given range of products. Recent developments in marketing have also led to the development of warehouse-style retail stores with extremely high ceilings where decorative shelving is replaced by tall heavy duty industrial racks, with the items ready for sale being placed in the bottom parts of the racks and the crated or palletized and wrapped inventory items being usually placed in the top parts. In this way the same building is used both as a retail store and a warehouse. Point of sale POS or PoS is an abbreviation for point of sale (or pointof-sale, or point of service). This can mean a retail shop, a checkout counter in a shop, or a variable location where a transaction occurs in this type of environment. Additionally, point of sale sometimes refers to the electronic cash register system being used in an establishment. Point of sale systems are used in restaurants, hotels, stadiums, casinos, as well as retail environments — in short, if something can be sold, it can be sold where a point of sale system is in use. Traditional stores A check-out counter, checkstand, or checkout is the aisle where people place items they have chosen to purchase from
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a store, such as a supermarket or department store. This is typically a long counter, which usually contains a moving belt or sometimes a rotating carousel, and a photocell to stop it when items reach the end. The cashier rings up each item on the cash register and obtains the total. The items are placed in bags and the customer can take them after paying. Point-of-sale technology The term is often used in connection with hardware and software for checkouts, and in the case of variable locations, with wireless systems. POS systems evolved from the mechanical cash registers of the first half of the 20th century. Examples of this type of register were the NCR registers, operated by a crank, and the lever-operated Burroughs registers. These registers recorded data on journal tapes or paper tape and required an extra step to transcribe the information into the retailer's accounting system. The next step in evolution was to move to operation by electricity. An example of this type of register was the NCR Class 5 cash register. In 1973 new registers that were driven by computers were introduced, such as the IBM 3653 Store System and the NCR 2150. Other computer-based manufacturers were Regitel, TRW, and Datachecker. 1973 also brought about the introduction of the UPC/EAN barcode readers on the POS systems. In 1986, the POS systems became based on PC technology with the introduction of the IBM 4683. During the late 1980s and throughout the 90s stand-alone credit card devices were developed so credit card processing could be more easily and securely added. Some popular models include the VeriFone Tranz 330, Hypercom T7 Plus, or Lipman Nurit 2085. These relatively simple devices have evolved in recent years to allow multiple applications (credit card, gift card, age verification, employee time clock) to reside on one device. Some wireless POS systems for restaurants not only allow for mobile payment processing, they also allow servers to process the entire food order right at tableside. As of 2005, retail POS systems were among the most sophisticated and powerful computer networks in commercial use. In fact, most retail POS systems do much more than just "point of sale" tasks. Even for the smaller tier 4 & 5 retailers, there are many POS systems available that include fully integrated accounting, inventory management, open to buy forecasting, customer relation management (CRM), service management, rental, and payroll modules.
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With all of these options available, one will commonly hear a variety of terms used when referring to a certain POS software application. Those terms can include: retail management software, business management software, POS system, and point of sale software.
Early POS software The early electronic cash registers (ECR) were programmed in proprietary software and were very limited in function and communications capability. In August of 1973 IBM announced the IBM 3650 and 3660 Store Systems that were, in essence, a mainframe computer packaged as a store controller that could control 128 IBM 3653/3663 Point of Sale Registers. This system was the first commercial use of client-server technology, peer to peer communications, and Local Area Network (LAN) simultaneous backup and remote initialization. By mid-1974, it was installed in Path mark Stores in New Jersey and Dillards Department Stores. Programmability allowed retailers to be more creative. In 1979 Gene Mosher's Old Canal Cafe in Syracuse, New York was using POS software written by Mosher that ran on an Apple II to take customer orders at the restaurant's front entrance and print complete preparation details in the restaurant's kitchen. In that novel context, customers would often proceed to their tables to find their food waiting for them already. This software included real time labor and food cost reports. In 1985 Mosher introduced the first touchscreen-driven, color graphic, POS interface. This software ran on the Atari ST, the world's first consumer-level color graphic computer. By the end of the 20th century Mosher's promotion of his unpatented software paradigm had resulted in its worldwide adoption by cash register manufacturers and other POS software developers as the de facto standard for point of sale software systems. Today, most of the major retailers of the world use POS software or systems. POS hardware interface standardization Initiatives to standardize development of computerized POS systems have been made to alleviate interconnecting POS devices. Two such initiatives are OPOS and JavaPOS, both conforming to the UnifiedPOS standard, a standard led by The National Retail Foundation. OPOS, short for OLE for POS, was the first commonly-adopted standard and was initiated by Microsoft, NCR Corporation, Epson and Fujitsu-
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ICL. OPOS is a COM-based interface compatible with all COMenabled programming languages for Microsoft Windows. OPOS was first released in 1996. JavaPOS was initiated by Sun Microsystems, IBM, and NCR Corporation in 1997 and first released in 1999. JavaPOS is for Java what OPOS is for Microsoft Windows and thus largely platform independent. POS communication command protocols There are several communication protocols POS systems use to control peripherals. Among them are • EPSON Esc/POS • UTC Standard • UTC Enhanced • AEDEX • ICD 2002 • Ultimate • CD 5220 • DSP-800 • IBM dumb terminal • ADM 787/788. There are also nearly as many proprietary protocols as there are companies making POS peripherals. EMAX, used by EMAX International, was a combination of AEDEX and IBM dumb terminal. Most POS peripherals, such as displays and printers, support several of these command protocols in order to work with many different brands of POS terminals and computers. Chain store Chain stores (also called retail chains) are a range of retail outlets which share a brand and central management, usually with standardized business methods and practices. They are a type of business chain. Such stores may be branches owned by one company or franchises owned by local individuals or firms and operated under contract with the parent corporation. Features common to all chains are centralized marketing and purchasing, which often result in economies of scale, meaning lower costs and presumably higher profits. These characteristics also apply to chain restaurants and some service-oriented chain businesses. Some argue that the standardized products which result from such centralization are culturally detrimental; for example, chain music stores are frowned upon by some for stocking works of more popular music if they exclude less well known, usually independent artists. Critics of chains allege that they are economically damaging to communities because they extract 122
capital that otherwise would recirculate in the local economy with independently owned businesses. The displacement of independent businesses by chains has generated controversy in many nations and has sparked increased collaboration among independent businesses and communities to prevent chain proliferation. Such efforts occur within national trade groups such as the American Booksellers Association and Council of Independent Restaurants of America as well as community-based coalitions such as Independent Business Alliances. National entities like the American Independent Business Alliance and The New Rules Project promote these efforts in the U.S. In Britain, the New Economics Foundation promotes community-based economics and independent ownership. By 2004, the world's largest retail chain, Wal-Mart, was the world's largest corporation in terms of gross sales. Business chains A business chain is a network of physical business locations, which all provide similar services or products, and share a brand. A retail chain is a type of business chain. They inevitably also share some degree of central management, supply chains, training programs, personnel, etc. They tend to either be parts of a single company or franchises, in which individual store owners license the use of the shared brand, training, and know-how. Chains of both main sorts tend to make purchases and licensing agreements as a single entity. Exceptions to these generalizations include Steve's Pizza in New York and EasyPizza in London. Even two stores or restaurants or businesses owned by the same person or group can constitute a local chain. Some large chains -- McDonald's, for instance -- are among the largest retail businesses in the world. Restaurant chains restaurant chain is a set of related restaurants, usually with the same name in many different locations either under shared corporate ownership (e.g., In-N-Out Burgers in the U.S.) or franchising agreements. Typically, the restaurants within a chain are built to a standard format and offer a standard menu. Fast food restaurants are the most common, but there are also midscale upscale establishments (T.G.I. Friday's, Ruby Tuesday, etc.). Restaurant chains are often found near shopping malls and tourist areas. The proliferation of chain restaurants (and other chain businesses) is becoming an increasingly controversial trend worldwide. A common concern is nation-wide homogenization of culture, low wages often paid to employees of chain
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restaurants, and the furthering of suburban sprawl. In the U.S., a movement is building among communities and independent businesses opposing this trend. Examples include the American Independent Business Alliance, The New Rules Project and the Council of Independent Restaurant Associations.
Inventory Inventory is a list of goods and materials held available in stock by a business. Business inventory Each country has its own rules about accounting for inventory; this article concentrates on economic theory, United States financial accounting rules, and Eliyahu M. Goldratt's throughput accounting. National boundaries do not limit economics, and throughput accounting functions independently of national regulations because it affects public financial reports only indirectly. Organizations in the U.S. define inventory to suit their needs within Generally Accepted Accounting Practices (GAAP), the rules defined by the Financial Accounting Standards Board (FASB) (and others) and enforced by the U.S. Securities and Exchange Commission (SEC) and other federal and state agencies. Inventory management affects organizations' internal operations through their cost accounting methods. Identification of goods using Stock Keeping Units (SKUs) assists in managing inventory. The term stockout means running out of inventory. While financial accounting uses standards that allow the public to compare firms, cost accounting functions internally to an organization and with much greater flexibility. A discussion of inventory from standard and theory of constraints-based (throughput) cost accounting perspective follows some examples and a discussion of inventory from a financial accounting perspective. Inventory examples While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization 124
uses. Stock is simply cash in disguise. If stocks are uncontrolled, you are encouraging theft. Moreover it will be impossible to know the actual level of stocks and therefore impossible to control them.
Manufacturing organizations usually divide their "goods for sale" inventory into:
Raw Materials - materials and components scheduled for use in making a product. • Work in Process, WIP - materials and components that have begun their transformation to finished goods. • Finished goods - goods ready for sale to customers. • Goods for resale. For example: Manufacturing A canned food manufacturer's materials inventory includes the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. Its finished good inventory consists of all the cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers. Logistics or distribution The logistics chain includes the owners (wholesalers and retailers), manufacturers' agents, and transportation channels that an item passes through between initial manufacture and final purchase by a consumer. At each stage, goods belong (as assets) to the seller until the buyer accepts them. Distribution includes four components: • Manufacturers' agents: Distributors who hold and transport a consignment of finished goods for manufacturers without ever owning it. Accountants refer to manufacturers' agents' inventory as "matériel" in order to differentiate it from goods for sale. • Transportation: The movement of goods between owners, or between locations of a given owner. The seller owns goods in transit until the buyer accepts them. Sellers or buyers may transport goods but most transportation providers act as the agent of the owner of the goods. • Wholesaling: Distributors who buy goods from manufacturers and other suppliers (farmers, fishermen,
•
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etc.) for re-sale work in the wholesale industry. A wholesaler's inventory consists of all the products in its warehouse that it has purchased from manufacturers or other suppliers. A produce-wholesaler (or distributor) may buy from distributors in other parts of the world or from local farmers. Food distributors wish to sell their inventory to grocery stores, other distributors, or possibly to consumers. • Retailing: A retailer's inventory of goods for sale consists of all the products on its shelves that it has purchased from manufacturers or wholesalers. The store attempts to sell its inventory (soup, bolts, sweaters, or other goods) to consumers. New old stock New old stock (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale which was manufactured long ago but that has never been used. Such merchandise may not be produced any more, and the new old stock may represent the only market source of a particular item at the present time. Accounting perspectives Financial accounting An organization's inventory can appear a mixed blessing, since it counts as an asset on the balance sheet, but it also ties up money that might serve for other purposes and requires additional expense for its protection. Inventory may also cause significant tax expenses, depending on particular countries' laws regarding depreciation of inventory Inventory appears as a current asset on an organization's balance sheet because the organization can turn it into cash by selling it. Some organizations hold larger inventories than their operations require in order inflating their apparent asset value and their perceived profitability. In addition to the money tied up by acquiring inventory, inventory also brings associated costs for space, for utilities, and for insurance to cover staff to handle and protect it, fire and other disasters, obsolescence, shrinkage (theft and errors), and others. Such holding costs can mount up: between a third and a half of its acquisition value per year. Businesses that stock too little inventory cannot take advantage of large orders from customers if they cannot deliver. The conflicting objectives of cost control and customer service often pit an organization's financial and operating managers against its sales and marketing 126
departments. Sales people, in particular, often receive commission payments, so unavailable goods may reduce their potential personal income. The role of a cost accountant on the 21st-century in a manufacturing organization By helping the organization to make better decisions, the accountants can help the public sector to change in a very positive way that delivers increased value for the taxpayer’s investment. It can also help to incentive wise progress and to ensure that reforms are sustainable and effective in the long term, by ensuring that success is appropriately recognized in both the formal and informal reward systems of the organization. To say that they have a key role to play is an understatement. Finance is connected to most, if not all, of the key business processes within the organization. It should be steering the stewardship and accountability systems that ensure that the organization is conducting its business in an appropriate, ethical manner. It is critical that these foundations are firmly laid. So often they are the litmus test by which public confidence in the institution is either won or lost. Finance should also be providing the information, analysis and advice to enable the organizations’ service managers to operate effectively. This goes beyond the traditional preoccupation with budgets – how much have we spent so far, how much have we left to spend? It is about helping the organization to better understand its own performance. That means making the connections and understanding the relationships between given inputs – the resources brought to bear – and the outputs and outcomes that they achieve. It is also about understanding and actively managing risks within the organization and its activities. FIFO vs. LIFO accounting When a dealer sells goods from inventory, the value of the inventory reduces by the cost of goods sold. For commodity items that one cannot track individually, accountants must choose a method to identify the nature of the sale. Two popular methods exist: FIFO and LIFO accounting (first in first out, last in - first out). FIFO regards the first unit that arrived in inventory the first one sold. LIFO considers the last unit arriving in inventory as the first one sold. Which method an accountant selects can have a significant effect on net income and book value and, in turn, on taxation. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value due to the effects of inflation. This generally
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results in lower taxation. Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting. Standard cost accounting Standard cost accounting uses ratios called efficiencies that compare the labor and materials actually used to produce a good with those that the same goods would have required under "standard" conditions. As long as similar actual and standard conditions obtain, few problems arise. Unfortunately, standard cost accounting methods developed about 100 years ago, when labor comprised the most important cost in manufactured goods. Standard methods continue to emphasize labor efficiency even though that resource now constitutes a (very) small part of cost in most cases. Standard cost accounting can hurt managers, workers, and firms in several ways. For example, a policy decision to increase inventory can harm a manufacturing managers' performance evaluation. Increasing inventory requires increased production, which means that processes must operate at higher rates. When (not if) something goes wrong, the process takes longer and uses more than the standard labor time. The manager appears responsible for the excess, even though s/he has no control over the production requirement or the problem. In adverse economic times, firms use the same efficiencies to downsize, right size, or otherwise reduce their labor force. Workers laid off under those circumstances have even less control over excess inventory and cost efficiencies than their managers. Many financial and cost accountants have agreed for many years on the desirability of replacing standard cost accounting. They have not, however, found a successor. Theory of constraints cost accounting Eliyahu M. Goldratt developed the theory of constraints in part to address the cost-accounting problems in what he calls the "cost world". He offers a substitute, called throughput accounting, that uses throughput (money for goods sold to customers) in place of output (goods produced that may sell or may boost inventory) and considers labor as a fixed rather than as a variable cost. He defines inventory simply as everything the organization owns that it plans to sell, including buildings, machinery, and many other things in addition to the categories listed here. Throughput accounting recognizes only one class of variable costs: the operating expenses like materials and components that vary directly with the quantity produced.
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Finished goods inventories remain balance-sheet assets, but labor efficiency ratios no longer evaluate managers and workers. Instead of an incentive to reduce labor cost, throughput accounting focuses attention on the relationships between throughput (revenue or income) on one hand and controllable operating expenses and changes in inventory on the other. Those relationships direct attention to the constraints or bottlenecks that prevent the system from producing more throughput, rather than to people - who have little or no control over their situations. National accounts Inventories also play an important role in national accounts and the analysis of the business cycle. Some short-term macroeconomic fluctuations are attributed to the inventory cycle. What is retail marketing? As retailers strive to touch consumers at every step of the purchase cycle, retail marketing has evolved to become a mosaic of mass-media branding, tactics for driving store traffic, in-store experience, and loyalty programs. Products don't sell without advertising and marketing to the consumer. Marketing, in economics, that part of the process of production and exchange that is concerned with the flow of goods and services from producer to consumer. In popular usage it is defined as the distribution and sale of goods, distribution being understood in a broader sense than the technical economic one. Marketing includes the activities of all those engaged in the transfer of goods from producer to consumer—not only those who buy and sell directly, wholesale and retail, but also those who develop, warehouse, transport, insure, finance, or promote the product, or otherwise have a hand in the process of transfer. In a modern capitalist economy, where nearly all production is intended for a market, such activities are just as important as the manufacture of the goods. It is estimated in the United States that approximately 50% of the retail price paid for a commodity is made up of the cost of marketing. MARKETING Definitions "Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business."
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If marketing is the distinguishing function of the business, then what is marketing and how is it achieved? 1. "...an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders." 2. Human activity directed at satisfying needs and wants through exchange processes".Philip Kotler 3. "...the ongoing process of moving people closer to making a decision to purchase, use, follow, refer, upload, download, obey, reject, conform, become complacent to someone else's products, services or values. Simply, if it doesn't facilitate a "sale" then it's not marketing." 4. "...the management process of anticipating, identifying and satisfying customer requirements profitably" Chartered Institute of Marketing 5. "...war between competitors." Al Ries and Jack Trout Take these definitions collectively and a comprehensive definition of marketing, applicable to both business and non-business environments, emerges: Processes, functions, exchanges or activities -- even if they involve "war" between competitors – that create perceived value by satisfying needs of those involved in the transaction. These processes succeed in moving people closer to making a decision to purchase and facilitate a "sale." Afterwards, these processes anticipate, identify and satisfy customer requirements profitably and successfully manage existing relationships. "this is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to satisfy customers." Nick Jones, The Concepts of Business History The practice of marketing is almost as old as humanity itself. A Market was originally simply a gathering place where people with a supply of items or capacity to perform a service could meet with those who might desire the items or services, perhaps at a pre-arranged time. Such meetings embodied many aspects of today's marketing methods, although sometimes in an informal way. Sellers and buyers sought to understand each other's needs, capacities, and psychology, all with the goal of getting the exchange of items or services to take place. Today's New York Stock Exchange had its humble beginnings as an open air market located at Wall Street in New York City. The rise of Agriculture undoubtedly influenced markets as the earliest means of 'mass production' of an item, namely
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foodstuffs. As agriculture allowed one to grow more food than could be eaten by the grower alone, and most food is perishable, there was likely motivation to seek out others who could use the excess food, before it spoiled, in exchange for other items. In 1960 Theodore Levitt wrote a journal article called Marketing Myopia. This is said to have really begun the marketing craze. In it he discussed that the big manufacturing industries at the time were misinterpreting what industry they were part of. He stated that until you fully understood the industry you were part of you were likely to fail. For example the rail industry was not in the business of rail transport but in the industry of transport in general they were still competing with the likes of cars and public transport. Levitt is said to be one of the founders of the marketing discipline, and contributed to the making of the 4Ps framework that transactional marketing is based around. Introduction A market-focused, or customer-focused, organization first determines what its potential customers desire, and then builds the product or service. Marketing theory and practice is justified in the belief that customers use a product/service because they have a need, or because a product/service has a perceived benefit. Two major factors of marketing are the recruitment of new customers (acquisition) and the retention and expansion of relationships with existing customers (base management). Once a marketer has converted the prospective buyer, base management marketing takes over. The process for base management shifts the marketer to building a relationship, nurturing the links, enhancing the benefits that sold the buyer in the first place, and improving the product/service continuously to protect the business from competitive encroachments. Marketing methods are informed by many of the social sciences, particularly psychology, sociology, and economics. Anthropology is also a small, but growing, influence. Market research underpins these activities. Through advertising, it is also related to many of the creative arts. For a marketing plan to be successful, the mix of the four "Ps" must reflect the wants and desires of the consumers in the target market. Trying to convince a market segment to buy something they don't want is extremely expensive and seldom successful. Marketers depend on marketing research, both formal and informal, to determine what consumers want
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and what they are willing to pay for it. Marketers hope that this process will give them a sustainable competitive advantage. Marketing management is the practical application of this process. The offer is also an important addition to the 4P's theory. Within most organizations, the activities encompassed by the marketing function are led by a Vice President or Director of Marketing. A growing number of organizations, especially large US companies, have a Chief Marketing Officer position, reporting to the Chief Executive Officer. Product (business) In marketing, a product is anything that can be offered to a market that might satisfy a want or need. It is of two types: Tangible (physical) or Intangible (non-physical). Since services have been at the forefront of all modern marketing strategies, some intangibility has become essential part of marketing offers. It is therefore the complete bundle of benefits or satisfactions that buyers perceive they will obtain if they purchase the product. It is the sum of all physical, psychological, symbolic, and service attributes, not just the physical merchandise. All products offered in a market can be placed between Tangible (Pure Product) and Intangible (Pure Service) spectrum. A product is similar to goods. In accounting, goods are physical objects that are available in the marketplace. This differentiates them from a service, which is a nonmaterial product. The term goods is used primarily by those that wish to abstract from the details of a given product. As such it is useful in accounting and economic models. The term product is used primarily by those that wish to examine the details and richness of a specific market offering. As such it is useful to marketers, managers, and quality control specialists. A physical item that is offered for sale should not automatically be considered a product if it has no market. Like 95% of patents they are at best interesting diversions and at worst a waste of time. A service is a non-material or intangible product - such as professional consultancy, waitressing, or an entertainment experience. • Classifying products Product management involves developing strategies and tactics that will increase product demand (referred to as primary demand) over the product's life cycle. One useful technique in understanding a product is the Aspinwall Classification System. It classifies and rates products based on five variables: 132
Replacement rate (How frequently is the product repurchased?) • Gross margin (How much profit is obtained from each product?) • Buyer goal adjustment (How flexible are the buyers' purchasing habits with regard to this product?) • Duration of product satisfaction (How long will the product produce benefits for the user?) • Duration of buyer search behaviour (How long will consumers shop for the product?) Product management Product management is an organizational function within a company dealing with the product planning or product marketing of a product or products at all stages of the product lifecycle. Product Management is also a collective term used to describe the broad sum of diverse activities performed in the interest of delivering a particular product to market. From a practical perspective, product management is an occupational domain which hold two professional disciplines: product planning and product marketing. This is because the product's functionality is created for the user via product planning efforts, and product value is presented to the buyer via product marketing activities. Product planning and product marketing are very different but due to the collaborative nature of these two disciplines, some companies erroneously perceive them as being one discipline, which they call product management. Done carefully, it is very possible to functionally divide the product management domain into product planning and product marketing, yet retain the required synergy between the two disciplines. Product planning typically deals with these activities: • Defining new products and gathering market requirements • Product Life Cycle considerations • Product portfolio management • Product differentiation Product marketing typically deals with these activities: • Product positioning and outbound messaging • Promoting the product externally with press, customers, and partners • Bringing new products to market Product management typically deals with these closelyrelated functions:
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• Product planning • Product marketing • Program management • Project management Product life cycle management The conditions a product is sold under will change over time. The Product Life Cycle refers to the succession of stages a product goes through. Product Life Cycle Management is the succession of strategies used by management as a product goes through its life cycle. The product lifecycle goes through many phases and involves many professional disciplines and requires many skills, tools and processes. Product life cycle (PLC) is to do with the life of a product in the market with respect to business/commercial costs and sales measures; whereas Product Lifecycle Management (PLM) is more to do with managing descriptions and properties of a product through its development and useful life, mainly from a business/engineering point of view The stages Products tend to go through five stages: (1)New product development stage • very expensive • no sales revenue • losses (2)Market introduction stage • cost high • sales volume low • no/little competition - competitive manufacturers watch for acceptance/segment growth • losses • demand has to be created • customers have to be prompted to try the product (3)Growth stage • costs reduced due to economies of scale • sales volume increases significantly • profitability • public awareness • competition begins to increase with a few new players in establishing market prices to maximize market share. (4)Mature stage • costs are very low as you are well established in market & no need for publicity. • sales volume peaks 134
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increase in competitive offerings prices tend to drop due to the proliferation of competing products brand differentiation, feature diversification, as each player seeks to differentiate from competition with "how much product" is offered very profitable
(5)Decline or Stability stage • costs become counter-optimal • sales volume decline or stabilize • prices, profitability diminish • profit becomes more a challenge of production/distribution efficiency than increased sales Market evolution Market Evolution is a process that parallels the product life cycle. As a product category matures, the industry goes through stages that mirror the five stages of a product life cycle: • Market Crystallization - latent demand for a product category is awakened with the introduction of the new product • Market Expansion - additional companies enter the market and more consumers become aware of the product category • Market Fragmentation - the industry is subdivided into numerous well populated competitive groupings as too many firms enter • Market Consolidation - firms start to leave the industry due to stiff competition, falling prices, and falling profits • Market Termination - consumers no longer demand the product and companies stop producing it Market Identification A "micro-market" can be used to describe a Walkman, more portable, as well as individually and privately recordable; and then Compact Discs ("CDs") brought increased capacity and CD-R offered individual private recording...and so the process goes. The below section on the "technology lifecycle" is a most appropriate concept in this context. In short, termination is not always the end of the cycle; it can be the end of a micro-entrant within the grander scope of a macro-environment. The auto industry, fast-food industry, petro-chemical industry, are just a few that demonstrate a macro-environment that overall has not
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terminated even while micro-entrants over time have come and gone.
Direct marketing
Direct marketing is a sub-discipline of marketing focused on driving purchases that can be attributed to a specific "call-to-action". Direct marketing is distinguished from other marketing efforts by its emphasis on trackable, measurable results (known as "response" in the industry) regardless of medium. Direct marketers use a variety of media including catalogs, postcards, statement inserts, card packs, magazines and other mail. Direct marketers also use media such as door hangers, package inserts, magazines, newspapers, radio, television, email, internet banner ads, pay-per-click ads, billboards, transit ads, etc. If the ad in the medium asks the prospect to take a specific action--call an 800 number, visit a website, return a response card, place an order, complete a survey, etc.--then the effort is considered to be direct marketing. The term is believed to have been first used in 1961 in a speech by Lester Wunderman, who pioneered direct marketing techniques with brands such as American Express and Columbia Records. Although Wunderman may have been the first to use the term "direct marketing", the practice of "mail order selling" (direct marketing via mail) essentially began in the U.S. upon invention of the typewriter in 1867. The first mail-order catalog was produced by Aaron Montgomery Ward in 1872. The Direct Mail Advertising Association, predecessor of the present-day Direct Marketing Association, was first established in 1917. Third class bulk mail postage rates were established in 1928. Direct marketing's history in Europe can be traced to the 15th century. Upon Gutenberg's invention of moveable type, the first trade catalogs from printer-publishers appeared sometime around 1450. Direct marketing is attractive to many marketers, because in many cases its effectiveness can be measured directly. For example, if a marketer sends out one million solicitations by mail, and ten thousand customers can be tracked as having responded to the promotion, the marketer can say with some confidence that the campaign led directly to the responses. By contrast, measurement of other media must often be indirect, since there is no direct response from a consumer. Measurement of results, a fundamental element in successful direct marketing, is explored in greater detail elsewhere in this article.
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While many marketers like this form of marketing, some direct marketing efforts using particular media have sometimes been criticized for generating unwanted solicitations. For example, direct mail that is irrelevant to the recipient is considered "junk mail", and unwanted email messages are considered "spam". Direct marketing channels Any medium that can be used to deliver a communication to a customer can be employed in direct marketing. Direct mail Probably the most commonly used medium for direct marketing is direct mail, in which marketing communications are sent to customers using the postal service. In many developed countries, direct mail represents such a significant amount of the total volume of mail that special rate classes have been established. In the United States and United Kingdom, for example, there are bulk mail rates that enable marketers to send mail at rates that are substantially lower than regular first-class rates. In order to qualify for these rates, marketers must format and sort the mail in particular ways - which reduces the handling (and therefore costs) required by the postal service. Direct mail permits the marketer to design marketing pieces in many different formats. Indeed, there is an entire subsector of the industry that produces specialized papers, printing, envelopes, and other materials for direct mail marketing. Some of the common formats, include: • Catalogs: Multi-page, bound promotions, usually featuring a selection of products for sale. • Self-mailers: Pieces usually created from a single sheet that has been printed and folded. For instance, a common practice is to print a page-length advertisement or promotion on one side of a sheet of paper. This is then folded in half or in thirds, with the promotional message to the inside. The two outside surfaces are then used for the address of the recipient and some "teaser" message designed to persuade the customer to open the piece. • Poly-bag packages: Large (often 9x12 or bigger) fullcolor packages sealed in a clear plastic outer wrap. The contents show through the poly-bag, giving the potential for maximum initial impact. Poly-bag packages can be extremely effective, but also quite expensive.
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Postcards: Simple, two-sided pieces, with a promotional message on one side and the customer's address on the other. • Envelope mailers: Mailings in which the marketing material is placed inside an envelope. This permits the marketer to include more than one insert. When more than one advertiser is included, this is often called "marriage mail". Valpak is one of the largest examples of a marriage mail service. • Snap Mailers: Mailers that fold and seal with pressure. The sides detach and the mailer is opened to reveal the message. • Dimensional Mailers: Mailers that have some dimension to them, like a small box. • Intelligent Documents: Programmable mail pieces built dynamically from database information, and printed digitally for faster production. Advantages and Disadvantages of Direct Mail Advantages include the following: • Targeting - Historically, the most important aspect of direct mail was its ability to precisely target previous customers. If a suitable list was available, it also did a good job of targeting prospects. • Personalization - Direct mail can address the customer personally and be tailored to their needs based on previous transactions and gathered data. • Optimization - Because of its direct accountability, direct mail can be tested to find the best list; the best offer; the best timing (and many other factors). Then the winning tests can be rolled out to a wider audience for optimal results. • Accumulation - Responses (and non-responses) can be added to the database, allowing future mailings to be better targeted. Disadvantages include: • Cost - The cost per thousand will be higher than almost any other form of mass promotion (although the wastage rate may be much lower). • Waste - Large quantities of paper are thrown away (see below). • Alienation - Some recipients resent direct marketing being "forced" upon them, and boycott companies that do so. Moreover, they may obtain Prohibitory Orders against companies whose direct marketing mail they find offensive.
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Business-to-Business Mailings (B2B) Business products and services have long used direct mail to promote themselves. Traditionally, this worked in one of two ways. As a direct sale, therefore precluding the use of a salesperson or a retail store, or as a method of generating leads for a salesforce. The former method was ideally used by products that were easy to sell, were familiar to the prospect and needed no demonstration. The latter method was used for large ticket items or for those that needed demonstration for example. Direct mail Although bulk mail, junk mail, and admail are, strictly speaking, not synonyms, the terms are used in common parlance to refer to advertising circulars, free trial CDs, pre-approved credit card applications, and other unsolicited merchandising invitations delivered by mail to homes and businesses. The term "junk" is usually used when someone receives an item of mail that is untargeted or not relevant to them. Bulk mailings are a particularly popular method of promotion for businesses operating in the financial services, home computer, and travel and tourism industries. Advertisers often call it "targeted mailing", as mail is usually sent out following database analysis. For example a person who likes golf may receive direct mail for golf related products or perhaps for goods and services that are appropriate for golfers. The USPS prefers to call it "advertising mail" (admail for short), noting that some people might find offers of interest to them in it. Some people respond positively to direct mail advertising and find useful goods and services on offer. Traditionally, this was more true in rural areas where people had to travel many miles to do their shopping and direct mail and mail order shopping was a major convenience. However, many people dislike it, in the same way as with telemarketers' calls and e-mail spam, and some jurisdictions like the US have laws requiring junk mailers to withhold their offerings from residents who opt out. Many consumers, as well as environmental protection groups, are concerned about the environmental impact generated by junk mail. According to 50 Simple Things You Can Do To Save The Earth: • • Each year, 100 million trees are used to produce junk mail. 250,000 homes could be heated with one day's supply of junk mail. 139
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Americans receive almost 4 million tons of junk mail every year. The yearly production and disposal of junk mail consumes more energy than 2.8 million cars.
Direct response marketing Direct response marketing is a form of marketing designed to solicit a direct response which is specific and quantifiable. The delivery of the response is direct between the viewer and the advertiser, that is, the customer responds to the marketer directly. This is in contrast to direct marketing in which the marketer contacts the potential customer directly. One common form today is infomercials. They try to achieve a direct response via television presentations. Viewers respond via telephone or internet, credit card in hand. Other media, such as magazines, newspapers, radio, and email can be used to elicit the response, but they tend to achieve lower response rates than television. Mail order is a term, seldom used today, that describes a form of direct response in which customers respond by mailing a completed order form to the marketer. Mail order is slow and response rates are low. It has been eclipsed by toll-free telephone numbers and the internet. Direct response ads like infomercials can be contrasted with normal television commercials because traditional commercials normally do not solicit a direct immediate response from the viewer, but instead try to brand their product in the market place. In direct marketing (such as telemarketing), there is no intermediary broadcast media involved (which is why it is called direct). In direct response marketing marketers use broadcast media to get customers to contact them directly. It is direct response marketing because the communications from the customer to the marketer is direct, and this differentiates it from direct marketing in which the communications from the marketer to the customer is direct. Marketing plan A marketing plan is a written document that details the actions necessary to achieve a specified marketing objective(s). It can be for a product or service, a brand, or a product line. It can cover one year (referred to as an
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annual marketing plan), or cover up to 5 (sometimes referred to as five) years. A marketing plan may be part of an overall business plan. Solid marketing strategy is the foundation of a wellwritten marketing plan. While a marketing plan contains a list of actions, a marketing plan without a sound strategic foundation is of little use. A typical marketing plan is based on; 1. Where are we now... 2. Where do we want to go... 3. How can we go there... 4. How can we control it... The contents of a very basic marketing plan are; 1. Executive Summary 2. Situational Analysis 3. Opportunities / Issue Analysis - SWOT Analysis 4. Objectives 5. Strategy 6. Action Programme 7. Financial Forecast 8. Controls In detail it would be 1. Title page 2. Executive Summary 3. Current Situation - Macroenvironment • economy • legal • government • technology • ecological • sociocultural • supply chain Current Situation - Market Analysis • market definition • market size • market segmentation • industry structure and strategic groupings • Porter 5 forces analysis • competition and market share • competitors' strengths and weaknesses • market trends 5.Current Situation - Consumer Analysis
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• nature of the buying decision • participants • demographics • psychographics • buyer motivation and expectations • loyalty segments 6.Current Situation - Internal • company resources • financial • people • time • skills • objectives • mission statement and vision statement • corporate objectives • financial objective • marketing objectives • long term objectives • corporate culture Summary of Situation Analysis • external threats • external opportunities • internal strengths • internal weaknesses • key success factors in the industry • our sustainable competitive advantage Marketing research • information requirements • research methodology • research results Marketing Strategy - Product • product mix • product strengths and weaknesses • perceptual mapping • product life cycle management and new product development • Brand name, brand image, and brand equity • the augmented product • product portfolio analysis • B.C.G. Analysis • contribution margin analysis
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• G.E. Multi Factoral analysis • Quality Function Deployment Marketing Strategy - Market share objectives • by products, • by customer segments, • by geographical markets Marketing Strategy - Price • pricing objectives • pricing method (eg.: cost plus, demand based, or competitor indexing) • pricing strategy (eg.: skimming, or penetration) • discounts and allowances • price elasticity and customer sensitivity • price zoning • break even analysis at various prices Marketing Strategy - promotion • promotional goals • promotional mix • advertising reach, frequency, flights, theme, and media • sales force requirements, techniques, and management • sales promotion • publicity and public relations • electronic promotion (eg.: Web, or telephone) Marketing Strategy - Distribution • geographical coverage • distribution channels • physical distribution and logistics • electronic distribution Implementation • personnel requirements • assign responsibilities • give incentives • training on selling methods • financial requirements • management information systems requirements • month-by-month agenda • PERT or critical path analysis • monitoring results and benchmarks • adjustment mechanism • contingencies (What if's) Financial Summary 143
• assumptions • pro-forma monthly income statement • contribution margin analysis • breakeven analysis • Monte Carlo method • ISI: Internet Strategic Intelligence Scenarios • Prediction of Future Scenarios • Plan of Action for each Scenario Appendix • pictures and specifications of the new product • results from research already completed Measurement of Progress The final stage of any marketing planning process is to establish targets (or standards) so that progress can be monitored. Accordingly, it is important to put both quantities and timescales into the marketing objectives (for example, to capture 20 per cent by value of the market within two years) and into the corresponding strategies. Changes in the environment mean that the forecasts often have to be changed. Along with these, the related plans may well also need to be changed. Continuous monitoring of performance, against predetermined targets, represents a most important aspect of this. However, perhaps even more important is the enforced discipline of a regular formal review. Again, as with forecasts, in many cases the best (most realistic) planning cycle will revolve around a quarterly review. Best of all, at least in terms of the quantifiable aspects of the plans, if not the wealth of backing detail, is probably a quarterly rolling review planning one full year ahead each new quarter. Of course, this does absorb more planning resource; but it also ensures that the plans embody the latest information, and with attention focused on them so regularly - forces both the plans and their implementation to be realistic. Plans only have validity if they are actually used to control the progress of a company: their success lies in their implementation, not in the writing'.
Performance analysis
Sales analysis Most organizations track their sales results; or, in nonprofit organizations for example, the number of clients. The more sophisticated track them in terms of 'sales variance' - the deviation from the target figures - which allows a more immediate picture of deviations to become 144
evident. `Micro- analysis', which is a nicely pseudoscientific term for the normal management process of investigating detailed problems, then investigates the individual elements (individual products, sales territories, customers and so on) which are failing to meet targets. Market share analysis Relatively few organizations, however, track market share. In some circumstances this may well be a much more important measure. Sales may still be increasing, in an expanding market, while share is actually decreasing boding ill for future sales when the market eventually starts to drop. Where such market share is tracked, there may be a number of aspects which will be followed: • overall market share • segment share - that in the specific, targeted segment • relative share -in relation to the market leaders Expense analysis The key ratio to watch in this area is usually the `marketing expense to sales ratio'; although this may be broken down into other elements (advertising to sales, sales administration to sales, and so on). Financial Analysis The `bottom line' of marketing activities should at least in theory, be the net profit (for all except non-profit organizations, where the comparable emphasis may be on remaining within budgeted costs). There are a number of separate performance figures and key ratios which need to be tracked: • gross contribution<>net profit • gross profit<>return on investment • net contribution<>profit on sales Retail Formats: A retailer will be involved in more than one format. • Mom-and-Pop – Represent the small, individually owned and operated retail outlet. In many cases these are family-run businesses catering to the local community. • Mass Discounters - These retailers can be either general or specialty merchandisers but either way their main focus is on offering discount pricing. Compared to department stores, mass discounters offer fewer services and lower quality products. • Warehouse Stores – This is a form of mass discounter that often provides even lower prices than traditional mass discounters. In addition, they often require
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buyers to make purchases in quantities that are greater than what can be purchased at mass discount stores. These retail outlets provide few services and product selection can be limited. Furthermore, the retail design and layout is as the name suggests, warehouse style, with consumers often selecting products off the ground from the shipping package. Some forms of warehouse stores, called warehouse clubs, require customers purchase memberships in order to gain access to the outlet. Category Killers – Many major retail chains have taken what were previously narrowly focused, small specialty store concepts and have expanded them to create large specialty stores. These so-called “category killers” have been found in such specialty areas as electronic (e.g., Best Buy), office supplies (e.g., Staples) and sporting goods (e.g., Sport Authority). Department Stores – These retailers are general merchandisers offering mid-to-high quality products and strong level of services, though in most cases these retailers would not fall into the full-service category. While department stores are classified as general merchandisers some carry a more selective product line. For instance, while Sears carries a wide range of products from hardware to cosmetics, Nordstrom’s focuses their products on clothing and personal care products. Boutique – This retail format is best represented by small store carrying very specialized and often highend merchandise. In many cases a boutique is a fullservice retailer following a full-pricing strategy. Catalog Retailers – Retailers such as Lands’ End and LL Bean have built their business by having customers place orders after seeing products that appear in a mailed catalog. Orders are then delivered by a thirdparty shipper. E-Retailers - Possibly the most publicized retail model to evolve in the last 50 years is the retailer that principally sells via the Internet. There are thousands of online-only retail sellers of which Amazon.com is the most famous. These retailers offer shopping convenience including being open for business all day, every day. Electronic retailers or eretailers also have the ability to offer a wide selection of product since all they really need in order to attract orders is a picture and description 146
•
•
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of the product. That is, they may not need to have the product on-hand the way physical stores do. Instead an e-retailer can wait until an order is received from their customers before placing their own order with their suppliers. This cuts down significantly on the cost of maintaining products instock. Franchise –A franchise is a form of contractual channel in which one party, the franchisor, controls the business activities of another party, the franchisee. Under these arrangements, an eligible franchisee agrees to pay for the right to use the franchisor’s business methods and other important business aspects, such as the franchise name. For instance, McDonalds is a well-known franchisor that allows individuals to use the McDonalds name and methods to deliver food to consumers. Payment is usually in the form of a onetime, upfront franchise fee and also on-going percentage of revenue. While the cost to the franchisee may be quite high, this form of retailing offers several advantages including: 1) allowing the franchisee to open a retail outlet that may already be known to local customers, and 2) being trained in how to operate the business, which may allow the franchisee to be successful much faster than if they attempted to start a business on their own. For the franchisor, in addition to added revenue, the franchise model allows for faster expansion since funds needed to expand the business (e.g., acquiring retail space, local advertising) are often supported by the franchisee’s up-front franchise fee. Convenience – As the name implies these general merchandise retailers cater to offering customers an easy purchase experience. Convenience is offered in many ways including through easily accessible store locations, small store size that allows for quick shopping, and fast checkout. The product selection offered by these retailers is very limited and pricing can be high. Vending – Within this category are automated methods for allowing consumers to make purchases and quickly acquire products. While most consumers are well aware of vending machines allowing customers to purchase smaller items, such as beverages and snack food, newer devices are entering the market containing more expensive and bulkier products. These systems require
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the vending machine have either Internet or telecommunications access to permit purchase using credit cards. Retail Summary Chart Below us summarizes each retail format by using the seven categorization characteristics. The characteristics identified for each format should be viewed as the “most likely” case for that format and are not necessarily representative of all retailers that fall into this format. For example, under distribution, clearly most retailers today have an online presence, however, for many the predominant distribution methods is still selling through retail stores.
Format
Target Market
Products Carried
Pricing Strategy
Promotion Emphasis
Distribution
Service Level
Ownership Structure
Mom-and-Pop
mass general competitive advertising specialty specialty direct mail mass mass mass general general specialty discount advertising
Mass Discounter Warehouse Store Category Killer
discount advertising discount advertising competitive Department Store specialty general competitive advertising Boutique speciatly specialty exclusive mass specialty mass specialty mass mass mass full selling
Catalog e-tailer
Franchise Convenience Vending
general discount direct mail specialty competitive general discount advertising specialty competitive full specialty competitive advertising general specialty full full advertising none
stand-alone strip center shopping area stand-alone strip-center stand-alone stand-alone strip center shopping area shopping mail stand-alone strip center shopping area direct marketer online seller
assorted individually o/o
self self assorted assorted full
corp. chain corp. chain corp. chain corp. chain individuallly o/o chain
assorted corp. structure self corp. structure
stand-along strip center stand-alone vending
assorted self self
contractual individually o/o corp. chain corp. structure
What is retailing? Retailing is defined as selling products to consumers for their personal use. A retailer is a reseller (i.e., obtains product from one party in order to sell to another) from which a consumer purchases products. In the majority of retail situations, the organization from which a consumer makes purchases is a reseller of products obtained from others and not the product manufacturer, 148
Distribution Decisions; some manufacturers also operate their own retail outlets in a corporate channel arrangement. While consumers are the retailer’s buyers, a consumer does not always buy from retailers.For instance, in a direct marketing system, where a consumer purchases from another consumer (e.g., eBay) the consumer purchase would not be classified as a retail purchase. This distinction can get confusing but in the US and other countries the dividing line is whether the one selling to consumers is classified as a business (e.g., legal and tax purposes) or is selling as a hobby without a legal business standing. As a reseller, retailers offer many benefits to suppliers and customers. For consumers the most important benefits relate to the ability to purchase small quantities of a wide assortment of products at prices that are considered reasonably affordable. For suppliers the most important benefits relate to offering opportunities to reach their target market, build product demand through retail promotions, and provide consumer feedback to the product marketer. Concerns of Retailers Retailers are faced with many issues as they attempt to be successful. The key issues include: • Customer Satisfaction – Retailers know that satisfied customers are loyal customers. Consequently, retailers must develop strategies intended to build relationships that result in customers returning to make more purchases. • Ability to Acquire the Right Products – A customer will only be satisfied if they can purchase the right products to satisfy their needs. Since a large percentage of retailers do not manufacture their own products, they must seek suppliers who will supply products demanded by customers. Thus, an important objective for retailers is to identify the products customers will demand and negotiate with suppliers to obtain these products. • Product Presentation – Once obtained products must be presented or merchandised to customers in a way that generates interest. Retail merchandising often requires hiring creative people who understand and can relate to the market. • Traffic Building – Like any marketer, retailers must use promotional methods to build customer interest. For retailers a key measure of interest is the number
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of people visiting a retail location or website. Building “traffic” is accomplished with a variety of promotional techniques such as advertising, including local newspapers or Internet, and specialized promotional activities, such as coupons. • Layout– For store-based retailers a store’s physical layout is an important component in creating a retail experience that will attract customers. The physical layout is more than just deciding in what part of the store to locate products. For many retailers designing the right shopping atmosphere (e.g., objects, light, and sound) can add to the appeal of a store. Layout is also important in the online world where site navigation and usability may be deciding factors in whether of a retail website is successful. • Location – Where to physically locate a retail store may help or hinder store traffic. Well placed stores with high visibility and easy access, while possibly commanding higher land usage fees, may hold significantly more value than lower cost sites that yield less traffic. Understanding the trade-off between costs and benefits of locations is an important retail decision. • Keeping Pace With Technology – Technology has invaded all areas of retailing including customer knowledge (e.g., customer relationship management software), product movement (e.g., use of RFID tags for tracking), point-of-purchase (e.g., scanners, kiosks, self-serve checkout), web technologies (e.g., online shopping carts, purchase recommendations) and many more. Ways to Categorize Retailers There are many ways retailers can be categorized depending on the characteristics being evaluated. For our purposes we will separate retailers based on six factors directly related to major marketing decisions: • target markets served • product offerings • pricing structure • promotional emphasis • distribution method • service level And one operational factor: • Ownership
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However, these groups are not meant to be mutually exclusive. Target Markets served The first classification looks at the type of markets a retailer intends to target. These categories are identical to the classification scheme. • Mass Market – Mass market retailers appeal to the largest market possible by selling products of interest to nearly all consumers. With such a large market from which to draw customers, the competition among these retailers is often fierce. • Specialty Market – Retailers categorized as servicing the specialty market are likely to target buyers looking for products having certain features that go beyond mass marketed products, such as customers who require more advanced product options or higher level of customer service. While not as large as the mass market, the target market serviced by specialty retailers can be sizable. Exclusive Market – Appealing to this market means appealing to discriminating customers who are often willing to pay a premium for features found in very few products and for highly personalized services. Since this target market is small, the number of retailers addressing this market within a given geographic area may also be small. Products Carried Under this classification retailers are divided based on the width (i.e., number of different product lines) and depth (i.e., number of different products within a product line) of the products they carry. • General Merchandisers – These retailers carry a wide range of product categories though the number of different items within a particular product line is generally limited (i.e., shallow depth). • Multiple Lines Specialty Merchandisers - Retailers classified in this category stock a limited number of product lines (i.e., narrow) but within the categories they handle they often offer a greater selection (i.e., deep) than are offered by general merchandisers. For example, a consumer electronics retailer would fall into this category. • Single Line Specialty Merchandisers – Some retailers limit their offerings to just one product line, and sometimes only one product. This can be seen online where a relatively small website may sell a single
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product such as computer gaming software. Another example may be a small jewelry store that only handles watches. Pricing Strategy Retailers can be classified based on their general pricing strategy. Retailers must decide whether their approach is to use price as a competitive advantage or to seek competitive advantage in non-price ways. • Discount Pricing – Discount retailers are best known for selling low priced products that have a low profit margin (i.e., price minus cost). To make profits these retailers look to sell in high volume. Typically discount retailers operate with low overhead costs by vigorously controlling operational spending on such things as real estate, design issues (e.g., store layout, website presentation), and by offering fewer services to their customers. • Competitive Pricing – The objective of some retailers is not to compete on price but alternatively not to be seen as charging the highest price. These retailers, who often operate in specialty markets, aggressively monitor the market to insure their pricing is competitive but they do not desire to get into price wars with discount retailers. Thus, other elements of the marketing mix (e.g., higher quality products, nicer store setting) are used to create higher value for which the customer will pay more. • Full Price Pricing – Retailers targeting exclusive markets find such markets are far less price sensitive than mass or specialty markets. In these cases the additional value added through increased operational spending (e.g., expensive locations, more attractive design, more services) justify higher retail prices. While these retailers are likely to sell in lower volume than discount or competitive pricing retailers, the profit margins for each product are much higher. Promotional Focus Retailers generate customer interest using a variety of promotional technique, yet some retailers rely on certain methods more than others as their principle promotional approach. • Advertising – Many retailers find traditional mass promotional methods of advertising, such as through newspapers or television, continue to be their best means for creating customer interest. Retailers
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selling online rely mostly on Internet advertising as their promotional method of choice. • Direct Mail – A particular form of advertising that many retailers use for the bulk of their promotion is direct mail – advertising through postal mail. Using direct mail for promotion is the primary way catalog retailers distribute their materials and is often utilized by smaller local companies who promote using postcard mailings. • Personal Selling – Retailers selling expensive or high-end products find a considerable amount of their promotional effort is spent in person-to-person contact with customers. While many of these retailers use other promotional methods, in particular advertising, the consumer-salesperson relationship is the key to persuading consumers to make purchase decisions. Distribution Method Retailers sell in many different formats with some requiring consumers visit a physical location while others sell to customers in a virtual space. It should be noted that many retailers are not tied to a single distribution method but operate using multiple methods. • Store-Based Sellers – By far the predominant method consumers use to obtain products is to acquire these by physically visiting retail outlets (aka brick-andmortar). Store outlets can be further divided into several categories. One key characteristic that distinguishes categories is whether retail outlets are physically connected to one or more others stores: • Stand-Alone – These are retail outlets that do not have other retail outlets connected. • Strip-Shopping Center – A retail arrangement with two or more outlets physically connected or that share physical resources (e.g., share parking lot). • Shopping Area – A local center of retail operations containing many retail outlets that may or may not be physically connected but are in close proximity to each other such as a city shopping district. • Regional Shopping Mall – Consists of a large selfcontained shopping area with many connected outlets. • Non-Store Sellers – A fast growing method used by retailers to sell products is through methods that do not have customers physically visiting a retail
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outlet. In fact, in many cases customers make their purchase from within their own homes. • Online Sellers – The fastest growing retail distribution method allows consumer to purchase products via the Internet. In most cases delivery is then handled by a third-party shipping service. • Direct Marketers – Retailers that are principally selling via direct methods may have a primary location that receives orders but does not host shopping visits. Rather, orders are received via mail or phone. • Vending – While purchasing through vending machines does require the consumer to physically visit a location, this type of retailing is considered as nonstore retailing as the vending operations are not located at the vending company’s place of business. Service Level Retailers attract customers not only with desirable products and affordable prices, but also by offering services that enhance the purchase experience. There are at least three levels of retail service: • Self-Service – This service level allows consumers to perform most or all of the services associated with retail purchasing. For some consumers self-service is considered a benefit while others may view it as an inconvenience. Self-service can be seen with: 1) self-selection services, such as online purchasing and vending machine purchases, and 2) self-checkout services where the consumer may get help selecting the product but they use self-checkout stations to process the purchase including scanning and payment. • Assorted-Service – The majority of retailers offer some level of service to consumers. Service includes handling the point-of-purchase transaction; product selection assistance; arrange payment plans; offer delivery; and many more. • Full-Service – The full-service retailer attempts to handle nearly all aspects of the purchase to the point where all the consumer does is select the item they wish to purchase. Retailers that follow a full-price strategy often follow the full-service approach as a way of adding value to a customer’s purchase. Ownership Structure finally, we can categorize retailers based on the ownership structure of the business.
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Individually Owned and Operated – Under this ownership structure an individual or corporate entity owns and operates one or a very small number of outlets. Single ownership of retail outlets most frequently occurs with small retail stores, though there are some cases, for instance in the automotive or furniture industries, where single ownership involves very large outlets. • Corporate Chain – A retail chain consists of multiple retail outlets owned and operated by a single entity all performing similar retail activities. While the number of retail outlets required to be classified as chain has never been specified, we will assume that anyone owning more than five retail locations would be considered a chain. • Corporate Structure – This classification covers large retailers predominantly operating in the non-store retail arena such as online, catalog and vending. • Contractually Licensed and Individually Operated – The contractual channel arrangement discussed in Part 8 has lead to a retail ownership structure in which operators of the retail outlet are not the out-right owners of the business. Instead, the arrangement often involves a legal agreement in which the owner of the retail concept allows the operator to run the owner’s business concept in exchange for financial considerations such as a percentage of revenue. This structure is most often seen in retail franchising. Definition of Marketing If you look around the Internet you will find marketing defined in many different ways. Some definitions focus on marketing as the process involved in satisfying the needs of a particular market, while other definitions lean more toward defining marketing in terms of its most visible functional areas, such as advertising and product development. There probably is no one best way to define marketing, though whatever definition is used should have an orientation that focuses on satisfying customers. Definition of marketing is as follows: Marketing consists of the strategies and tactics used to identify, create and maintain satisfying relationships with customers that result in value for both the customer and the marketer.
Let's examine this definition in a little more detail by focusing on a few of the key terms.
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Strategies and Tactics - Strategies are best explained as the direction the marketing effort will take over some period of time, while tactics are actionable steps or decisions made in order to follow the strategies established. For instance, if a strategy is to enter a new market, the tactics may involve the marketing decisions made to carry this out. Performing strategic and tactical planning activities in advance of taking action is considered critical for long-term marketing success. Identify - Arguably the most important marketing function involves efforts needed to gain knowledge of customers, competitors, and markets. We will see throughout this tutorial how marketing research is utilized in all decision areas. And since it is so important, Part 2 of this tutorial will examine marketing research in greater detail. Create - Competition forces marketers to be creative people. When marketers begin new ventures, such as building a new company, it is often based around something that is new (e.g., new product, new way to distribute a product, new advertising approach, etc.). But once the new venture is launched innovation does not end. Competitive pressure is continually felt by the marketer, who must respond by devising new strategies and tactics that help the organization remain successful. Maintain - Today's marketers work hard to insure their customers return to purchase from them again. Long gone (see History below) are the days when success for a marketer was measured simply in how many sales they made each day. Now, in most marketing situations, marketing success is evaluated not only in terms of sales figures but also by how long a marketer can retain good customers. Consequently, marketers' efforts to attract customers do not end when a customer makes a purchase. It continues in various ways for, hopefully, a long time after the initial purchase. Satisfying Relationships - A key objective of marketing is to provide products and services that customers really want AND to make customers feel their contact with the marketer is helping to build a good relationship between the two. In this way the customer is made to feel as if she/he is a partner in the transaction not just a source of revenue for the marketer. In recent years this has lead to the concept of Customer Relationship Management (CRM), which has emerged as a strategic approach that insures that everyone in an organization, not just the marketer, understands the importance of customers. Maintaining close and consistent relationships with customers through all points of customer
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contact is crucial but difficult to do well. We'll see in later sections technology plays a key role in carrying out CRM, so that nearly anyone in a organization that comes into contact with a customer (e.g., sales force, service force, customer service representatives, accounts receivable, etc.) has the necessary information and is well prepared to deal with the customer. Value for Both Customer and Marketer - Value refers to the perception of benefits received for what someone must give up. For customers value is most often measured by how much they feel they are getting for their money, though the value one customer feels she/he obtains may differ from the perception of value from another customer even though they purchase the same product. On the other side of the transaction, the marketer may measure value in terms of how much profit they are making for the marketing efforts and resources expended. For a successful marketing effort to take place both the customer and the marketer must feel they are receiving something worth while in return for the efforts. Without a strong perception of value it is unlikely a strong relationship can be built. Throughout this tutorial we will emphasize value and show ways in which the marketer builds value into the solutions they offer. What Marketers Do In order to reach the goal of creating a relationship that holds value for customers and for the organization, marketers use a diverse toolkit that includes (but is not limited to) making decisions regarding: • Target Markets – those markets identified as possessing needs the marketer believes can be addressed by its marketing efforts. • Products/Services – a tangible or intangible solution to the market’s needs • Promotion – a means for communicating information about the marketing organization’s solution to the market • Distribution – means used to allow the market to obtain the solution • Pricing – ways for the marketer to adjust the cost to the market for the solution • Services – additional options that enhance the solution’s value Each option within the marketer’s toolkit is tightly integrated with all other options so that a decision in one area could and often does impact decisions in other areas.
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For instance, a change in the price of a product (e.g., lowering the price) could impact the distribution area (e.g., increases shipments, generates higher store traffic). Additionally, options within the toolkit are affected by factors that are not controlled by the marketer. These factors include economic conditions, legal issues, technological developments, social/cultural changes, and many more. While not controllable, these external factors must be monitored and dealt with since these can potentially cause considerable harm to the organization. Ignoring outside elements also can lead to missed opportunities in the market especially if competitors are the first to take advantage of the opportunities. As part of the strategic and tactical planning process discussed above it would be wise for marketers to pay close attention to the environment outside the organization. History of marketing it is hard for many to believe, but when compared to economics, production and operations, accounting and other business areas, marketing is a relatively young discipline having emerged in the early 1900s. Prior to this time most issues that are now commonly associated with marketing were either assumed to fall within basic concepts of economics (e.g., price setting was viewed as a simple supply/demand issue), advertising (well developed by 1900), or in most cases were simply not yet explored (e.g., customer purchase behavior, importance of distribution partners). Lead by marketing scholars from several major universities, the development of marketing was in large part motivated by the need to dissect in greater detail relationships and behaviors that existed between sellers and buyers. In particular, the study of marketing lead sellers to recognize that adopting certain strategies and tactics could significantly benefit the seller/buyer relationship. In the old days of marketing (before the 1950s) this often meant identifying strategies and tactics for simply selling more products and services with little regard for what customers really wanted. Often this lead companies to embrace a “sell-as-much-as-we-can” philosophy with little concern for building relationships for the long term. But starting in the 1950s, companies began to see that old ways of selling were wearing thin with customers. As competition grew stiffer across most industries, organizations looked to the buyer side of the transaction for ways to improve. What they found was an emerging philosophy suggesting that the key factor in successful marketing is to understanding the needs of customers. This
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now famous “marketing concept” suggests marketing decisions should flow from FIRST knowing the customer and what they want. Only then should an organization initiate the process of developing and marketing products and services. The marketing concept continues to be at the root of most marketing efforts, though the concept does have its own problems (e.g., doesn’t help much with marketing new technologies) a discussion of which is beyond the scope of this tutorial. But overall marketers have learned they can no longer limit their marketing effort to just getting customers to purchase more. They must have an in-depth understanding of who their customers are and what they want. The Importance of Good Customers Today, most successful marketers know that building customers for the long term holds more value to the marketer than short term sales. They also are aware that current customers who are satisfied with the purchases they have made in the past are the best source for future sales. Why? Because they have first-hand experienced with the organization and, if they have been satisfied with past purchases, they probably trust the organization. Thus, convincing these customers to make more purchases requires significantly less effort (i.e., marketing expenditures) when compared to efforts and costs needed to attract new customers. This philosophy is at the heart of the previously discussed CRM and this approach to managing customers has attracted much interest in the last few years. Under CRM the key driver for marketing success is to treat good customers in a way that will increase the probability they will stay good customers. The fact that we place the descriptive term “good” in front of “customers” should not be taken lightly. Not all customers are the same. Some consistently spend large sums to purchase products from an organization; others do not spend large sums but hold the potential to do so; and still others use up a large amount of an organization’s resources but contribute little revenue. Clearly there are lines of demarcation between customers. As we will see later, identifying this line is critical for marketing success. Marketing Research In many ways the foundation of marketing rests with marketing research since nearly all tactical decisions require some amount of research. However, research does not have to be elaborate to be effective. Sometimes small efforts, such as doing a quick search on the Internet, will provide the needed information.
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The knowledge gained from research helps marketers make more informed decisions. Market research does this by giving marketers a picture of what is occurring (or likely to occur) and offering alternatives from which choices can be made. For instance, good research may suggest multiple options for introducing new products or entering new markets. In most cases marketing decisions prove less risky (though they are never risk free!) when the marketer can select from more than one option. However, as sophisticated as research is today, marketers are cautioned not to use marketing research as the only tool for making marketing decisions. It may prove costly for the results of marketing studies to be the lone reason why decisions are made. Rather, smart marketing decisions require the use of knowledge gained from many areas, including management’s own judgment of what is best. But being cautious with how research is used should not diminish the need for conducting research that aids marketing decisions. As noted, research should help support decisions in all key marketing areas. Doing Market Research Right while undertaking research is important for gaining knowledge and aids marketing decision-making, marketers must understand its limitations. Almost all types of research, whether it is for business, medical science, government, etc., contain the risk that results may be wrong. There are many reasons why errors occur (a full discussion being beyond the scope of this tutorial), however, one key reason can be traced to the controls in place (or not) when data collection occurs. If research is collected without the necessary controls to insure it is done correctly, relying on results to make decisions could prove problematic if not disastrous. Thousands of examples exist of firms using faulty research to make decisions, including many dot-com companies that failed between 1999 and 2002. Since many research studies are really only snapshots of something that is bigger, making sure research is done right is critical. For instance, many companies survey a small percentage of their customers (called a sample) to see how satisfied they are with the company’s efforts. But, unless the company only has a few customers, the chances of surveying everyone (called a census) is unlikely, and even if they could talk to everyone there is still a chance the information is not totally accurate (e.g., customers may make errors when they fill out the survey).
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Seeking a high-level of relevant results requires instituting strict controls on how the information is collected. Many of these controls use a scientific approach meaning a research project becomes highly structured and is not very flexible once a study is underway. For instance, for research involving a sample of a large population of customers, certain controls must be in place to define how many are in the sample as well as how the research is carried out (e.g., research design should be the same for all). As you might expect the trade-off for getting more relevant results is the increase in cost and time needed to carryout the research. So a big decision for marketers, when it comes to doing research, is to determine the balance between relevancy of the information obtained and the costs involved to carry out the research. Good market research is produced when results of the research are strong indicators of what is happening now or might happen in the future. This means the results are relevant to a situation. Being relevant does not mean it is 100% correct (remember there is always risk). Instead, being relevant means the probability is high that the research results reflect what is actually happening or what will happen. Reasons to Undertake Market Research There are numerous reasons why marketers seek to conduct research but, in general, these fall into three categories. Describe what is Happening (Descriptive Research) the focus of descriptive research is to provide an accurate description and/or explanation for something that is occurring. For example, what age group is buying a particular brand, what are a product’s market shares in a specific geographic region, how many competitors a company faces, etc? This type of research is by far the most popular form of market research. But to be considered useful it must be conducted correctly, which means the marketer must adhere to a strict set of research requirements to capture relevant results. Examine something that is Mostly Unknown (Exploratory Research) the exploratory approach attempts to discover general information about some topic that is not well understood by the marketer. For instance, a marketer knows about a new Internet technology for marketing a product but the marketer doesn’t know much about the technology. When gaining insight on an issue is the primary goal, exploratory research is used. The basic difference between
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exploratory and descriptive research is in the research design. Exploratory research follows a format that is less structured and more flexible than descriptive research. This approach works well when the marketer doesn’t have an understanding of the topic or the topic is new, and it is hard to pinpoint the research direction. The downside, however, is the results may not be as useful in aiding a marketing decision. So why use it? In addition to offering the marketer basic information on a topic, exploratory research may also provide direction for a more formal research effort. For instance, exploratory research may indicate who the key decision makers are in a particular market thus enabling a more structured descriptive study to be targeted to this group. See How Something Affects Something Else (Causal Research) in this form of research the marketer tries to determine if one variable affects another variable. In essence, the marketer is conducting an experiment. To be effective the design of causal research is highly structured and controlled so that other factors do not affect those being studied. Marketers use this approach to test marketing scenarios such as what might happen to product sales if changes are made to a product’s design. If causal research is performed well the marketer may be able to use results to forecast what might happen if the changes are made. Types of Market Research marketing research falls into one of two categories: primary research and secondary research. Primary Research when a marketer conducts research to collect original data it is referred to as primary marketing research. This process involves designing a research plan, collecting information, inputting the data, and producing and analyzing results. Since there is a great deal of marketer involvement, primary research is often very expensive to undertake and do well. But with the marketer controlling the process, the results may be much more relevant to his/her situation and, consequently, more useful. In general there are two basic types of primary research methods – quantitative and qualitative. Quantitative Research Information gathered using quantitative means are often open to evaluation using statistical analysis. While this tutorial does not cover statistical techniques, it should be understood that data collected following a structured and well-controlled scientific research design can yield numerical values that can be analyzed using statistics.
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Such analysis may prove very relevant and even results from a small number of collection points may be used in determining characteristics of a larger group (e.g., sample a small group of customers). Quantitative research comes in many forms but the most popular forms are surveys, tracking, and experiments. Surveys – This method captures respondent information through the input of responses to a research instrument, such as a questionnaire. Information can be input either by the respondents themselves (e.g., complete online survey) or the researcher can input the data (e.g. phone survey). The main methods for distributing surveys are via postal mail, phone, and website or in person. However, newer technologies are creating additional delivery options including through wireless devices, such as PDAs and cell phones. Tracking – With tracking research marketers are able to monitor the behavior of customers as they engage in regular purchase or information gathering activities. Possibly the most well known example of tracking research is used by websites as they track customer visits. But tracking research also has offline applications, especially when point-of-purchase scanners are employed, such as tracking product purchases at grocery stores and automated collections on toll roads. This method of research is expected to grow significantly as more devices are introduced that provide means for tracking. However, some customers may see tracking devices as intrusive and many privacy advocates have raised concerns about certain tracking methods especially if these are not disclosed to customers. Experiments – Marketers often undertake experiments to gage how the manipulation of one marketing variable will affect another (causal research). For example, a market researcher for a retail chain may want to study what the effect on sales would be if a point-of-purchase display is moved to different locations in a store. The use of causal research has applications for many marketing decision areas including product testing, advertising design, setting price points, and creating packaging. Unfortunately, performing highly controlled experiments can be quite costly. Some researchers have found the use of computer simulations can work nearly as well as experiments and may be less expensive, though the number of applications of simulation for marketing decisions is still fairly limited. Qualitative Research Sometimes referred to as “touchy-feely” research,
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qualitative research gathers information that requires researchers to interpret the information being gathered, most often without the benefit of statistical support. If the researcher is well-trained in interpreting respondents’ comments and activities, this form of research can offer very good information. However, it may not hold the same level of relevancy as quantitative research due to the lack of scientific controls that are often associated with this data collection method. For example, a researcher may want to know more about how customers make purchase decisions. One way to do this is to sit and talk with customers using one-on-one interviews. However, if the interview process allows the researcher to vary what questions are asked (i.e., not all respondents are asked the same questions), then this type of research may lack controls needed to follow a scientific approach. An additional drawback of qualitative research is that it can be a time consuming and expensive undertaking and, consequently, only a very small portion of the total population generally participate in the research. Due to the lack of strong controls in the research design (i.e., not as well structured, fewer participants), using results to estimate characteristics of a larger group is more difficult. This is not to say qualitative research is not useful, it is very useful if its limitations are understood and it is widely employed for marketing research. Qualitative Research options include individual interviews, focus groups and observational research Individual Interviews – Talking to someone one-on-one allows a researcher to cover more ground than may be covered if a respondent was completing a survey. The reason lies with the researcher’s ability to dig deeper into a respondent’s comments to find out additional details that may not have emerged from initial responses. Unfortunately, individual interviewing can be quite expensive and may be intimidating to some who are not comfortable sharing details with a researcher. Focus Groups – To overcome the drawbacks associated with individual interviews, marketers can turn to focus groups. Under this research format, a group of respondents (generally numbering 8-12) are guided through discussion by a moderator. The power of focus groups as a research tool rests with the environment created by the interaction of the participants. In well-run sessions, members of the group are stimulated to respond by the comments and the support of others in the group. In this way, the depth of information offered by a respondent may be much greater
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than that obtained through individual interviews. However, focus groups can be very expensive to conduct especially if participants must be paid (often the case in B-to-B research). To help reduce costs, online options for focus groups have emerged. While there are many positive aspects to online focus groups, the fact that respondents are not physically present diminishes the benefits gained by group dynamics. However, as technology improves, in particular video conferencing, the online focus group could become a major research option. Observational Research – Watching customers as they perform activities can be a very useful research method, especially when customers are observed in a natural setting (e.g., shopping in a retail store, using products at home). In fact, an emerging research technique called ethnographic research has researchers following customers as they shop, work, and relax at home in order to see how they make decisions, use products and more. Secondary Research By far the most widely used research method is collecting data through secondary research. This process involves collecting data from either the originator or a distributor of primary research. In other words, accessing information that others have already gathered. In most cases this means finding information from third-party sources such as marketing research reports, consulting firm white papers, magazine articles, and other sources. But in actuality any information previously gathered, whether from sources external to the marketer or from internal sources, such as accessing material from previous market research carried out by the marketer, fall under the heading of secondary research. Compared to primary research there are several advantages to the secondary approach, including ease of access and generally lower cost for acquiring the information. But there are also major disadvantages that may limit the usefulness of the research including the fact the information may not be exactly what the marketer needs, results may be out-of-date, or the research design poorly constructed. Sources for secondary research are quite extensive. In years past accessing good secondary research required marketers to visit a library or spend large sums of money accessing proprietary electronic databases. However, the Internet has changed how secondary research is accessed by offering convenience, accessibility to a large array of information sources, and generally low cost...
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Consumer Buying Behavior Possibly the most challenging concept in marketing deals with understanding why buyers do what they do (or don’t do). But such knowledge is critical for marketers since having a strong understanding of buyer behavior will help shed light on what is important to the customer and also suggest the important influences on customer decisionmaking. Using this information, marketers can create marketing programs that they believe will be of interest to customers. As you might guess, factors affecting how customers make decisions are extremely complex. Buyer behavior is deeply rooted in psychology with dashes of sociology thrown in just to make things more interesting. Since every person in the world is different, it is impossible to have simple rules that explain how buying decisions are made. But those who have spent many years analyzing customer activity have presented us with useful “guidelines” in how someone decides whether or not to make a purchase. In fact, pick up any textbook that examines customer behavior and each seems to approach it from a different angle. The perspective we take is to touch on just the basic concepts that appear to be commonly accepted as influencing customer behavior. We will devote two sections of the Principles of Marketing tutorial to customer behavior. In this section we will examine the buying behavior of consumers (i.e., when people buy for personal reasons) while in section 4 we will examine factors that influence buyer’s decisions in the business market. Types of Consumer Purchase Decisions Consumers are faced with purchase decisions nearly every day. But not all decisions are treated the same. Some decisions are more complex than others and thus require more effort by the consumer. Other decisions are fairly routine and require little effort. In general, consumers face four types of purchase decisions: • Minor New Purchases – these purchases represent something new to a consumer but in the customer’s mind is not a very important purchase in terms of need, money or other reason (e.g., status within a group). • Minor Re-Purchases – these are the most routine of all purchases and often the consumer returns to purchase the same product without giving much thought to other product options (i.e., consumer is brand loyalty). • Major New Purchases – these purchases are the most difficult of all purchases because these are important to the consumer but the consumer has little or no 166
previous experience making the purchase AND is important. This type of decision often (but not always) requires the consumer to engage in an extensive decision-making process. • Major Re-Purchase - these purchase decisions are also important to the customer but the customer feels more confident in making the decision since they have experienced purchasing the product in the past. For marketers it is important to understand how consumers treat the purchase decisions they face. If a company is targeting customers who feel a purchase decision is difficult (i.e., Major New Purchase), their marketing strategy may vary greatly from a company targeting customers who view the purchase decision as routine. In fact, the same company may face both situations at the same time; for some the product is new, while other customers see the purchase as routine. The implication of buying behavior for marketers is that different buying situations require different marketing efforts. Why Consumers Buy customers make purchases in order to satisfy needs. Some of these needs are basic and must be filled by everyone on the planet (e.g., food, shelter) while others are not required for basic survival and vary depending on the person. It probably makes more sense to classify needs that are not a necessity as wants or desires. In fact, in many countries where the standard of living is very high, a large portion of the population’s income is spent on wants and desires rather than on basic needs. When we mention the consumer we are referring to the actual buyer, the person spending the money. But is should also be pointed out that the one who does the buying is not necessarily the user of what is bought and that others may be involved in the buying decision in addition to the actual buyer. While the purchasing process in the consumer market is not as complex as the business market, having multiple people involved in a purchase decision is not unusual. For example, in planning for a family vacation the mother may make the hotel reservations but others in the family may have input on the hotel choice. Similarly, a father may purchase snacks at the grocery store but his young child may be the one who selected it from the store shelf. So understanding consumer purchase behavior involves not only understanding how decisions are made but also understanding the dynamics that influence purchases.
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What Influences Purchasing as we discussed the decision-making process for consumers is anything but straight forward. There are many factors that can affect this process as a person works through the purchase decision. The number of potential influences on consumer behavior is limitless. However, marketers are well served to understand the KEY influences. By doing so they may be in a position to tailor their marketing efforts to take advantages of these influences in a way that will satisfy the consumer and the marketer (remember this is a key part of the definition of marketing).
For the purposes of this tutorial we will break these influences down into three main categories: Internal, External and Marketing. However, those interested in learning more about customer buying activity may want to consult one or more consumer behavior books where they will find additional methods for explaining consumer buying behavior. For the most part the influences are not mutually exclusive. Instead, they are all interconnected and, as we will see, work together to form who we are and how we behave. For each of the influences that are discussed we will provide a basic description and also suggest its implication to marketers. Bear in mind we only provide a few marketing implications for each influence; clearly there are many more. Perceptual Filter Perception is how we see ourselves and the world we live in. However, what ends up being stored inside us doesn’t always get there in a direct manner. Often our mental makeup results from information that has been consciously or unconsciously filtered as we experience it, a process we refer to as a perceptual filter. To us this is our
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reality, though it does not mean it is an accurate reflection on what is real. Thus, perception is the way we filter stimuli (e.g., someone talking to us, reading a newspaper story) and then make sense out of it. Perception has several steps. • Exposure – sensing a stimuli (e.g. seeing an ad) • Attention – an effort to recognize the nature of a stimuli (e.g. recognizing it is an ad) • Awareness – assigning meaning to a stimuli (e.g., humorous ad for particular product) • Retention – adding the meaning to one’s internal makeup (i.e., product has fun ads) How these steps are eventually carried out depends on a person’s approach to learning. By learning we mean how someone changes what they know, which in turn may affect how they act. There are many theories of learning, a discussion of which is beyond the scope of this tutorial, however, suffice to say that people are likely to learn in different ways. For instance, one person may be able to focus very strongly on a certain advertisement and be able to retain the information after being exposed only one time while another person may need to be exposed to the same advertisement many times before he/she even recognizes what it is. Consumers are also more likely to retain information if a person has a strong interest in the stimuli. If a person is in need of new car they are more likely to pay attention to a new advertisement for a car while someone who does not need a car may need to see the advertisement many times before they recognize the brand of automobile. Marketing Implication: Marketers spend large sums of money in an attempt to get customers to have a positive impression of their products. But clearly the existence of a perceptual filter suggests that getting to this stage is not easy. Exposing consumers to a product can be very challenging considering the amount of competing product messages (ads) that are also trying to accomplish the same objective (i.e., advertising clutter). So marketers must be creative and use various means to deliver their message Once the message reaches consumer it must be interesting enough to capture the attention (e.g., talk about the product’s benefits). But attending to the message is not enough. For marketers the most critical step is the one that occurs with awareness. Here marketers must continually monitor and respond if their message becomes distorted in ways that will negatively shape its meaning. This can often happen due in part to competitive 169
activity (e.g., comparison advertisements). Finally, getting the consumer to give positive meaning to the message they have retained requires the marketer make sure that consumers accurately interpret the facts about the product. Knowledge: Knowledge is the sum of all information known by a person. It is the facts of the world as he/she knows it and the depth of knowledge is a function of the breadth of worldly experiences and the strength of an individual’s long-term memory. Obviously what exists as knowledge to an individual depends on how an individual’s perceptual filter makes sense of the information it is exposed to. Marketing Implications: Marketers may conduct research that will gauge consumers’ level of knowledge regarding their product. As we will see below, it is likely that other factors influencing consumer behavior are in large part shaped by what is known about a product. Thus, developing methods (e.g., incentives) to encourage consumers to accept more information (or correct information) may affect other influencing factors.
Attitude: In simple terms attitude refers to what a person feels or believes about something. Additionally, attitude may be reflected in how an individual acts based on his or her beliefs. Once formed, attitudes can be very difficult to change. Thus, if a consumer has a negative attitude toward a particular issue it will take considerable effort to change what they believe to be true. Marketing Implication: Marketers facing consumers who have a negative attitude toward their product must work to identify the key issues shaping a consumer’s attitude then adjust marketing decisions (e.g., advertising) in an effort to change the attitude. For companies competing against strong rivals to whom loyal consumers exhibit a positive attitude, an important strategy is to work to see why consumers feel positive toward the competitor and then try to meet or beat the competitor on these issues. Alternatively, a company can try to locate customers who feel negatively toward the competitor and then increase awareness among this group. Personality: An individual’s personality relates to perceived personal
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characteristics that are consistently exhibited, especially when one acts in the presence of others. In most, but not all, cases the behaviors one project in a situation is similar to the behaviors a person exhibits in another situation. In this way personality is the sum of sensory experiences others get from experiencing a person (i.e., how one talks, reacts). While one’s personality is often interpreted by those we interact with, the person has their own vision of their personality, called self concept, which may or may not be the same has how others view us. Marketing Implication: For marketers it is important to know that consumers make purchase decisions to support their self concept. Using research techniques to identify how customers view themselves may give marketers insight into products and promotion options that are not readily apparent. For example, when examining consumers a marketer may initially build marketing strategy around more obvious clues to consumption behavior, such as consumer’s demographic indicators (e.g., age, occupation, income). However, indepth research may yield information that shows consumers are purchasing products to fulfill self-concept objectives that have little to do with the demographic category they fall into (e.g., senior citizen may be making purchases that make them feel younger). Appealing to the consumer’s self concept needs could expand the market to which the product is targeted. Lifestyle this influencing factor relates to the way we live through the activities we engage in and interests we express. In simple terms it is what we value out of life. Lifestyle is often determined by how we spend our time and money. Marketing Implication: Products and services are purchased to support consumers’ lifestyles. Marketers have worked hard researching how consumers in their target markets live their lives since this information is key to developing products, suggesting promotional strategies and even determining how best to distribute products. The fact that lifestyle is so directly tied to marketing activity will be further examined. Roles Roles represent the position we feel we hold or others feel we should hold when dealing in a group environment. These positions carry certain responsibilities yet it is important to understand that some of these responsibilities may, in fact, be perceived and not spelled out or even
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accepted by others. In support of their roles, consumers will make product choices that may vary depending on which role they are assuming. As illustration, a person who is responsible for selecting snack food for an office party his boss will attend may choose higher quality products than he would choose when selecting snacks for his family. Marketing Implication: Advertisers often show how the benefits of their products aid consumers as they perform certain roles. Typically the underlying message of this promotional approach is to suggest that using the advertiser’s product will help raise one’s status in the eyes of others while using a competitor’s product may have a negative effect on status. Motivation Motivation relates to our desire to achieve a certain outcome. Many internal factors we have already discussed can affect a customer’s desire to achieve a certain outcome but there are others. For instance, when it comes to making purchase decisions customers’ motivation could be affected by such issues as financial position (e.g., can I afford the purchase?), time constraints (e.g., do I need to make the purchase quickly?), overall value (e.g., am I getting my money’s worth?), and perceived risk (e.g., what happens if I make a bad decision). Marketing Implication: Motivation is also closely tied to the concept of involvement, which relates to how much effort the consumer will exert in making a decision. Highly motivated consumers will want to get mentally and physically involved in the purchase process. Not all products have a high percentage of highly involved customers (e.g., milk) but marketers who market products and services that may lead to high level of consumer involvement should prepare options that will be attractive to this group. For instance, marketers should make it easy for consumers to learn about their product (e.g., information on website, free video preview) and, for some products, allow customers to experience the product (e.g., free trial) before committing to the purchase. EXTERNAL INFLUENCES: Consumer purchasing decisions are often affected by factors that are outside of their control but have direct or indirect impact on how we live and what we consume. Culture: Culture represents the behavior, beliefs and, in many cases, the way we act learned by interacting or observing other members of society. In this way much of what we do
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is shared behavior, passed along from one member of society to another. Yet culture is a broad concept that, while of interest to marketers, is not nearly as important as understanding what occurs within smaller groups or subcultures to which we may also belong. Sub-cultures also have shared values but this occurs within a smaller groups. For instance, sub-cultures exist where groups share similar values in terms of ethnicity, religious beliefs, geographic location, special interests and many others. Marketing Implication: As part of their efforts to convince customers to purchase their products, marketers often use cultural representations, especially in promotional appeals. The objective is to connect to consumers using cultural references that are easily understood and often embraced by the consumer. By doing so the marketer hopes the consumer feels more comfortable with or can relate better to the product since it corresponds with their cultural values. Additionally, smart marketers use strong research efforts in an attempt to identify differences in how sub-culture behaves. These efforts help pave the way for spotting trends within a sub-culture, which the marketer can capitalize on through new marketing tactics (e.g., new products, new sales channels, added value, etc.). Other Group Membership In addition to cultural influences, consumers belong to many other groups with which they share certain characteristics and which may influence purchase decisions. Often these groups contain opinion leaders or others who have major influence on what the customer purchases. Some of the basic groups we may belong to include: • Social Class – represents the social standing one has within a society based on such factors as income level, education, occupation • Family – one’s family situation can have a strong effect on how purchase decisions are made • Reference groups – most consumers simultaneously belong to many other groups with which they associate or, in some cases, feel the need to disassociate Marketing Implication: Identifying and understanding the groups consumers belong to is a key strategy for marketers. Doing so helps identify target markets, develop new products, and create appealing marketing promotions to which consumers can relate. In particular, marketers seek to locate group leaders and others to whom members of the group look for advice or direction. These opinion leaders, if well 173
respected by the group, can be used to gain insight into group behavior and if these opinion leaders accept promotional opportunities could act as effective spokespeople for the marketer’s products. Situation: A purchase decision can be strongly affected by the situation in which people find themselves. Not all situations are controllable, in which case a consumer may not follow their normal process for making a purchase decision. For instance, if a person needs a product quickly and a store does not carry the brand they normally purchase, the customer may choose a competitor’s product. Marketing Implications: Marketers can take advantage of decisions made in uncontrollable situations in at least two ways. First, the marketers can use promotional methods to reinforce a specific selection of products when the consumer is confronted with a particular situation. For example, automotive services can be purchased that promise to service vehicles if the user runs into problems anywhere and at anytime. Second, marketers can use marketing methods that attempt to convince consumers that a situation is less likely to occur if the marketer’s product is used. This can also be seen with auto products, where marketers explain that using their product will prevent unexpected damage to their vehicles. How Consumers buy This process is presented in a sequence of 5 steps as shown below. 1. Need Recognized 2. Search 3. Evaluate Options 4. Purchase 5. Post Purchase However, whether a consumer will actually carryout each step depends on the type of purchase decision that is faced. For instance, for minor re-purchases the consumer may be quite loyal to the same brand, thus the decision is a routine one (i.e., buy the same product) and little effort is involved in making a purchase decision. In cases of routine, brand loyal purchases consumers may skip several steps in the purchasing process since they know exactly what they want allowing the consumer to move quickly through the steps. But for more complex decisions, such as Major New Purchases, the purchasing process can extend for days, weeks, months or longer. So in presenting these steps marketers should realize that, depending on the
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circumstances surrounding the purchase, the importance of each step may vary. 1. Need/Want/Desire is Recognized In the first step the consumer has determined that for some reason he/she is not satisfied (i.e., consumer’s perceived actual condition) and wants to improve his/her situation (i.e., consumer’s perceived desired condition). For instance, internal triggers, such as hunger or thirst, may tell the consumer that food or drink is needed. External factors can also trigger consumer’s needs. Marketers are particularly good at this through advertising; in-store displays and even the intentional use of scent (e.g., perfume counters). At this stage the decision-making process may stall if the consumer is not motivated to continue (see Motivation above). However, if the consumer does have the internal drive to satisfy the need they will continue to the next step. 2. Search for Information assuming consumers are motivated to satisfy his or her need, they will next undertake a search for information on possible solutions. The sources used to acquire this information may be as simple as remembering information from past experience (i.e., memory) or the consumer may expend considerable effort to locate information from outside sources (e.g., Internet search, talk with others, etc.). How much effort the consumer directs toward searching depends on such factors as: the importance of satisfying the need, familiarity with available solutions, and the amount of time available to search. To appeal to consumers who are at the search stage, marketers should make efforts to ensure consumers can locate information related to their product. For example, for marketers whose customers rely on the Internet for information gathering, attaining high rankings in search engines has become a critical marketing objective. 3. Evaluate Options Consumers’ search efforts may result in a set of options from which a choice can be made. It should be noted that there may be two levels to this stage. At level one the consumer may create a set of possible solutions to their needs (i.e., product types) while at level two the consumer may be evaluating particular products (i.e., brands) within each solution. For example, a consumer who needs to replace a television has multiple solutions to choose from such as plasma, LCD and CRT televisions. Within each solution type will be multiple brands from which to choose. Marketers need to understand how consumers evaluate product
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options and why some products are included while others are not. Most importantly, marketers must determine which criteria consumers are using in their selection of possible options and how each criterion is evaluated. Returning to the television example, marketing tactics will be most effective when the marketer can tailor their efforts by knowing what benefits are most important to consumers when selecting options (e.g., picture quality, brand name, screen size, etc.) and then determine the order of importance of each benefit. 4. Purchase In many cases the solution chosen by the consumer is the same as the product whose evaluation is the highest. However, this may change when it is actually time to make the purchase. The “intended” purchase may be altered at the time of purchase for many reasons such as: the product is out-of-stock, a competitor offers an incentive at the point-of-purchase (e.g., store salesperson mentions a competitor’s offer), the customer lacks the necessary funds (e.g., credit card not working), or members of the consumer’s reference group take a negative view of the purchase (e.g., friend is critical of purchase). Marketers whose product is most desirable to the consumer must make sure that the transaction goes smoothly. For example, Internet retailers have worked hard to prevent consumers from abandoning online purchase (i.e., online shopping carts) by streamlining the checkout process. For marketers whose product is not the consumer’s selected product, last chance marketing efforts may be worth exploring, such as offering incentives to store personnel to “talk up” their product at the checkout line. 5. After-Purchase Evaluation Once the consumer has made the purchase they are faced with an evaluation of the decision. If the product performs below the consumer’s expectation then he/she will reevaluate satisfaction with the decision, which at its extreme may result in the consumer returning the product while in less extreme situations the consumer will retain the purchased item but may take a negative view of the product. Such evaluations are more likely to occur in cases of expensive or highly important purchases. To help ease the concerns consumers have with their purchase evaluation, marketers need to be receptive and even encourage consumer contact. Customer service centers and follow-up market research are useful tools in helping to address purchasers’ concerns. Business Buying Behavior
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The business market is comprised of organizations that, in some form, are involved in the manufacturer, distribution or support of products or services sold or otherwise provided to other organizations. The amount of purchasing undertaken in the business market easily dwarfs the total spending by consumers.Because the business market is so large it draws the interest of millions of companies worldwide that market exclusively to business customers. For these marketers understanding how businesses make purchase decisions is critical to their organizations’ marketing efforts. In some ways understanding the business market is not as complicated as understanding the consumer market. For example, in certain business markets purchase decisions hinge on the outcome of a bidding process between competitors offering similar products and services. In these cases the decision to buy is often whittled down to one concern – which has the lowest price. Thus, unlike consumer markets, where building a recognizable brand is very important, for many purchase situations in the business market this is not the case. However, in many other ways business buying is much more complicated. For instance, the demand by businesses for products and services is affected by consumer purchases (called derived demand) and because so many organizations may have a part in creating consumer purchases, a small swing in consumer demand can create big changes in business purchasing. Automobile purchases are a good example. If consumer demand for cars increases many companies connected with the automobile industry will also see demand for their products and services increase (we will later refer to these companies as supply chain members). Under these conditions companies will ratchet up their operations to ensure demand is met, which invariably will lead to new purchases by a large number of companies. In fact, it is conceivable that an increase of just one or two percent for consumer demand can increase business demand for products and services by five or more percent. Unfortunately, the opposite is true if demand declines. Trying to predict these swings requires businesses to not only understand their immediate customers but also the end user, which as we will discuss, may be well down the supply chain from where the business operates. Who makes Up the Business Market there are millions of organizations worldwide selling their products and services to other businesses. They operate in many industries and range in size from huge multinational
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companies with thousands of employees to one-person small businesses. With such a large number of organizations and industries contained within the business market, a marketer can obtain a better picture of who is involved by looking at popular business classification systems set up by international governments, such as the North American Industrial Classification System (NAICS), which covers Canada, Mexico and the United States and the International Standard Industrial Classification (ISIC), which is widely used in Europe. These reports provide descriptions of hundreds of industry classifications. For instance, the table below shows how US operators of “Golf Pro Shops” are listed in the NAICS coding system. Note the numeric sequence that occurs as one “drills down” in order to locate individual industry groups.
Level NAICS Code Description
Sector Sub sector Industry Group Industry US Industry
45 451 4511 45111 451110
Retail Trade Sporting Goods, Hobby, Book, and Music Stores Sporting Goods, Hobby, and Musical Instrument Stores Sporting Goods Stores Golf Pro Shops
Once industry codes are known these can be used within various government and industry research reports to locate specific industry information such as number of firms operating in the industry, total industry sales, number of employees and more. Supply Chain Members the supply chain consists of mostly for-profit companies engaged in activities involving product creation and delivery. Essentially the chain represents major steps needed to manufacture a product that will eventually be sold as a final product. Each member of the supply chain purchases products and services enabling them to carry out its business objectives. When making purchase decisions supply chain members may be motivated by such factors as: product cost, return on investment (i.e., benefits obtained exceed price paid), assurance of consistent supply (i.e., product is available and delivery is on-time), reciprocity with supplying firm (i.e., we buy from you and you buy from us), and much more. Examples of purchasing occurring in the supply chain include: manufacturing and plant equipment, information technology, office supplies, professional business services, etc. In the table below we arbitrarily identify five main categories of supply chain members primarily based on the stage at which they contribute to the manufacturing process. However, it is conceivable that these categories
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can be further divided in order to flush out more specific activities.
Supply Chain Member What They Do Example
Raw Material Suppliers
These companies are generally considered Copper is mined and extracted from the first stage in the supply chain and copper ore. Copper is then refined to provide basic products through mining, remove impurities. harvesting, fishing, etc., that are key ingredients in the production of higherorder products.
Processed Firms at this level use raw materials to Copper is purchased by electrical wire Materials or Basic produce more advanced materials or manufacturers. Component products contained within more advanced Manufacturers components. Advanced Component Manufacturers Product Manufacturers These companies use basic components to produce products that offer a significant function needed within a larger product. This market consists of companies that purchase both basic and advanced components and then assemble these components into a final product designated for a user. These products may or may not be sold as stand-alone products. Some may be included within larger products. These companies offer services at almost any point in the supply chain and also to the business user market. Some services are directly related to the product while others focus on areas of the business not directly related to production. Electrical wire is purchased by a manufacturer of electrical power supplies. Power supplies are purchased by manufacturers of desktop computers.
Support Service Firms
Distribution companies, such as truck firms and storage facilities, assist in moving products from one supply chain member to another. However, in most cases they do not take ownership of products that pass through the supply chain.
Business User Markets besides selling final products and services to supply chain companies, several additional user markets also make purchases either for their own consumption or they buy with the intention of redistributing to others. In these purchase situations the buyer generally does not radically change the product from its form when it was purchased from a Product Manufacturer. While technically these markets are also part of the supply chain, members of the business user market do not, in most cases, engage or directly assist in production activities.
Market What They Do Considerations When Buying What They Buy
Government Made up of Federal, State, Local and Mostly require suppliers to Defense equipment, International governments. They be approved, meet heavy equipment for use purchases to assist with the specifications and to bid for public works projects, functioning of the government that purchases. office supplies, may include redistributing to others. pharmaceuticals, etc. Not-ForProfit Organizations whose tax structure Look for purchases that will Office equipment and precludes earning profits from fit within tight budgetary supplies, office rental, operations and whose missions tend restrictions and also within professional services, to be oriented to assisting others. the mission of the etc. organization. Also called distributors, these companies operate in both the Seek products that are of interest to the reseller’s Consumer and industrial products to
Reseller
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consumer and the business customers. Other issues be redistributed to markets. Their function involves include how delivery is other businesses and purchasing large volumes of handled and whether the consumers. products from manufacturers (and supplier offers incentives to sometimes from other resellers) and help the reseller promote selling these products in smaller the product. quantities. Includes wholesalers, retailers and industrial distributors.
How Business Markets Compare to Consumer Markets For marketers, the selling environment of business markets present uniquely different circumstances when compared to selling to consumers. At the beginning of this tutorial we saw two ways in which consumer and business markets differ: 1) business markets are more likely to be price driven than brand driven, and 2) demand in business markets tends to be more volatile than consumer markets. However, the two markets are dissimilar in other ways requiring marketers to take a different approach when selling to business customers than to consumers. These differences include: • How Decisions Are Made • Existence of Experienced Purchasers • Time Needed to Make Buying Decision • Size of Purchases • Number of Buyers • Type of Promotional Effort Needed to Reach Buyer A further discussion of each of these differences is presented below: How Decisions are made in the consumer market a very large percentage of purchase decisions are made by a single person. As we discussed in Part 3, there are situations in which multiple people may be involved in a consumer purchase decision, such as a child influencing a parent to choose a certain brand of cereal or a husband and wife deciding together to buy a house, but most of the time purchases are individual decisions. The business market is significantly different. While single person purchasing is not unusual, especially within a small company, a significant percentage of business buying, especially within larger organizations, requires the input of many. In the marketing literature those associated with the purchase decision are known to be part of a Buying Center, which consists of individuals within an organization that perform one or more of the following roles: • Buyer – responsible for dealing with suppliers and placing orders (e.g., purchasing agent) • Decider – has the power to make the final purchase decision (e.g., CEO) 180
Influencer – has the ability to affect what is ordered such as setting order specifications (e.g., engineers, researchers, product managers) • User – those who will actually use the product when it is received (e.g., office staff) • Initiator – any Buying Center member who is the first to determine that a need exists • Gatekeeper – anyone who controls access to other Buying Center members (e.g., administrative assistant) For marketers confronting a Buying Center it is important to first identify who plays what role. Once identified the marketer must address the needs of each member, which may differ significantly. For instance, the Decider, who may be the company president, wants to make sure the purchase will not negatively affect the company’s bottom line while the Buyer wants to be assured the product will be delivered on time. Thus, the way each Buying Center member is approached and marketed to requires careful planning in order to address the unique needs of each member. Experienced Purchasers organizations often employ purchasing agents or professional buyers whose job is to negotiate the best deals for their company. Unlike consumers, who often lack information when making purchase decisions, professional buyers are generally as knowledgeable about the product and the industry as the marketer who is selling to them. Decision Making Time Depending on the product, business purchase decisions can drag on for an extensive period. Unlike consumer markets where impulse purchasing is rampant, the number of people involved in business purchase decisions results in decisions taking weeks, months or even years. Larger Purchases For products that are regularly used and frequently purchased, businesses will often buy a larger volume at one time compared to consumer purchases. Because of this business purchasers often demand price breaks (e.g., discounts) for higher order levels. Number of Buyers while there are several million companies worldwide that operate in the overall business market, within a particular market the number is much smaller. For example, while in the United States there are over 95 million households who may shop at a grocery store, there are only a few thousand grocery stores with many of these centrally controlled as part of a chain of stores? Additionally, within some industries buyers are highly concentrated in certain 181
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geographic areas. Consequently, compared to consumer products, marketing efforts are confined to a smaller targeted group. Promotional Focus Companies who primarily target consumers often use mass advertising methods to reach an often widely dispersed market. For business-to-business marketers the size of individual orders, along with a smaller number of buyers, makes person-to-person contact by sales representatives a more effective means of promotion. Types of Business Purchase Decisions while it would appear business customers face the same four purchase situations faced by consumers (Minor New Purchase, Minor Re-Purchase, Major New Purchase, and Major RePurchase), the nature of the business market noted above has led many marketing academics to group business purchase situations into only three categories. The reason is that the idea of a minor order may not hold as well in the business market, where buyers tend to place larger orders and where suppliers’ marketing efforts are directed toward the most profitable buyers. • Straight Re-Purchase - These purchase situations involve routine ordering. In most cases buyers simply reorder the same products or services that were previously purchased. In fact, many larger companies have programmed re-purchases into an automated ordering system that initiates electronic orders when inventory falls below a certain pre-determined level. For the supplier benefiting from the re-purchase this situation is ideal since the purchaser is not looking to evaluate other products. For competitors who are not getting the order it may require extensive marketing efforts to persuade the buyer to consider other product or service options. • Modified Re-Purchase – These purchases occur when products or services previously considered a straight re-purchase are for some reason now under a reevaluation process. There are many reasons why a product is moved to the status of a modified repurchase. Some of these reasons include: end of purchase contract period, change in who is involved in making the purchase, supplier is removed from an approved suppliers list, mandate from top level of organization to re-evaluate all purchasing, or strong marketing effort by competitors. In this circumstance the incumbent supplier faces the same challenges they may have faced when they initially convinced the buyer 182
to make the purchase. For competitors the door is now open and they must work hard to make sure their message is heard by those in charge of the purchase decision. • New Task Purchase – As the name suggests, these purchases are ones the buyer has never or rarely made before. In some ways new task purchases can be considered as either minor or major depending on the total cost or overall importance of the purchase. In either case the buyer will spend considerably more time evaluating alternatives. For example, if faced with a major new task purchase, which often involves complex items, such as computer systems, buildings, robotic assembly lines, etc., the purchase cycle from first recognizing the need to placement of the order may be months or even years. How Businesses buy Business purchasing follows the same five-step buying process faced by consumers: 1. Need Recognition 2. Search 3. Evaluate Options 4. Purchase 5. After-Purchase Evaluation. While the steps are the same as consumer purchasing, the activities occurring within each step are quite different as we discuss below. 1. Need Recognition In a business environment needs arise from just about anywhere within the organization. The Buying Center concept shows that Initiators are the first organizational members to recognize a need. In most situations the Initiator is also the User or Buyer. Users are inclined to identify the need for new solutions (i.e., new products) while Buyers are more likely to identify the need to repurchase products. But marketers should also understand that more companies are replacing human involvement in repurchase decisions with automated methods, thus making it more challenging for competitors to replace currently purchased products. In straight re-purchase situations, whether there is human intervention or not, the purchasing process often jumps from Need Recognition to Purchase and little search activity is performed. As part of this step, a specifications document may be generated that lays out the requirements of the product or
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service to be purchased. Several members of the Buying Center may be involved in creation of the specifications. For the marketer, establishing close contact with those who draw up the specifications may help position the marketer’s product for inclusion in the search phase. 2. Search The search for alternatives to consider as potential solutions to recognized needs is one of the most significant differences between consumer and business purchasing. Much of this has to do with an organization’s motive to reduce costs. While a consumer will probably not search hard to save two cents a gallon on gas, a company that has a large fleet of cars or trucks certainly will. In fact, this step in the purchase process is where professional buyers make their mark. The primary intention of their search efforts is to identify multiple suppliers who meet product specifications and then, through a screening process, offer a selected group the opportunity to present their products to members of the Buying Center. Although in some industries, such as chemicals, online marketplaces and auction sites offer buyers another option for selecting suppliers that may not include supplier presentations.
For suppliers, the key to this step of the purchase process is to make sure they are included within the search activities of the Buyer or others in the Buying Center. In some instances this may require that a supplier work to be included within an approved suppliers list. In the case of online marketplaces and auction sites, suppliers should work to be included within relevant sites.
3. Evaluate Option Once the search has produced options, members of the Buying Center may then choose among the alternatives. In more advanced purchase situations, members of the Buying Center may evaluate each option using a checklist of features and benefits sought by the buyer. Each feature/benefit is assigned a weight that corresponds to its importance to the purchase decision. In many cases, especially when dealing with Government and Not-For-Profit markets, suppliers must submit bids with the lowest bidder often being awarded the order, assuming products or services meet specifications. 4. Purchase to actually place the order may require the completion of paperwork (or electronic documents) such as a purchase order. Acquiring the necessary approvals can delay the order for an extended period of time. And for very large purchases, such as buildings or large equipment, financing options may need to be explored. 5. After-Purchase Evaluation After the order is received the purchasing company may 184
spend time reviewing the results of the purchase. This may involve the Buyer discussing product performance issues with Users. If the product is well received it may end up moving to a straight re-purchase status thus eliminating much of the evaluation process on future purchases. Targeting Markets The first four parts of the Principles of Marketing tutorial has introduced the basic concepts needed as a foundation for building a strong marketing program. In particular, it has emphasized the importance of understanding customers since they are the reason an organization is in business. With customer knowledge in hand, it is now time to turn our attention to the process of addressing customers’ needs through actions undertaken by the marketer. • Selecting Target Markets • Developing Products/Services • Creating Promotions • Arranging Distribution • Setting Price • Adding Support Services What is a Market? The simplest way to define a market is to think of it as consisting of all the people or organizations that may have an interest in purchasing a company’s products or services. In other words, a market comprises all customers who have needs that may be fulfilled by an organization’s offerings. Yet just having a need is not enough to define a market. Many people may say they have a need for a California mansion that overlooks the Pacific Ocean but most would not be considered potential customers of a real estate agent who is attempting to sell such a property. So other factors come into play when defining a market. The first factor is that markets consist of customers who are qualified to make a purchase. Qualified customers are defined as those who: • Seek a solution to a need, and • Are eligible to make a purchase, and • Possess the financial ability to make the purchase, and • Have the authority to make the decision. Note that a customer must meet ALL factors listed above, though for some markets the customer may have a surrogate who will handle some of these qualifications for a targeted customer. For instance, a market may consist of pre-teen
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customers who have a need for certain clothing item but the actual purchase may rest with the pre-teens’ parents. So the parents could possibly assume one or more surrogate roles (e.g., financial ability, authority) that will result in the pre-teen being a qualified customer. A second factor for defining a market rests with the company’s ability to service the market. To an organization a market can only exist if the solutions sought by customers are ones that the company can satisfy with their offerings. If a company identifies a group of customers who are qualified to make purchases they only become a market for the company once the company is in a position to execute marketing activities designed to service those customers. Thus, for the purposes of this tutorial, a market is defined as a group of customers who are qualified to make purchases of products or services that a marketer is able to offer. However, even if an organization can offer products and services to a market, not all markets will fit an organization’s goals and objectives. With this in mind, we now turn our attention to examining the process marketers follow to choose which markets are best to target with their marketing effort. Selecting Target Markets Through Market Segmentation The market selected by a company as the target for their marketing efforts is critical since all subsequent marketing decisions will be directed toward satisfying the needs of these customers. But what approach should be taken to select markets the company will target? One approach is to target at a very broad level by identifying the market as consisting of qualified customers who have a basic need that must be satisfied. For example, one could consider the beverage market as consisting of all customers that want to purchase liquid refreshment products to solve a thirst need. While this may be the largest possible market a company could hope for (it would seem to contain just about everyone in the world!) in reality there are no commercial products that would appeal to everyone in the world since individual nutritional needs, tastes, purchase situations, economic conditions, and many other issues lead to differences in what people seek to satisfy their thirst needs. Because people are different and seek different ways to satisfy their needs, nearly all organizations, whether forprofits or not-for-profits, industrial or consumer, domestic or international, must use a market segmentation approach to target marketing. This approach divides broad
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markets, consisting of customers possessing different characteristics, into smaller market segments in which customers are grouped by characteristic shared by others in the segment. To successfully target markets, using a segmentation approach, organizations should engage in the following three-step process. • Identify segments within the overall market • Choose the segment(s) that fits best with the organization’s objectives and goals • Develop a marketing strategy that appeals to the selected target market(s) Step 1 - Identify Market Segments The first step in targeting markets is to separate customers who make up large, general markets into smaller groupings based on selected characteristics or variables (also referred to as bases of segmentation) shared by those in the group. General markets are most often associated with basic product groups, such as automobile, beverage, footwear, home entertainment, etc. The purpose of segmentation is to look deeper within the general market in order to locate customers with more specific needs within the product group (e.g., seek hybrid automobiles) AND who also share similar characteristics (e.g., college educated, support environmental issues, etc.). When grouped together these customers may form a smaller segment of the general market. By focusing market research on these smaller segments the marketer can learn a great deal about these customers and with this information can begin to craft highly targeted marketing campaigns. In a three-stage hierarchy with higher stages building on information obtained from lower stages in order to reach greater precision in identifying shared characteristics. Yet, the more precise a marketer wishes to be with their segmentation efforts the more this process requires sufficient funding and strong research capabilities. For instance, a marketer entering a new market may not have the ability to segment beyond the first two stages since the precision available in Stage 3 segmentation may demand an established relationship with customers in the market. The three-stage segmentation process presented below works for both consumer and business markets (e.g., manufacturers, reseller, etc.), though, as one might expect, the variables used to segment these markets may be different. Each segmentation stage includes an explanation along with suggestions for variables the marketer should consider. This is not meant to be an exhaustive list, as 187
other variables are potentially available, but for marketers who are new to segmentation these will offer a good starting point for segmenting markets. Stage 1 Segmentation Variables Stage 1 segmentation consists of variables that can be easily identified through demographics (i.e., statistics that describe a population), geographic (i.e., location issues) and financial information. For both consumer and business segmentation this information focuses mostly on easy to obtain data from such sources as government data (e.g., census information), examining secondary data sources (e.g., news media), trade associations and financial reporting services. While Stage 1 segmentation does not offer the segmentation benefits available with higher-level stages, the marketer benefits from accomplishing the segmentation task in a short time frame and at lower cost.
Segmentation Variables Consumer Markets
Segmentation Variables Business Markets
Demographics age group (e.g., teens, retirees, young adults), gender, education level, ethnicity, income, occupation, social class, marital status Geographics location (e.g., national, regional, urban/suburban/rural, international), climate
Demographics type (e.g., manufacturer, retailer, wholesaler), industry, size (e.g., sales volume; number of retail outlets), age (e.g., new; young growth, established growth, mature Geographics location (e.g., national, regional, urban/suburban/rural, international), climate Business Arrangement ownership (e.g.,. private versus public, independent versus chain), financial condition (e.g., credit rating, income growth, stock price, cash flow)
Stage 2 Segmentation Variable some firms, especially companies with limited funds or those who feel they need to move quickly to get their product to market, will stop the search for segmentation variables at the Stage 1 level. However, moving beyond Stage 1 segmentation offers a rich amount of customer information that will allow marketers to more effectively and efficiently target customers’ needs. To segment using Stage 2 variables marketers must use market research techniques that help gain insight into customers’ current purchase situation and the environment in which the customer operates. Information at this stage includes learning what options customers have chosen to satisfy their needs, what circumstances within customers’ environment could affect how purchases are made, and understanding local conditions that could impact purchase decisions. Marketers might locate some of this information 188
through the same sources used in Stage 1 (e.g., may find out brands most frequently purchased) but most of these variables require the marketer to engage in at least casual contact with customers in the market. This can be done through primary research methods, such as surveying the market, having sales personnel contact customers, purchasing research reports from commercial research firms or hiring consultants to undertake research projects. The cost and time needed to acquire this information may be significantly greater than that of Stage 1 segmentation.
Segmentation Variables Consumer Markets Segmentation Variables Business Markets
Current Purchasing Situation brands used, purchase frequency, current suppliers Purchase Ready possess necessary equipment, property, knowledge and skill sets Local Environment cultural, political, legal
Current Purchasing Situation brands used, purchase frequency, current suppliers Purchase Ready possess necessary equipment, property, knowledge and skill sets Local Environment cultural, political, legal Customers Served by the Business identify the business’ market Business’ Perceived Image identify how targeted businesses are perceived by their customers
Stage 3 Segmentation Variables Marketers choosing to segment at the Stage 3 level face an enormous challenge in gathering useful segmentation information but, for those who do commit to segmenting at this level, the rewards may include gaining competitive advantage over rivals whose segmentation efforts have not dug this deep. However to reach the reward the marketer must invest significant time and money to amass the detailed market intelligence needed to achieve Stage 3 segmentation. Additionally much of what is needed at Stage 3 is information that is often well protected and not easily shared by customers. In fact, many customers are unwilling to share certain personal information (e.g., psychological) with marketers with whom they are not familiar. Consequently, segmenting on Stage 3 variables is often not an option for marketers new to a market unless they purchase this access via other means (e.g., hire a consultant who knows the market to undertake customer research). To get access to this information, marketers who already serve the market with other products may be able to use primary research such as focus groups, in-depth interviews, observation research and other high level market research techniques.
Segmentation Variables Consumer Markets Segmentation Variables Business Markets
Benefits Sought price, overall value, specific feature, ease-ofuse, service, etc.
Benefits Sought price, overall value, specific feature, services, profit margins, promotional assistance; etc.
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Product Usage Product Usage how used, situation when used, etc. how used (e.g., raw material, component product, Purchase Conditions major selling item at retail level), situation when time of day/month/year when purchased, credit used, etc. terms, trade-in option, etc. Purchase Conditions Characteristics of Individual Buyer length of sales cycle, set product specifications, bid purchase experience, how purchase is made, pricing, credit terms, trade-in option, product influencers on purchase decision, importance of handling, etc. purchase Characteristics of Buying Center Psychographics purchase experience, number of members, makepersonality, attitudes, and lifestyle combined up of key influencers, willingness to assume risk; with demographics
Step 2 - Choosing Market Segments The second step in selecting target markets requires the marketer to critically evaluate the segments identified in Step 1 in order to select those which are most attractive. For small firms this step may not be very involving since they may lack the resources needed to do it effectively. So they are often left with using their own intuition or judgment to determine which segments are the most promising. For companies with the time and money to commit to this step, the results may identify the segments that are primary candidates for current marketing efforts and also present segments that are future targets for the company’s offerings. In determining whether a segment is worthy of being a target market, the marketer needs to address the following questions: • Is the segment large enough to support the marketer’s objectives? This is an especially critical question if the marketer is entering a market served by many competitors. • Is the segment showing signs of growth? One of the worst situations for a marketer is to enter a market whose growth is flat or declining, especially if competitors already exist. • Does the company have the necessary skills, knowledge and expertise to service the segment? The company should understand and be able to communicate with the customers in the segment, otherwise they may face a significant learning curve in understanding how to effectively market to a segment. • Does the segment meet the mission of the company? The segment should not extend too far beyond the direction the company has chosen to take. Once one or more segments have been identified the marketer must choose the most attractive option(s) for their marketing efforts. At this point the choice becomes the firm’s target market(s). Step 3 - Develop Marketing Strategy to Appeal to Target Market(s) 190
The results of analyzing market segments lead the marketer to consider one of the following target marketing strategies. Undifferentiated or Mass Marketing – Under this strategy the marketer attempts to appeal to one large market with a single marketing strategy. While this approach offers advantages in terms of lowering development and production costs, since only one product is marketed, there are few markets in which all customers seek the same benefits. While this approach was very popular in the early days of marketing (e.g., Ford Model-T), few companies now view this as a feasible strategy. Differentiated or Segmentation Marketing – Marketers choosing this strategy try to appeal to multiple smaller markets with a unique marketing strategy for each market. The underlying concept is that bigger markets can be divided into many sub-markets and an organization chooses different marketing strategies to reach each sub-market it targets. Most large consumer products firms follow this strategy as they offer multiple products (e.g., running shoes, basketball shoes) within a larger product category (e.g., footwear). Concentrated or Niche Marketing –This strategy combines mass and segmentation marketing by using a single marketing strategy to appeal to one or more very small markets. It is primarily used by smaller marketers who have identified small sub-segments of a larger segment that are not served well by larger firms that follow a segmentation marketing approach. In these situations a smaller company can do quite well marketing a single product to a narrowly defined target market. Customized or Micro-Marketing - This newest target marketing strategy attempts to appeal to targeted customers with individualized marketing programs. For micromarketing segmentation to be effective the marketer must, to some degree, allow customers to “build-their-own” products. This approach requires extensive technical capability for marketers to reach individual customers and allow customers to interact with the marketer. The Internet has been the catalyst for this target marketing strategy. As more companies learn to utilize the Internet micro-marketing is expected to flourish. Product Positioning No matter which target marketing strategy is selected, the overall marketing strategy should involve the process of positioning the firm’s offerings in ways that will appeal to targeted customers. Positioning is concerned with the
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perception customers hold regarding a product or company. In particular, it relates to marketing decisions an organization undertakes to get customers to think about a product or company in a certain way compared to its competitors. The goal of positioning is to convince customers to believe the marketer’s offerings are different in some way from its competitors on an important benefit sought by the market. For instance, if a customer has discovered she has a need for an affordable laptop computer, a company such as Dell may come to mind since their marketing efforts position their products as offering good value at a reasonable cost. To position successfully the marketer must have thorough knowledge of the key benefits sought by the market. Obviously the more effort the marketer expends on segmentation (i.e., reached Stage 3) the more likely they will know the benefits sought by the market. Once known, the marketer must: 1) tailor marketing efforts to ensure their offerings satisfy the most sought after benefits, and 2) communicate to the market in a way that differentiates the marketer’s offerings from competitors. For firms that seek to appeal to multiple target markets (i.e., segmentation marketing), positioning strategies may differ for each market. For example, a marketer may sell the same product to two different target markets, but in one market the emphasis is on styling while in another market the emphasis is on ease-of-use benefits. The important point is that the overall market strategy must be evaluated for each target market since what works well in one market may not work as well in another market. Product Decisions Marketing starts with the product since it is what an organization has to offer its target market. As we’ve stressed many times in this tutorial, organizations attempt to provide solutions to a target market’s problems. These solutions include tangible or intangible (or both) product offerings marketed by an organization. In addition to satisfying the target market’s needs, the product is important because it is how organizations generate revenue. It is the “thing” that for-profit companies sell in order to realize profits and satisfy stakeholders and what non-profit organizations use to generate funds needed to sustain it. Without a welldeveloped product strategy that includes input from the target market, a marketing organization will not have longterm success. What is a Product?
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In marketing, the term “product” is often used as a catchall word to identify solutions a marketer provides to its target market. We will follow this approach and permit the term “product” to cover offerings that fall into one of the following categories: Goods – Something is considered a good if it is a tangible item. That is, it is something that is felt, tasted, heard, smelled or seen. For example, bicycles, cell phones, and donuts are all examples of tangible goods. In some cases there is a fine line between items that affect the senses and whether these are considered tangible or intangible. We often see this with digital goods accessed via the Internet, such as listening to music online or visiting an information website. In these cases there does not appear to be anything that is tangible or real since it is essentially computer code that is proving the solution. However, for our purposes, we distinguish these as goods since these products are built (albeit using computer code), are stored (e.g., on a computer hard drive), and generally offer the same benefits each time (e.g., quality of the download song is always the same). Services – Something is considered a service if it is an offering a customer obtains through the work or labor of someone else. Services can result in the creation of tangible goods (e.g., a publisher of business magazines hires a freelance writer to write an article) but the main solution being purchased is the service. Unlike goods, services are not stored, they are only available at the time of use (e.g., hair salon) and the consistency of the benefit offered can vary from one purchaser to another (e.g., not exactly the same hair styling each time). Ideas – Something falls into the category of an idea if the marketer attempts to convince the customer to alter their behavior or their perception in some way. Marketing ideas is often a solution put forth by non-profit groups or governments in order to get targeted groups to avoid or change certain behavior. This is seen with public service announcements directed toward such activity as youth smoking, automobile safety, and illegal drug use. While in some cases a marketer offers solutions that provide both tangible and intangible attributes, for most organizations their primary offering -- the thing that is the main focus of the marketing effort -- is concentrated in one area. So while a manufacturer may offer intangible services or a service firm provides certain tangible equipment, these are often used as add-ons that augment the organization’s main product.
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Categories of Consumer Products In addition to categorizing by type of offering, most products intended for consumer use can be further categorized by how frequently and where they are purchased. Convenience Products – These are products that appeal to a very large market segment. They are generally consumed regularly and purchased frequently. Examples include most household items such as food, cleaning products, and personal care products. Because of the high purchase volume, pricing per item tends to be relatively low and consumers often see little value in shopping around since additional effort yields minimal savings. From the marketer’s perspective the low price of convenience products means that profit per unit sold is very low. In order to make high profits marketers must sell in large volume. Consequently, marketers attempt to distribute these products in mass through as many retail outlets as possible. Shopping Products – These are products consumers purchase and consume on a less frequent schedule compared to convenience products. Consumers are willing to spend more time locating these products since they are relatively more expensive than convenience products and because these may possess additional psychological benefits for the purchaser, such as raising their perceived status level within their social group. Examples include many clothing products, personal services, electronic products, and household furnishings. Because consumers are purchasing less frequently and are willing to shop to locate these products, the target market is much smaller than that of convenience goods. Consequently, marketers often are more selective when choosing distribution outlets to sell their products. Specialty Products – These are products that tend to carry a high price tag relative to convenience and shopping products. Consumption may occur at about the same rate as shopping products but consumers are much more selective. In fact, in many cases consumers know in advance which product they prefer and will not shop to compare products. But they may shop at retailers that provide the best value. Examples include high-end luxury automobiles, expensive champagne, and celebrity hair care experts. The target markets are generally very small and outlets selling the products are very limited to the point of being exclusive. In addition to the three main categories above, products are classified in at least two additional ways:
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Emergency Products – These are products a customer seeks due to sudden events and for which pre-purchase planning is not considered. Often the decision is one of convenience (e.g., whatever works to fix a problem) or personal fulfillment (e.g., perceived to improve purchaser’s image). Unsought Products – These are products whose purchase is unplanned by the consumer but occur as a result of marketer’s actions. Such purchase decisions are made when the customer is exposed to promotional activity, such as a salesperson’s persuasion or purchase incentives like special discounts offered to certain online shoppers. These promotional activities often lead customers to engage in impulse purchasing. Categories of Business Products The amount spent on business purchasing far exceeds consumer purchasing. Products sold within the b-to-b market fall into one of the following categories: Raw Materials – These are products obtained through mining, harvesting, fishing, etc., that are key ingredients in the production of higher-order products. Processed Materials – These are products created through the processing of basic raw materials. In some cases the processing refines original raw materials while in other cases the process combines different raw materials to create something new. For instance, several crops including corn and sugar cane can be processed to create ethanol which has many uses including as a fuel to power car and truck engines. Equipment – These are products used to help with production or operations activities. Examples range from conveyor belts used on an assembly line to large buildings used to house the headquarters staff of a multi-national company. Basic Components – These are products used within more advanced components. These are often built with raw material or processed material. Electrical wire is an example. Advanced Components – These are products that use basic components to produce products that offer a significant function needed within a larger product. Yet by itself an advanced component does not stand alone as a final product. In computers the motherboard would be an example since it contains many basic components but without the inclusion of other products (e.g., memory chips, microprocessor, etc.) would have little value. Product Component – These are products used in the assembly of a final product though these could also function as
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stand alone products. Dice included as part of a children’s board game would be an example. MRO (Maintenance, Repair and Operating) Products – These are products used to assist with the operation of the organization but are not directly used in producing goods or services. Office supplies, parts for a truck fleet and natural gas to heat a factory would fall into this category. Components of a Product On the surface it seems a product is simply a marketing offering, whether tangible or intangible, that someone wants to purchase and consume.In which case one might believe product decisions are focused exclusively on designing and building the consumable elements of goods, services or ideas. For instance, one might think the key product decision for a manufacturer of floor cleaners is to focus on creating a formula that cleans more effectively. In actuality, while decisions related to the consumable parts of the product are extremely important, the TOTAL product consists of more than what is consumed. The total product offering and the decisions facing the marketer can be broken down into three key parts: • Core Benefits • Actual Product • Augmented Product 1. Core Benefits people make buying decisions that satisfy their needs. While many needs are addressed by the consumption of a product or service, some needs are not. For instance, customers may need to be perceived highly by other members of their group or need a product that is easy to use or need a risk-free purchase. In each of these cases, and many more, the core product itself is the benefit the customer receives from using the product. In some cases these core benefits are offered by the product itself (e.g., floor cleaner) while in other cases the benefit is offered by other aspects of the product (e.g., the can containing the floor cleaner that makes it easier to spread the product). Consequently, at the very heart of all product decisions is determining the key or core benefits a product will provide. From this decision, the rest of the product offering can be developed. 2. Actual Product the core benefits are offered through the components that make up the actual product the customer purchases. For instance, when a consumer returns home from shopping at the grocery store and takes a purchased item out of her shopping bag, the actual product is the item she holds in 196
her hand. Within the actual product is the consumable product, which can be viewed as the main good, service or idea the customer is buying. For instance, while toothpaste may come in a package that makes dispensing it easy, the consumable product is the paste that is placed on a toothbrush. But marketers must understand that while the consumable product is, in most cases, the most critical of all product decisions, the actual product includes many separate product decisions including product features, branding, packaging, labeling, and more 3. Augmented Product Marketers often surround their actual products with goods and services that provide additional value to the customer’s purchase. While these factors may not be key reasons leading customers to purchase (i.e., not core benefits), for some the inclusion of these items strengthens the purchase decision while for others failure to include these may cause the customer not to buy. Items considered part of the augmented product include: • Guarantee – This provides a level of assurance that the product will perform up to expectations and if not the company marketing the product will support the customer’s decision to replace, have it repaired or return for a refund. • Warranty – This offers customers a level of protection that often extends past the guarantee period to cover repair or replacement of certain product components. • Customer Service – This consists of additional services that support the customer’s needs including offering training and assistance via telephone or online. • Complementary Products – The value of some product purchases can be enhanced with add-on products, such as items that make the main product easier to use (e.g., laptop carry bag), enhance styling (e.g., cell phone face plates) or extend functionality (e.g., portal keyboard for PDAs). • Accessibility – How customers obtain the product can affect its perceived value depending on such considerations as how easy it is to obtain (e.g., stocked at nearby store, delivered directly to office), the speed at which it can be obtained, and the likelihood it will be available when needed. Key Product Decisions the actual product is designed to provide the core benefits sought by the target market. The marketer offers these
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benefits through a combination of factors that make up the actual product. Four key factors that together help shape the actual product. These factors include: • Consumable Product Features • Branding • Packaging • Labeling Consumable Product Features Features are characteristics of a product that offer benefits to the customer. In most cases, the most important features are those associated with the consumable product since they are the main reason a customer makes a purchase. For this tutorial we separate the benefits of consumable product features into two groups: functional and psychological. Functional Benefits - Are benefits derived from features that are part the consumable product? For instance, a plasma television includes such features and benefits as:
Feature Functional Benefit
screen size screen resolution surround sound remote control
offers greater detail and allows for more distant viewing viewing provides clear, more realistic picture immerses all senses in the viewing experience allows for greater comfort while viewing
These features are called functional because they result in a benefit the user directly associates with the consumable product. For marketers functional benefits are often the result of materials, design and production decisions. How the product is built can lead to benefits such as effectiveness, durability, speed, ease-of-use, and cost savings to name just few. Psychological Benefits – Are benefits the customer perceives they receive when they use the product though these may be difficult to measure and may vary by user. These benefits address needs such as status within a group, risk reduction, sense of independence, and happiness. Such benefits are developed through promotional efforts that target customer’s internal makeup. In addition to determining the type of features to include in a product, the marketer faces several other decisions related to features: • Quantity & Quality vs. Cost - For the marketers an important decision focuses on the quantity and quality of features to include in a product. In most cases the more features included or the higher the quality
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level for a particular feature, the more expensive the product is to produce and market. • Is Better? – Even if added cost is not a major concern, the marketer must determine if more features help or hurt the target market’s perception of the product. A product with too many features could be viewed as too difficult to use. This was often the case when video cassette recorders (VCR) were the principle device for taping television programs and watching rented movies. Many of the higher-level features introduced in the 1990s as the product matured, such as advanced television recording, proved too difficult for the average consumer to master. • Who Should Choose the Features? – Historically marketers determined what features to include in a product. However, as we discussed in Part 5 – Targeting Markets, technology, and especially the Internet, offer customers the opportunity to choose their own features to custom build a product. For instance, companies offering website hosting services allow website owners to choose from a list of service options that best suits their needs. Also, for traditional products, such as clothing, companies allow customers to stylize their purchases with logos and other personalized options Branding Branding involves decisions that establish an identity for a product with the goal of distinguishing it from competitors’ offerings. In markets where competition is fierce and where customers may select from among many competitive products, creating an identity through branding is essential. It is particularly important in helping position the product (see discussion of product position) in the minds of the product’s target market. While consumer products companies have long recognized the value of branding, it has only been within the last 10-15 years that organizations selling component products in the business-to-business market have begun to focus on brand building strategies. The most well-known company to brand components is Intel with its now famous “Intel Inside” slogan. Intel’s success has led many other b-to-b companies and even non-profits to incorporate branding within their overall marketing strategy. Brand Names and Brand Marks At a very basic level branding is achieved through the use of unique brand names and brand marks. The brand name,
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which may be either the individual product name or a name applied to a group or family of products, is important for many reasons including suggesting what the product is or does (e.g., Mop-and-Glow). The name is also what we utter when we discuss the product (i.e., word-of-mouth marketing). The brand mark is a design element, such as a symbol (e.g., Nike shoes), logo, (e.g., Yahoo! graphic) a character (e.g., Keebler elves) or even a sound (e.g., Intel inside sound), that provides visual or auditory recognition for the product. Advantages of Brands a strong brand offers many advantages for marketers including: Brands provide multiple sensory stimuli to enhance customer recognition. For example, a brand can be visually recognizable from its packaging, logo, shape, etc. It can also be recognizable via sound, such as hearing the name on a radio advertisement or talking with someone who mentions the product. Customers who are frequent and enthusiastic purchasers of a particular brand are likely to become brand loyal. Cultivating brand loyalty among customers is the ultimate reward for successful marketers since these customers are far less likely to be enticed to switch to other brands compared to non-loyal customers. Well-developed and promoted brands make product positioning efforts more effective. The result is that upon exposure to a brand (e.g., hearing it, seeing it) customers conjure up mental images or feelings of the benefits they receive from using that brand. The reverse is even better. When customers associate benefits with a particular brand, the brand may have attained a significant competitive advantage. In these situations the customer who recognizes he needs a solution to a problem (e.g., needs to bleach clothes) may automatically think of one brand that offers the solution to the problem (e.g., Clorox). This “benefit = brand” association provides a significant advantage for the brand that the customer associates with the benefit sought. Firms that establish a successful brand can extend the brand by adding new products under the same “family” brand. Such branding may allow companies to introduce new products more easily since the brand is already recognized within the market. Strong brands can lead to financial advantages through the concept of brand equity in which the brand itself becomes valuable. Such gains can be realized through the out-right
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sale of a brand or through licensing arrangements. For example, Company A may have a well-recognized brand (Brand X) within a market but for some reason they are looking to concentrate their efforts in other markets. Company B is looking to enter the same market as Brand X. If circumstances are right Company A could sell to Company B the rights to use the Brand X name without selling any other part of the company. That is, Company A simply sells the legal rights to the Brand X name but retains all other parts of Brand X, such as the production facilities and employees. In cases of well developed brands such a transaction may carry a very large price tag. Thus, through strong branding efforts Company A achieves a large financial gain by simply signing over the rights to the name. But why would Company B seek to purchase a brand for such a high price tag?Because by buying the brand Company B has already achieved an important marketing goal – building awareness within the target market. The fact the market is already be familiar with the brand allows the Company B to concentrate on other marketing decisions. Packaging nearly all products require a packaging decision. In most cases, the product is contained in a package when purchased by the customer. In a few cases, such as with certain produce items, the final customer may purchase the product without a package but the produce marketer still faces packaging decisions when it comes to shipping to the store. Thus, for many products there are two packaging decisions – customer and distribution. Customer Packaging This relates to the package purchasers receive in exchange for their payment. This packaging can be further divided into the following: • First-Level Package - This is packaging that holds the actual product (e.g., Tylenol Bottle). In some cases this packaging is minimal since it only serves to protect the product. For instance, certain frozen food products are sold to consumers in a cardboard box with the product itself contained in a plastic bag found inside the box. This plastic bag represents the first level package. In other cases frozen food products are sold in the plastic bag that contains the product. In these cases the plastic bag is both first-level package and the primary package for convey product information. • Second-Level Package – In some cases the first level package is protected by one or more outer packages 201
(e.g., box holding the Tylenol Bottle). This secondlevel package may act as the primary package for the product. • Inserts - Marketers use a variety of other methods to communicate with customers after they open the product package. These methods are often inserted within, or sometimes on, the product’s package. Insertions include information such as instruction manuals and warranty cards, promotional incentives such as coupons, and items that add value such as recipes and software. Distribution Packaging this packaging is used to transport the customer package through the supply chain. It generally holds multiple customer packages and also offers a higher level of damage protection than that of customer packaging. Factors to Consider When Making Packaging Decision Packaging decisions are important for several reasons including: • Protection – Packaging is used to protect the product from damage during shipping and handling, and to lessen spoilage if the protect is exposed to air or other elements. • Visibility – Packaging design is used to capture customers’ attention as they are shopping or glancing through a catalog or website. This is particularly important for customers who are not familiar with the product and in situations, such as those found in grocery stores, where a product must stand out among thousands of other products. Packaging designs that standout are more likely to be remembered on future shopping trips. • Added Value – Packaging design and structure can add value to a product. For instance, benefits can be obtained from package structures that make the product easier to use while stylistic designs can make the product more attractive to display in the customer’s home. • Distributor Acceptance – Packaging decisions must not only be accepted by the final customer, they may also have to be accepted by distributors who sell the product for the supplier. For instance, a retailer may not accept packages unless they conform to requirements they have for storing products on their shelves.
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Cost – Packaging can represent a significant portion of a product’s selling price. For example, it is estimated that in the cosmetics industry the packaging cost of some products may be as high as 40% of a product’s selling price. Smart packaging decisions can help reduce costs and possibly lead to higher profits. • Expensive to Create - Developing new packaging can be extremely expensive. The costs involved in creating new packaging include: graphic and structural design, production, customer testing, possible destruction of leftover old packaging, and possible advertising to inform customer of the new packaging. • Long Term Decision – When companies create a new package it is most often with the intention of having the design on the market for an extended period of time. In fact, changing a product’s packaging too frequently can have negative effects since customers become conditioned to locate the product based on its package and may be confused if the design is altered. • Environmental or Legal Issues – Packaging decisions must also include an assessment of its environmental impact especially for products with packages that are frequently discarded. Packages that are not easily bio-degradable could draw customer and possibly governmental concern. Also, caution must be exercised in order to create packages that do not infringe on intellectual property, such as copyrights, trademarks or patents, held by others. Labeling most packages, whether consumer or channel, are imprinted with information intended to assist the customer. For consumer products, labeling decisions are extremely important for several reasons. First, labels serve to capture the attention of shoppers. The use of catchy words may cause strolling customers to stop and evaluate the product. Second, the label is likely to be the first thing a new customer sees and thus offers their first impression of the product. Third, the label provides customers with product information to aid their purchase decision or help improve the customer’s experience when using the product (e.g., recipes). Fourth, labels generally include a universal product codes (UPC) and, in some cases, radio frequency identification (RFID) tags, that make it easy for resellers, such as retailers, to checkout customers and manage inventory. Fifth, for companies serving
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international markets or diverse cultures within a single country, bilingual or multilingual labels may be needed. Finally, in some countries many products, including food and pharmaceuticals, are required by law to contain certain labels such as listing ingredients, providing nutritional information or including usage. Managing Products Product Management Responsibilities while this tutorial touches on basic concepts and strategies applicable to a large percentage of marketing situations, the reader should understand that no two marketing situations are the same. Yet while some concepts and strategies important to one marketer may not hold the same weight with another, in general, the basic principles of marketing (e.g., satisfying target markets, support decisions using research, etc.) hold no matter the type of industry, type of company or type of product being sold. What is often different between two marketing situations is the level of complication and challenge that arises as a marketer’s scope of responsibility increases. For our purposes a marketer’s level of responsibility is measured in terms of: • the number and variety of tasks that must be performed (i.e., what has to be done) • the value these tasks represent to the organization (i.e., how important marketing is perceived within the company) • The overall financial stake the marketing position holds (i.e., total sales volume and profit generation). As responsibilities change so to do the marketer’s tasks. For instance, with regard to product decisions, as a marketer’s responsibilities become greater her or his dayto-day job shifts from being involved in specific product issues (e.g., finding a graphics design company to create a new label) to decisions concerning many products and focusing on setting the future marketing direction of the company (e.g., developing marketing plans for numerous products). • Product Item Level – At this level responsibilities are associated with marketing a single product or brand. By “single” we are limiting the marketer’s responsibility to one item. For instance, a startup software development company may initially market just one product. In some organizations the person in charge has the title Product Manager, though in
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smaller companies this person may simply be the Marketing Manager. • Brand Product Line Level – At this level responsibilities are associated with managing two or more similar product items. By “similar” we are referring to products carrying the same brand name that fit within the same product category and offer similar solutions to customers’ needs. Procter & Gamble, one of the largest consumer products companies in the world, markets Tide laundry detergent in several different packaging sizes (e.g., 50oz., 100oz., 200oz.), in different forms (e.g., powder, liquid) and with different added features (e.g., softener, bleach). Tide’s product line consists of over 100 different versions of the product. Differences in the product offerings indicate these are targeted to different segments within the larger market (e.g., those preferring liquid vs. those preferring powder), however, it may also represent a choice for the same target market who may seek variety. A product line is often measured by its depth, relative to competitors, with deep product lines offering extensive product items. Brand product lines are often managed by a Brand or Product Line Manager. • Category Product Line Level – At this level responsibilities are associated with managing two or more brand product lines within the same product category. In this situation the marketer may manage products that offer similar basic benefits (e.g., clean clothes) but target their offerings to slightly different needs (e.g., product for tough to clean clothing vs. product to clean delicate clothing). Multiple brand product lines allow the marketer to cover the needs of more segments and, consequently, increase their chance to generate sales. Often in larger companies category product lines are the responsibility of the Product Category or Divisional Marketing Manager who may have Brand Product Managers reporting to him/her. • Product Mix Level – At this level responsibilities include two or more category product lines that are directed to different product categories. In some cases the category product lines may yield similar general solutions (e.g., cleaning) but are aimed at entirely different target markets (e.g., cleaning
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dishes vs. cleaning automobiles). In large companies, the product lines are very diverse and offer different solutions. For example, BIC sells writing instruments, shaving products, and lighters. This diversification strategy cushions against an “alleggs-in-one-basket” risk that may come if a company directs all resources to one product category. A product mix can be classified based on its width (how many different category product lines) and its depth (how many different brand product lines within a category product line). Generally responsibility for this level belongs to a company’s Vice President for Marketing. Branding Strategy branding is an important decision designed to enhance the identity of the product through the use of unique brand names, symbols and other distinctive measures. With competition growing more intense in almost all industries, establishing a strong brand allows an organization’s products to stand out and avoid potential pitfalls, such as price wars, that have befallen many products. Therefore, a clear understanding of branding strategy is essential in order to build solid products and product lines. In particular, marketers should be aware of various branding approaches that can be pursued. By branding approach we are referring to different product identification strategies that can be deployed to establish a product within the market. As we will see, the purpose of these approaches is to build a brand that will exist for the long term. Making smart decisions up front is crucial since a company may have to live with the decision for a long time. Branding approaches include the following: Individual Product Branding – Under this branding approach new products are assigned new names with no obvious connection to existing brands offered by the company. Under individual product branding the marketing organization must work hard to establish the brand in the market since it cannot ride the coattails of previously introduced brands. The chief advantage of this approach is it allows brands to stand on their own thus lessening threats that may occur to other brands marketed by the company. For instance, if another company brand receives negative publicity this news is less likely to rub off on the company’s other brands that carry their own unique names. Additionally, as mentioned in Part 6, brands can create financial gains through the concept known as brand 206
equity. Under an individual branding approach, each brand builds its own separate equity which allows the company, if they choose, to sell off individual brands without impacting other brands owned by the company. The most famous marketing organization to follow this strategy is Procter and Gamble, which has historically introduced new brands without any link to other brands or even to the company name. Family Branding – Under this branding approach new products are placed under the umbrella of an existing brand. The principle advantage of this approach is that it enables the organization to rapidly build market awareness and acceptance since the brand is already established and known to the market. But the potential disadvantage is that the market has already established certain perceptions of the brand. For instance, a company that sells low-end, lower priced products may have a brand that is viewed as an economy brand. This brand image may create customer confusion and hinder the company if they attempt to introduce higher-end, higher priced products using the same brand name. Additionally, as noted with individual branding, with family branding any negative publicity that may occur for one product within a brand could spread to all other products that share the same name. • Co-Branding – This approach takes the idea of individual and family branding a step further. With co-branding a marketer seeks to partner with another firm, which has an established brand, in hopes synergy of two brands on a product is even more powerful than a single brand. The partnership often has both firms sharing costs but also sharing the gains. For instance, major credit card companies, such as Visa and MasterCard, offer co-branding options to companies and organizations. The cards carry the name of a cobranded organization (e.g., University name) along with the name of the issuing bank (e.g., Citibank) and the name of the credit card company. Besides tapping into awareness for multiple brands, the co-branding strategy is also designed to appeal to a larger target market, especially if each brand, when viewed separately, does not have extensive overlapping target markets with the other brand. Thus, co-branding allows both firms to tap into market segments where they did not previously have a strong position. • Private or Store Branding – Some suppliers are in the business of producing products for other companies including placing another company’s brand name on the 207
product. This is most often seen in the retail industry where stores or online sellers contract with suppliers to manufacture the retailer’s own branded products. In some cases the supplier not only produces product for the retailer’s brand but also markets their own brand so that store shelves will contain both brands. • No-Name or Generic Branding – Certain suppliers supply products that are intentionally “brandless.” These products are mostly basic commodity-type products that consumer or business customers purchase as low price alternatives to branded products. Basic household products such as paper products, over-the-counter medicines such as ibuprofen, and even dog food are available in a generic form. • Brand Licensing – Under brand licensing a contractual arrangement is created in which a company owning a brand name allows others to produce and supply products carrying the brand name. This is often seen when a brand is not directly connected with a product category. For instance, several famous children’s characters, such as Sesame Street’s Elmo, have been licensed to toy and food manufacturers who market products using the branded character’s name and image. Developing New Products by its nature marketing requires new ideas. Unlike some organizational functions, where basic processes follow a fairly consistent routine (e.g., accounting), successful marketers are constantly making adjustments to their marketing efforts. New ideas are essential for responding to changing demand by the target market and by pressure exerted by competitors. These changes are manifested in decisions in all marketing areas including the development of new products. In addition to being responsive to changing customer tastes and competitive forces, there are many other reasons why new product development is vital. These include: • Many new products earn higher profits than older products. This is often the case for products considered innovative or unique which, for a period of time, may enjoy success and initially face little or no competition. • New products can help reposition the company in customer’s minds. For instance, a company that traditionally sold low priced products with few features may shift customers’ perceptions about the
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company by introducing products with more features and slightly higher pricing. • Fierce global competition and technological developments make it much easier for competitors to learn about products and replicate them. To stay ahead of competitors marketers must innovate and often create and introduce new products on a consistent schedule. • Companies with limited depth in a product line may miss out on more sales unless they can add new products to fill out the line. • Some firms market seasonal products that garner their highest sales during a certain time of the year or sell cyclical products whose sales fluctuate depending on economic or market factors. Expanding the firm’s product mix into new areas may help offset these fluctuations. For manufacturing firms an additional benefit is realized as new products utilize existing production capacity that is under-used when seasonal or cyclical products are not being produced. Categories of New Products New products can fall into one of several categories. These categories are defined by the type of market the product is entering (i.e., newly created, existing but not previously targeted, existing and targeted ) and the level of product innovation (i.e., radically new, new, upgrade). • Creates New Market with Radically New Product or Product Line – This category is represented by new breakthrough products that are so revolutionary they create an entirely new market. Recent examples include digital music players, such as Apple’s iPod, that have spawned new delivery methods (downloadable music) and new media (pod casting). Highly innovative products are rare so very few new products fall into this category. • Enters Existing But Not Previously Targeted Market with New-Product or Product Line – In this category a marketer introduces a new product item or product line to an existing market which they did not previously target. Often these products are similar to competitors’ products already available in the market but with some level of difference (e.g., different features, lower price, etc.). Microsoft’s entry into the video gaming system market with their Xbox is an example.
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Stays in Existing and Previously Targeted Market by Enhancing Existing Product or Product Line – Under this development category the marketer attempts to improve its current position in the market by either improving or upgrading existing products or by extending a product line by adding new products. This type of new product is seen in our earlier example of Procter and Gamble’s Tide product line which contains many product variations of the basic Tide product. How New Products Are Obtained Marketers have several options for obtaining new products. First, products can be developed within an organization’s own research operations. For some companies, such as service firms, this may simply mean the marketer designs new service options to sell to target markets. For instance, a marketer for a mortgage company may design new mortgage packages that offer borrowers different rates or payment options. At the other extreme companies may support an extensive research and development effort where engineers, scientists or others are engaged in new product discovery. A second way to obtain products is to acquire them from external sources. This can occur in several ways including: • Purchase the Product - With this option a marketer purchases the product outright from another firm that currently owns the product. The advantage is that the product is already developed, which reduces the purchasing company’s time and cost of trying to develop it themselves. On the negative side the purchase cost may be high. • License the Product – Under this option the marketer negotiates with the owner of the product for the rights to market the product. This may be a particularly attractive option for companies who have to fill a product need quickly (e.g., give a product line more depth) or it may be used as a temporary source of products while the marketer’s company is developing its own product. On the negative side the arrangement may have a limited time frame at which point the licensor may decide to end the relationship leaving the marketer without a source for the product. • Purchase Another Firm - Instead of purchasing another company’s products marketers may find it easier to just purchase the whole company selling the products. One key advantage to this is that the acquisition
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often includes the people and resources that developed the product which may be a key consideration if the acquiring company wants to continue to develop the acquired products. Because introducing new products on a consistent basis is important to the future success of many organizations, marketers in charge of product decisions often follow set procedures for bringing products to market. In the scientific area that may mean the establishment of ongoing laboratory research programs for discovering new products (e.g., medicines) while less scientific companies may pull together resources for product development on a less structured timetable. • The key elements of new product development. While some companies may not follow a deliberate step-bystep approach, the steps are useful in showing the information input and decision making that must be done in order to successfully develop new products. The process also shows the importance market research plays in developing products. • The 7-step process works for most industries, it is less effective in developing radically new products. The main reason lies in the inability of the target market to provide sufficient feedback on advanced product concepts since they often find it difficult to understand radically different ideas. So while many of these steps are used to research breakthrough ideas, the marketer should exercise caution when interpreting the results. Step 1. IDEA GENERATION – The first step of new product development requires gathering ideas to be evaluated as potential product options. For many companies idea generation is an ongoing process with contributions from inside and outside the organization. Many market research techniques are used to encourage ideas including: running focus groups with consumers, channel members, and the company’s sales force; encouraging customer comments and suggestions via toll-free telephone numbers and website forms; and gaining insight on competitive product developments through secondary data sources. One important research technique used to generate ideas is brainstorming where open-minded, creative thinkers from inside and outside the company gather and share ideas. The dynamic nature of group members floating ideas, where one idea •
New Product Development Process
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often sparks another idea, can yield a wide range of possible products that can be further pursued. Step2. SCREENING – In Step 2 the ideas generated in Step 1 are critically evaluated by company personnel to isolate the most attractive options. Depending on the number of ideas, screening may be done in rounds with the first round involving company executives judging the feasibility of ideas while successive rounds may utilize more advanced research techniques. As the ideas are whittled down to a few attractive options, rough estimates are made of an idea’s potential in terms of sales, production costs, profit potential, and competitors’ response if the product is introduced. Acceptable ideas move on to the next step. Step3. CONCEPT DEVELOPMENT AND TESTING – With a few ideas in hand the marketer now attempts to obtain initial feedback from customers, distributors and its own employees. Generally, focus groups are convened where the ideas are presented to a group, often in the form of concept board presentations (i.e., storyboards) and not in actual working form. For instance, customers may be shown a concept board displaying drawings of a product idea or even an advertisement featuring the product. In some cases focus groups are exposed to a mock-up of the ideas, which is a physical but generally non-functional version of product idea. During focus groups with customers the marketer seeks information that may include: likes and dislike of the concept; level of interest in purchasing the product; frequency of purchase (used to help forecast demand); and price points to determine how much customers are willing to spend to acquire the product. Step4. BUSINESS ANALYSIS – At this point in the new product development process the marketer has reduced a potentially large number of ideas down to one or two options. Now in Step 4 the process becomes very dependent on market research as efforts are made to analyze the viability of the product ideas. (Note, in many cases the product has not been produced and still remains only an idea.) The key objective at this stage is to obtain useful forecasts of market size (e.g., overall demand), operational costs (e.g., production costs) and financial projections (e.g., sales and profits). Additionally, the organization must determine if the product will fit within the company’s overall mission and strategy. Much effort is directed at both internal research, such as discussions with production and purchasing personnel, and external marketing research, such as customer and distributor surveys, secondary research, and competitor analysis.
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Step5. PRODUCT AND MARKETING MIX DEVELOPMENT – Ideas passing through business analysis are given serious consideration for development. Companies direct their research and development teams to construct an initial design or prototype of the idea. Marketers also begin to construct a marketing plan for the product. Once the prototype is ready the marketer seeks customer input. However, unlike the concept testing stage where customers were only exposed to the idea, in this step the customer gets to experience the real product as well as other aspects of the marketing mix, such as advertising, pricing, and distribution options (e.g., retail store, direct from company, etc.). Favorable customer reaction helps solidify the marketer’s decision to introduce the product and also provides other valuable information such as estimated purchase rates and understanding how the product will be used by the customer. Reaction that is less favorable may suggest the need for adjustments to elements of the marketing mix. Once these are made the marketer may again have the customer test the product. In addition to gaining customer feedback, this step is used to gauge the feasibility of large-scale, cost effective production for manufactured products. Step6. MARKET TESTING – Products surviving to Step 6 are ready to be tested as real products. In some cases the marketer accepts what was learned from concept testing and skips over market testing to launch the idea as a fully marketed product. But other companies may seek more input from a larger group before moving to commercialization. The most common type of market testing makes the product available to a selective small segment of the target market (e.g., one city), which is exposed to the full marketing effort as they would be to any product they could purchase. In some cases, especially with consumer products sold at retail stores, the marketer must work hard to get the product into the test market by convincing distributors to agree to purchase and place the product on their store shelves. In more controlled test markets distributors may be paid a fee if they agree to place the product on their shelves to allow for testing. Another form of market testing found with consumer products is even more controlled with customers recruited to a “laboratory” store where they are given shopping instructions. Product interest can then be measured based on customer’s shopping response. Finally, there are several high-tech approaches to market testing including virtual reality and computer simulations. With virtual reality testing customers are
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exposed to a computer-projected environment, such as a store, and are asked to locate and select products. With computer simulations customers may not be directly involved at all. Instead certain variables are entered into a sophisticated computer program and estimates of a target market’s response are calculated. Step7. COMMERCIALIZATION – If market testing displays promising results the product is ready to be introduced to a wider market. Some firms introduce or roll-out the product in waves with parts of the market receiving the product on different schedules. This allows the company to ramp up production in a more controlled way and to fine tune the marketing mix as the product is distributed to new areas. Managing Existing Products marketing strategies developed for initial product introduction almost certainly need to be revised as the product settles into the market. While commercialization may be the last step in the new product development process it is just the beginning of managing the product. Adjusting the product’s marketing strategy is required for many reasons including: • Changing customer tastes • Domestic and foreign competitors • Economic conditions • Technological advances To stay on top of all possible threats the marketer must monitor all aspects of the marketing mix and make changes as needed. Such efforts require the marketer to develop and refine the product’s marketing plan on a regular basis. In fact, as we will discuss in a later section of this tutorial, marketing strategies change as a product moves through time leading to the concept called the Product Life Cycle (PLC). We will see that marketers make numerous revisions to their strategy as product move through different stage of the PLC. Distribution Decisions Distribution decisions focus on establishing a system that, at its basic level, allows customers to gain access and purchase a marketer’s product. However, marketers may find that getting to the point at which a customer can acquire a product is complicated, time consuming, and expensive. The bottom line is a marketer’s distribution system must be both effective (i.e., delivers a good or service to the right place, in the right amount, in the right condition) and efficient (i.e., delivers at the right time and for the
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right cost). Yet, as we will see, achieving these goals takes considerable effort. Distribution decisions are relevant for nearly all types of products. While it is easy to see how distribution decisions impact physical goods, such as laundry detergent or truck parts, distribution is equally important for digital goods (e.g., television programming, downloadable music) and services (e.g., income tax services). In fact, while the Internet is playing a major role in changing product distribution and is perceived to offer more opportunities for reaching customers, online marketers still face the same distribution issues and obstacles as those faced by offline marketers. In order to facilitate an effective and efficient distribution system many decisions must be made including (but certainly not limited to): • Assessing the best distribution channels for getting products to customers • Determining whether a reseller network is needed to assist in the distribution process • Arranging a reliable ordering system that allows customers to place orders • Creating a delivery system for transporting the product to the customer • For tangible and digital goods, establishing facilities for product storage What are Channels of Distribution? A supply chain as consisting of all parties and their supplied activities that help a marketer create and deliver products to the final customer. For marketers the distribution decision is primarily concerned with the supply chain’s front-end or channels of distribution that are designed to move the product (goods or services) from the hands of the company to the hands of the customer. Obviously when we talk about intangible services the use of the word “hands” is a figurative way to describe the exchange that takes place. But the idea is the same as with tangible goods. All activities and organizations helping with the exchange are part of the marketer’s channels of distribution. • Activities involved in the channel are wide and varied though the basic activities revolve around these general tasks: • Ordering • Handling and shipping • Storage 215
• Display • Promotion • Selling • Information feedback Type of Channel Members Channel activities may be carried out by the marketer or the marketer may seek specialist organizations to assist with certain functions. We can classify specialist organizations into two broad categories: resellers and specialty service firms. Resellers These organizations, also known within some industries as intermediaries, distributors or dealers, generally purchase or take ownership of products from the marketing company with the intention of selling to others. If a marketer utilizes multiple resellers within its distribution channel strategy the collection of resellers is termed a reseller network. These organizations can be classified into several sub-categories including: • Retailers – Organizations that sell products directly to final consumers. • Wholesalers – Organizations that purchase products from suppliers, such as manufacturers or other wholesalers, and in turn sell these to other resellers, such as retailers or other wholesalers.
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Industrial Distributors – Firms that work mainly in the business-to-business market selling products obtained from industrial suppliers.
Specialty Service Firms- these are organizations that provide additional services to help with the exchange of products but generally do not purchase the product (i.e., do not take ownership of the product): • Agents and Brokers – Organizations that mainly work to bring suppliers and buyers together in exchange for a fee. • Distribution Service Firms – Offer services aiding in the movement of products such as assistance with transportation, storage, and order processing. • Others – This category includes firms that provide additional services to aid in the distribution process such as insurance companies and firms offering transportation routing assistance. Importance of Distribution Channels As noted, distribution channels often require the
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assistance of others in order for the marketer to reach its target market. But why exactly does a company need others to help with the distribution of their product? Wouldn’t a company that handles its own distribution functions be in a better position to exercise control over product sales and potentially earn higher profits? Also, doesn’t the Internet make it much easier to distribute products thus lessening the need for others to be involved in selling a company’s product? While on the surface it may seem to make sense for a company to operate its own distribution channel (i.e., handling all aspects of distribution) there are many factors preventing companies from doing so. While companies can do without the assistance of certain channel members, for many marketers some level of channel partnership is needed. For example, marketers who are successful without utilizing resellers to sell their product (e.g., Dell Computers sells mostly through the Internet and not in retail stores) may still need assistance with certain parts of the distribution process (e.g., Dell uses parcel post shippers such as FedEx and UPS). In Dell’s case creating their own transportation system makes little sense given how large such a system would need to be in order to service Dell’s customer base. Thus, by using shipping companies Dell is taking advantage of the benefits these services offer to Dell and to Dell’s customers. When choosing a distribution strategy a marketer must determine what value a channel member adds to the firm’s products. Remember, as we discussed in Part 6: Product Decisions, customers assess a product’s value by looking at many factors including those that surround the product (i.e., augmented product). Several surrounding features can be directly influenced by channel members, such as customer service, delivery, and availability. Consequently, for the marketer selecting a channel partner involves a value analysis in the same way customers make purchase decisions. That is, the marketer must assess the benefits received from utilizing a channel partner versus the cost incurred for using the services. Benefits Offered by Channel Members • Cost Savings in Specialization – Members of the distribution channel are specialists in what they do and can often perform tasks better and at lower cost than companies who do not have distribution experience. Marketers attempting to handle too many 217
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aspects of distribution may end up exhausting company resources as they learn how to distribute, resulting in the company being “a jack of all trades but master of none.” Reduce Exchange Time – Not only are channel members able to reduce distribution costs by being experienced at what they do, they often perform their job more rapidly resulting in faster product delivery. For instance, consider what would happen if a grocery store received direct shipment from EVERY manufacturer that sells products in the store. This delivery system would be chaotic as hundreds of trucks line up each day to make deliveries, many of which would consist of only a few boxes. On a busy day a truck may sit for hours waiting for space so they can unload their products. Instead, a better distribution scheme may have the grocery store purchasing its supplies from a grocery wholesaler that has its own warehouse for handling simultaneous shipments from a large number of suppliers. The wholesaler will distributes to the store in the quantities the store needs, on a schedule that works for the store, and often in a single truck, all of which speeds up the time it takes to get the product on the store’s shelves. Customers Want to Conveniently Shop for Variety – Marketers have to understand what customers want in their shopping experience. Referring back to our grocery store example, consider a world without grocery stores and instead each marketer of grocery products sells through their own stores. As it is now, shopping is time consuming, but consider what would happen if customers had to visit multiple retailers each week to satisfy their grocery needs. Hence, resellers within the channel of distribution serve two very important needs: 1) they give customers the products they want by purchasing from many suppliers (termed accumulating and assortment services), and 2) they make it convenient to purchase by making products available in single location. Resellers Sell Smaller Quantities – Not only do resellers allow customers to purchase products from a variety of suppliers, they also allow customers to purchase in quantities that work for them. Suppliers though like to ship products they produce in large quantities since this is more cost effective than shipping smaller amounts. For instance, consider what
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it costs to drive a truck a long distance. In terms of operational expenses for the truck (e.g., fuel, truck driver’s cost) let’s assume it cost (US) $1,000 to go from point A to point B. Yet in most cases, with the exception of a little decrease in fuel efficiency, it does not cost that much more to drive the truck whether it is filled with 1000 boxes containing the product or whether it only has 10 boxes. But when transportation costs are considered on a per product basis ($1 per box vs. $10 per box) the cost is much less for a full truck. The ability of intermediaries to purchase large quantities but to resell them in smaller quantities (referred to as bulk breaking) not only makes these products available to those wanting smaller quantities but the reseller is able to pass along to their customers a significant portion of the cost savings gained by purchasing in large volume. Create Sales – Resellers are at the front line when it comes to creating demand for the marketer’s product. In some cases resellers perform an active selling role using persuasive techniques to encourage customers to purchase a marketer’s product. In other cases they encourage sales of the product through their own advertising efforts and using other promotional means such as special product displays. Offer Financial Support – Resellers often provide programs that enable customers to more easily purchase products by offering financial programs that ease payment requirements. These programs include allowing customers to: purchase on credit; purchase using a payment plan; delay the start of payments; and allowing trade-in or exchange options. Provide Information – Companies utilizing resellers for selling their products depend on distributors to provide information that can help improve the product. High-level intermediaries may offer their suppliers real-time access to sales data including information showing how products are selling by such characteristics as geographic location, type of customer, and product location (e.g., where located within a store, where found on a website). If highlevel information is not available, marketers can often count on resellers to provide feedback as to how customers are responding to products. This feedback can occur either through surveys or interviews with
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reseller’s employees or by requesting the reseller allow the marketer to survey customers Costs of Utilizing Channel Members • Loss of Revenue – Resellers are not likely to offer services to a marketer unless they see financial gain in doing so. They obtain payment for their services as either direct payment (e.g., marketer pays for shipping costs) or, in the case of resellers, by charging their customers more than what they paid the marketer for acquiring the product (termed markup). For the latter, marketers have a good idea of what the final customer will pay for their product which means the marketer must charge less when selling the product to resellers. In these situations marketers are not reaping the full sale price by using resellers, which they may be able to do if they sold directly to the customer. • Loss of Communication Control – Marketers not only give up revenue when using resellers, they may also give up control of the message being conveyed to customers. If the reseller engages in communication activities, such as personal selling in order to get customers to purchase the product, the marketer is no longer controlling what is being said about the product. This can lead to miscommunication problems with customers, especially if the reseller embellishes the benefits the product provides to the customer. While marketers can influence what is being said by training reseller’s salespeople, they lack ultimate control of the message. • Loss of Product Importance – Once a product is out of the marketer’s hands the importance of that product is left up to channel members. If there are pressing issues in the channel, such as transportation problems, or if a competitor is using promotional incentives in an effort to push their product through resellers, the marketer’s product may not get the attention the marketer feels it should receive. Channel Arrangements the distribution channel consists of many parties each seeking to meet their own business objectives. Clearly for the channel to work well, relationships between channel members must be strong with each member understanding and trusting others on whom they depend for product distribution to flow smoothly. For instance, a small sporting goods retailer that purchases products from a 220
wholesaler trusts the wholesaler to deliver required items on-time in order to meet customer demand, while the wholesaler counts on the retailer to place regular orders and to make on-time payments. Relationships in a channel are in large part a function of the arrangement that occurs between the members. These arrangements can be divided in two main categories: independent and dependent. Independent Channel Arrangement Under this arrangement a channel member negotiates deals with others that do not result in binding relationships. In other words, a channel member is free to make whatever arrangements they feel is in their best interest. This socalled “conventional” distribution arrangement often leads to significant conflict as individual members decide what is best for them and not necessarily for the entire channel. On the other hand, an independent channel arrangement is less restrictive than dependent arrangements and makes it easier for a channel members to move away from relationships they feel are not working to their benefit. Dependent Channel Arrangement Under this arrangement a channel member feels tied to one or more members of the distribution channel. Sometimes referred to as “vertical marketing systems” this approach makes it more difficult for an individual member to make changes to how products are distributed. However, the dependent approach provides much more stability and consistency since members are united in their goals. The dependent channel arrangement can be broken down into three types: • Corporate – Under this arrangement a supplier operates its own distribution system in a manor that produces an integrated channel. This occurs most frequently in the retail industry where a supplier operates a chain of retail stores. Starbucks is a company that does this. They import and process coffee and then sell it under their own brand name in their own stores. It should be mentioned that Starbucks also distributes their products in other ways, such as through grocery stores and mail order. As we will see in more detail later, Starbucks is using a multi-channel structure to market their products. • Contractual – Under this arrangement a legal document obligates members to agree on how a product is distributed. Often times the agreement specifically spells out which activities each member is permitted
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to perform or not perform. This type of arrangement can occur in several formats including: • Wholesaler-sponsored – where a wholesaler brings together and manages many independent retailers including having the retailers use the same name Retailer-sponsored – this format also brings together retailers but the retailers are responsible for managing the relationship
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Franchised – where a central organization controls nearly all activities of other members • Administrative Arrangement – In certain channel arrangements a single member may dominate the decisions that occur within the channel. These situations occur when one channel member has achieved a significant power position. This most likely occurs if a manufacturer has significant power due to brands in strong demand by target markets (e.g., Procter &Gamble) or if a retailer has significant power due to size and market coverage (e.g., Wal-Mart). In most cases the arrangement is understood to occur and is not bound by legal or financial arrangements. (More discussion on channel power can be found below.) Factors in Creating Distribution Channels Like most marketing decisions, a great deal of research and thought must go into determining how to carry out distribution activities in a way that meets a marketer’s objectives. The marketer must consider many factors when establishing a distribution system. Some factors are directly related to marketing decisions while others are affected by relationships that exist with members of the channel. Two main categories: marketing decision issues and channel relationship issues. In turn, each of these categories contains several topics of concern to marketers. Marketing Decision Issues Distribution strategy can be shaped by how decisions are made in other marketing areas. Product Issues the nature of the product often dictates the distribution options available especially if the product requires special handling. For instance, companies selling delicate or fragile products, such as flowers, look for shipping arrangements that are different than those sought for companies selling extremely tough or durable products, such as steel beams.
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Promotion Issues Besides issues related to physical handling of products, distribution decisions are affected by the type of promotional activities needed to sell the product to customers. For products needing extensive salesperson-tocustomer contact to (e.g., automobile purchases) the distribution options are different than for products where customers typically require no sales assistance (i.e., bread purchases). Pricing Issues the desired price at which a marketer seeks to sell their product can impact how they choose to distribute. As previously mentioned, the inclusion of resellers in a marketer’s distribution strategy may affect a product’s pricing since each member of the channel seeks to make a profit for their contribution to the sale of the product. If too many channel members are involved the eventual selling price may be too high to meet sales targets in which case the marketer may explore other distribution options. Target Market Issues A distribution system is only effective if customers can obtain the product. Consequently, a key decision in setting up a channel arrangement is for the marketer to choose the approach that reaches customers in the most effective way possible. The most important decision with regard to reaching the target market is to determine the level of distribution coverage needed to effectively meet customer’s needs. Distribution coverage is measured in terms of the intensity by which the product is made available. For the most part, distribution coverage decisions are of most concern to consumer products companies, though there are many industrial products that also must decide how much coverage to give their products. As we will see the marketer must take into consideration many factors when choosing the right level of distribution coverage. However, all marketers should understand that distribution creates costs to the organization. Some of these expenses can be passed along to customers (e.g., shipping costs) but others cannot (e.g., need for additional salespeople to handle more distributors). Thus, the process for determining the right level of distribution coverage often comes down to an analysis of the benefits (e.g., more sales) versus the cost associated with gain the benefits. There are three main levels of distribution coverage - mass coverage, selective and exclusive.
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Mass Coverage - The mass coverage (also known as intensive distribution) strategy attempts to distribute products widely in nearly all locations in which that type of product is sold. This level of distribution is only feasible for relatively low priced products that appeal to very large target markets (e.g., see consumer convenience products). A product such as Coca-Cola is a classic example since it is available in a wide variety of locations including grocery stores, convenience stores, vending machines, hotels and many, many more. With such a large number of locations selling the product the cost of distribution is extremely high and must be offset with very high sales volume. Selective Coverage - Under selective coverage the marketer deliberately seeks to limit the locations in which this type of product is sold. To the nonmarketer it may seem strange for a marketer to not want to distribute their product in every possible location. However, the logic of this strategy is tied to the size and nature of the product’s target market. Products with selective coverage appeal to smaller, more focused target markets (e.g., see consumer shopping products) compared to the size of target markets for mass marketed products. Consequently, because the market size is smaller, the number of locations needed to support the distribution of the product is fewer. Exclusive Coverage - Some high-end products target very narrow markets that have a relatively small number of customers. These customers are often characterized as “discriminating” in their taste for products and seek to satisfy some of their needs with high-quality, though expensive products. Additionally, many buyers of high-end products require a high level of customer service from the channel member from whom they purchase. These characteristics of the target market may lead the marketer to sell their products through a very select or exclusive group of resellers. Another type of exclusive distribution may not involve high-end products but rather products only available in selected locations such as company-owned stores. While these products may or may not be higher priced compared to competitive products, the fact these are only available in company outlets give exclusivity to the distribution. 224
The advent of the Internet has brought into question the effectiveness of these schemes. For all intents and purposes all products available for purchase over the Internet are distributed in the same way - mass coverage. So a better way to look at the three levels is to consider these as options for distribution coverage of products that are physically purchased by a customer (i.e., walk-in to purchase). Relationship Issues a good distribution strategy takes into account not only marketing decisions, but also considers how relationships within the channel of distribution can impact the marketer’s product. In this section we examine three such issues: Channel Power a channel can be made up of many parties each adding value to the product purchased by customers. However, some parties within the channel may carry greater weight than others. In marketing terms this is called channel power, which refers to the influence one party within a channel has over other channel members. When power is exerted by a channel member they are often in the position to make demands of others. For instance, they may demand better financial terms (e.g., will only buy if prices are lowered, will only sell if price is higher) or demand others members perform certain tasks (e.g., do more marketing to customers, perform more product services). Channel power can be seen in several ways: • Backend or Product Power – Occurs when a product manufacturer or service provider markets a brand that has a high level of customer demand. The marketer of the brand is often in a power position since other channel members have little choice but to carry the brand or risk losing customers. • Middle or Wholesale Power – Occurs when an intermediary, such as a wholesaler, services a large number of smaller retailers with products obtained from a large number of manufacturers. In this situation the wholesaler can exert power since the small retailers are often not in the position to purchase products cost-effectively and in as much variety as what is offered by the wholesaler. • Front or Retailer Power – As the name suggests, the power in this situation rests with the retailer who can command major concessions from their suppliers. This type of power is most prevalent when the retailer
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commands a significant percentage of sales in the market they serve and others in the channel are dependent on the sales generated by the retailer. Channel Conflict In an effort to increase product sales, marketers are often attracted by the notion that sales can grow if the marketer expands distribution by adding additional resellers. Such decisions must be handled carefully, however, so that existing dealers do not feel threatened by the new distributors who they may feel are encroaching on their customers and siphoning potential business. For marketers, channel strategy designed to expand product distribution may in fact do the opposite if existing members feel there is a conflict in the decisions made by the marketer. If existing members sense a conflict and feel the marketer is not sensitive to their needs they may choose to stop handling the marketer’s products. Need for Long-Term Commitments Channel decisions have long-term consequences for marketers since efforts to establish new relationships can take an extensive period of time while ending existing relationships can prove difficult. For instance, Company A, a marketer of kitchen cabinets that wants to change distribution strategy, may decide to stop selling their product line through industrial supply companies that distribute cabinets to building contractors and instead sell through large retail home centers. If in the future Company A decides to once again enter the industrial supply market they may run into resistance since supply companies may have replaced Company A’s product line with other products and, given what happened to the previous relationship, may be reluctant to deal with Company A. As another example of problems with long-term commitments, building contractors may be comfortable purchasing kitchen cabinets from industrial suppliers. If Company A decides to change their reseller network they may find it difficult to regain the building contractor customer base, who may continue to purchase from the industrial suppliers but are now purchasing products from Company A’s competitors. In this case, Company A may have to give serious thought to whether breaking their long-term relationship with industrial suppliers is in the company’s best interest. Overall Distribution Design Mindful of the factors affecting distribution decisions (i.e., marketing decision issues and relationship issues), the marketer has several options to choose from when settling on a design for their distribution network. We 226
stress the word “may” since while in theory an option would appear to be available, marketing decision factors (e.g., product, promotion, pricing, target markets) or the nature of distribution channel relationships may not permit the marketer to pursue a particular option. For example, selling through a desired retailer may not be feasible if the retailer refuses to handle a product. For marketers the choice of distribution design comes down to selecting between direct or indirect methods, or in some case choosing both. Direct Distribution System With a direct distribution system the marketer reaches the intended final user of their product by distributing the product directly to the customer. That is, there are no other parties involved in the distribution process that take ownership of the product. The direct system can be further divided by the method of communication that takes place when a sale occurs. These methods are: • Direct Marketing Systems – With this system the customer places the order either through information gained from non-personal contact with the marketer, such as by visiting the marketer’s website or ordering from the marketer’s catalog, or through personal communication with a customer representative who is not a salesperson, such as through toll-free telephone ordering. • Direct Retail Systems – This type of system exists when a product marketer also operates their own retail outlets. Starbucks would fall into this category. • Personal Selling Systems – The key to this direct distribution system is that a person whose main responsibility involves creating and managing sales (e.g., salesperson) is involved in the distribution process, generally by persuading the buyer to place an order. While the order itself may not be handled by the salesperson (e.g., buyer physically places the order online or by phone) the salesperson plays a role in generating the sales. • Assisted Marketing Systems – Under the assisted marketing system, the marketer relies on others to help communicate the marketer’s products but handles distribution directly to the customer. The classic example of assisted marketing systems is eBay which helps bring buyers and sellers together for a fee. Other agents and brokers would also fall into this category.
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Indirect Distribution System With an indirect distribution system the marketer reaches the intended final user with the help of others. These resellers generally take ownership of the product, though in the some cases they may sell products on a consignment basis (i.e., only pay the supplying company if the product is sold). Under this system intermediaries may be expected to assume many responsibilities to help sell the product. Indirect methods include: • Single-Party Selling System - Under this system the marketer engages another party who then sells and distributes directly to the final customer. This is most likely to occur when the product is sold through large store-based retail chains or through online retailers, in which case it is often referred to as a trade selling system. • Multiple-Party Selling System – This indirect distribution system has the product passing through two or more distributors before reaching the final customer. The most likely scenario is when a wholesaler purchases from the manufacturer and sells the product to retailers. Multi-channel or Hybrid System In cases where a marketer utilizes more than one distribution design the marketer is following a multichannel or hybrid distribution system. As we discussed, Starbucks follows this approach as their distribution design includes using a direct retail system by selling in company-owned stores, a direct marketing system by selling via direct mail, and a single-party selling system by selling through grocery stores (they also use other distribution systems). The multi-channel approach expands distribution and allows the marketer to reach a wider market, however, as we discussed under Channel Relationships, the marketer must be careful with this approach due to the potential for channel conflict. Establishing Channel Relationships Since channel members must be convinced to handle a marketer’s product it makes sense to consider channel partner’s needs in the same way the marketer considers the final user’s needs. However, the needs of channel members are much different than those of the final customer. As we noted in Part 4: Business Buying Behavior, resellers seek
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products of interest to the reseller’s customers but are also concerned with many other issues such as: • Delivery – Resellers want the product delivered ontime and in good condition in order to meet customer demand and avoid inventory out-of-stocks. • Profit Margin – Resellers are in business to make money so a key factor in their decision to handle a product is how much money they will make on each product sold. They expect that the difference (i.e., margin) between their cost for acquiring the product from a supplier and the price they charge to sell the product to their customers will be sufficient to meet their profit objectives. • Other Incentives – Besides profit margin, resellers may want other incentives to entice them especially if they are required to give extra effort selling the product. These incentives may be in the form of additional free products or even bonuses (e.g., bonus, free trips) for achieving sales goals. • Packaging – Resellers want to handle products as easily as possible and want their suppliers to ship and sell products in packages that fit within their system. For example, products may need to be a certain size or design in order to fit on a store’s shelf, or the shipping package must fit within the reseller’s warehouse or receiving dock space. Also, many resellers are now requiring marketers to consider adding identification tags to products (e.g., RFID tags) to allow for easier inventory tracking when the product is received and also when it is sold. • Training – Some products require the reseller to have strong knowledge of the product including demonstrating the product to customers. Marketers must consider offering training to resellers to insure the reseller has the knowledge to present the product accurately. • Promotional Help – Resellers often seek additional help from the product supplier to promote the product to customers. Such help may come in the form of funding for advertisements, point-of-purchase product materials, or in-store demonstrations. Wholesaling What is a Wholesaling? Wholesaling is defined as the activities involved in selling to organizational buyers who intend to either
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resell or use for their own purposes. A wholesaler is an organization providing the necessary means to: 1) allow suppliers (e.g., manufacturers) to reach organizational buyers (e.g., retailers, business buyers), and 2) allow certain business buyers to purchase products which they may not be able to otherwise purchase. While many large retailers and even manufacturers have centralized facilities and carry out the same tasks as wholesalers, we do not classify these as wholesalers since these relationships only involve one other party, the buyer. Thus, a distinguishing characteristic of wholesalers is they offer distribution activities for both a supplying party and for a purchasing party. For our discussion of wholesalers we will primarily focus on wholesalers who sell to other resellers such as retailers. Benefits of Wholesalers The benefits wholesalers offer to members of the channel can be significant and involve most of the ones we discussed in Part 8: Distribution Decisions, though specific benefits vary by type of wholesaler. Yet there are two particular benefits – one for suppliers and one for retailers - that are common to most wholesale operations and are worth further discussion: • Provide Access to Products - Wholesalers are in business to provide products and services to buyers (e.g., retailers) who either cannot purchase directly from suppliers because their purchase quantities are too low to meet the supplier’s minimum order requirements or, if they purchase directly from suppliers, will pay higher prices compared to bigger retailers who obtain better pricing by purchasing in greater quantities. Since wholesalers sell to a large number of buyers their order quantities may match those of large retailers thus allowing them to obtain lower prices from suppliers. Wholesalers can then pass these lower prices along to their buyers, which can enable smaller retailers to remain competitive with larger rivals. In this way transacting through wholesalers is often the only way certain retailers can stay in business. • Provide Access to Markets – Providing smaller retailer’s access to products they cannot acquire without wholesaler help offers a benefit for suppliers as well since it opens additional market opportunities for suppliers. Namely, suppliers can have their products purchased and made available for sale across a wide number of retail outlets. More importantly, 230
for a company offering a new product, convincing a few wholesalers to stock a new product may make it easier to gain traction in the market as the wholesaler can yield power with the smaller retailers convincing them to stock the new product. Considering a wholesaler can serve hundreds of small retail customers, the marketing efforts persuading the wholesaler to adopt a new product may be far more efficient compared to efforts needed to convince individual store owners to stock the new product. Concerns of Wholesalers the wholesale industry has served an important role in the distribution process for well over 100 years, yet the challenges they face today are raising the stakes as many wholesalers fight to maintain their market position. Some of the issues facing today’s wholesalers include: • Disintermediation – The growth of the Internet as a communication and distribution channel has lead many to conclude that wholesaling will lose its importance as manufacturers and final buyers learn to transact directly. This so called “disintermediation” of marketing channels is a real concern to some wholesalers, especially those that do not function as a dominate party within a distribution channel. For example, assume a retailer operating a gift card store uses a wholesaler only to purchase a specific manufacturer’s products. In this situation if the manufacturer begins to offer direct purchasing to smaller customers the wholesaler may have little leverage in efforts to retain the retailer as a customer? In instances of disintermediation wholesalers face the challenge of creating greater value for their services, thus making the retailer’s decision to switch more difficult. • Facility Location – Wholesalers who are heavily involved in product shipment may spend considerable time evaluating sites for locating facilities. For organizations needing very large facilities, the decision as to where to locate becomes more difficult and more expensive the closer the location is to major metropolitan areas. In fact, land costs in some regions of the world have risen so high that utilizing this space for wholesaling operations may not be feasible. In addition to land costs, facility location is also affected by access to adequate transportation, such as roads, seaports, airports and
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rail terminals. Areas with available land often lack the infrastructure needed to run wholesale facilities unless expensive and time-consuming improvements (e.g., build highway, extend rail line, etc) are made. Transportation Costs – For wholesalers involved in transporting products, the worldwide rise in fuel costs has forced a close examination of how they handle product distribution. Transportation expense can represent a significant portion of overall distribution costs and these higher costs are often passed on to customers in the form of higher product prices. This problem also presents opportunities for wholesalers that work hard to control fuel costs with such methods as: using equipment and delivery vehicles that are more fuel efficient; utilizing computer routing software to determine less costly delivery routes; and offering greater incentives to customers to accept deliveries during less congested times of the day. Adapting to New Technologies – In addition to technologies to lower fuel costs, other technologies that assist the distribution process are offering both advantages and disadvantages to wholesalers. On one hand new technologies, such as radio frequency identification tags (RFID) placed on shipped products allow wholesalers to maintain tighter control over their distribution activities. But gaining the benefits associated with these new distribution technologies can be expensive in terms of acquiring and learning to use. Offering Non-Product Assistance – Wholesalers are finding that offering products is not the only thing of interest to their buyers. Many customers also want wholesalers to offer additional value-added services such as employee training (e.g., teach selling skills), promotional support (e.g., financial support for advertising), and assistance in managing their operations (e.g., building an online store). Keeping pace with the services in demand by their customers requires constant research and communication with customers.
Ways to Categorize Wholesalers
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Wholesalers can likewise be grouped together, though the characteristics are slightly different. • For our purposes we will separate wholesale operations based on four marketing decisions: • products carried • promotional activities • distribution method • service level • And one legal factor: • product ownership • These grouping schemes are not meant to be mutually exclusive. Consequently, a wholesaler can be evaluated on each characteristic. • Products Carried Similar to how retailers can be categorized, wholesalers can also be classified by the width and depth of product lines they handle. The categories include: • General Merchandise – Wholesalers carrying a very broad line of products fall into the general merchandise wholesaler category. Like general merchandise retailers, the product lines these wholesalers carry may not offer many options (i.e., shallow depth). These wholesalers tend to market to the smaller general merchandise retailer such as smaller convenience or general stores. • Specialty Merchandise – Wholesalers focusing on narrow product lines but offering deep selection within the lines fall into the specialty merchandise category. Most specialty merchandise wholesalers direct their marketing efforts to specific industries. For example, specialty wholesalers supply such industries such as electronics, seafood, and pharmaceuticals. Promotional Activities Wholesalers can be separated based on the importance promotion plays in generating demand for products handled by the wholesaler. Two basic categories exist: • Extensive Promotion – The main job of some wholesalers is to actively locate buyers. This occurs most often where a wholesaler is hired to find buyers for a supplier’s products or where the wholesaler is very aggressive in finding new customers for their business. Under these arrangements the most common promotional activity is personal selling through a sales force, though advertising may also be used. 233
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Limited Promotion – Nearly all wholesalers engage in some promotional activities. Even in situations where a wholesaler dominates a channel and clients have little choice but to acquire products from the wholesaler, some promotion will still occur. For instance, at times a wholesaler may need to use their salespeople to persuade buyers to purchase in larger volume than normal or to agree to stock a new product the wholesaler is handling. In other cases, especially for wholesalers selling products for business use, promotional activities may be more extensive and include advertising and other promotional methods. Distribution Method Wholesalers have distribution methods similar to those of retailers in that customers may or may not be able to physically visit the wholesaler’s location to acquire their purchase. For the purposes of our discussion of wholesaling, this category is separated based on whether or not a stationary location exists from which the wholesaler conducts the physical movement of products. • Stationary Location – The most common wholesaler arrangement is where the wholesaler has one or more fixed facilities where product handling operations take place. However, while stationary wholesalers share the characteristic of a permanent location, they often differ on whether customers can visit these facilities: • Customer Accessible – At certain wholesaler locations buyers can shop at the facility. In fact, retail warehouse clubs, such as Costco and Sam’s Club, also function as wholesalers for qualifying businesses. In addition to selecting their orders, buyers are responsible for making their own arrangements to transport their purchases.
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Not Customer Accessible – Most operations classified as wholesalers do not permit buyers to visit their facility in order to select items, rather buyers place orders via phone, web or through person-to-person contact with wholesaler’s representatives. Also, in most cases, the wholesaler takes responsibility for product delivery. • Non-Stationary Location – Not all wholesalers carry inventory at a stationary location. In fact, some do not carry inventory at all!
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Mobile – Several specialized wholesalers transport products to the customer’s location using vans or trucks. Buyers then have the ability to purchase product by either walking through the mobile facility or ordering from the wholesaler who then selects the items from the vehicle.
No Facilities – Some wholesalers do not have physical locations that store products. Instead, these operations rely on others, such as delivery companies, to ship products from one location (e.g., manufacturer) to the buyer’s place of business. Service Level Wholesalers can be distinguished by the number and depth of services they provide to their customers. • Full-Service – Wholesalers in this category mainly sell to the retail industry, and in most cases, require a strong, long-term retailer-wholesaler relationship be established. In addition to basic distribution services, such as providing access to an assortment of products and furnishing delivery, these wholesalers also offer customers additional services that aid retail store operations including offering assistance with: in-store merchandising; retail site location decisions (e.g., find best geographic location for a new store); store design and construction; back-end operations (e.g., payroll services); financial support; and many more. • Limited Service – Compared to full-service wholesalers, buyers dealing with limited service firms offer far fewer services. Most offer basic services, such as shipping and allow credit purchasing, but few offer the number of service options found with fullservice wholesalers. • No Service – Some wholesalers follow a business model whose only service is to make products available for sale and only on a cash basis. In these instances, the buyer handles their own transportation of the product. Product Ownership Wholesalers can be classified based on whether they do or do not become the owners of the products they sell. By ownership we mean that title (i.e., legal ownership) has passed from the party from whom the wholesaler purchased the product (e.g., manufacturer) to the wholesaler. It
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also means the wholesaler assumes any risk that may arise with handling the product. Do Take Title – Wholesalers taking title own the products they purchase. Do Not Take Title – Wholesalers who do not take title are focused on activities that bring buyers and sellers together. Often these wholesalers never physically handle products. Wholesale Formats considering the criteria by which wholesalers can be categorized, it is not surprising many different wholesale formats exist. Below we discuss ten wholesale formats. While many of these wholesalers also have an online presence, we do not distinguish an “e-wholesaler” as a separate format the way we did with “e-tailers” or online retailers. The reason? While most wholesalers do operate from a brick-and-mortar facility, few wholesale operations permit customer shopping at their facility. Thus, the nature of industry for many years has been to have customers use communication tools (e.g., phone, fax) to place orders. With the wholesale industry, the Internet simply serves as another communication option rather than a significantly different distribution channel. • General Merchandise – These wholesalers offer broad but shallow product lines that are mostly of interest to retailers carrying a wide assortment of products, such as convenience stores, variety stores (e.g., those offering closeout products), and novelty retailers. Since these wholesalers offer such a wide range of products, their knowledge of individual products may not be strong. • Specialty Merchandise – Many wholesalers focus on specific product lines or industries and in doing so supply a narrow assortment of products but within the product lines offered there is great depth. Additionally, these wholesalers tend to be highly knowledgeable of the markets they serve. • Contractual – In Part 8: Distribution Decisions we introduced the concept of wholesaler-sponsored channel arrangements where a wholesaler brings together and manages many independent retailers. The services of these wholesalers are limited to the retailers involved in the contractual arrangement. • Industrial Distributors – The industrial distributor directs their operations to the business customer rather than to other resellers. Depending on the
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distributor, they can carry either broad or narrow product lines. • Cash-and-Carry – A wholesale operation common to the food industry is the cash-and-carry where buyers visit the wholesaler’s facility, select their order, pay in cash (i.e., credit purchases not permitted), and then handle their own delivery (i.e., carry) to their place of business. This form of wholesaling has begun to expand outside of the food industry as large wholesale club, such as Costco and Sam’s Club, allow qualified businesses to purchase products intended for retail sale. • Truck – As the name suggests, truck wholesaling operations are primarily run out of a truck that is stocked with products. These wholesalers often have assigned geographic territories where they regularly visit buyer’s locations. In most cases these wholesalers offer specialty product lines with many being found in the retail food industry and the industrial markets. • Rack Jobber – Similar to truck wholesalers, the rack jobber also sells from a truck. However, the main difference is that rack jobbers are assigned and manage space (i.e., racks) within a retailer’s store. The rack jobber is then responsible for maintaining inventory and may even handle other marketing duties such as setting product price. This form of wholesaling is most prominent with magazines, candy, bakery, and health-and-beauty products. In some trades the name rack jobber is being replaced by the name service merchandiser. • Drop Shipper – Wholesalers in this category never take physical possession of products, though they do take ownership. Essentially they are shipping coordinators who receive orders from customers and then place the order with a product supplier. Shipping is then arranged so that the supplier ships directly to the drop shipper’s customer. Drop shipping is often most useful when very large orders are placed where transportation and product handling costs are high if there are too many distribution points. • Broker– A far less obvious type of wholesaler is the broker, who is responsible for bringing buyers and sellers together. However, brokers do not take ownership of products and often never handle the product. Brokers are paid based on a pre-negotiated 237
percentage of the sale (i.e., commission) by the side that hires their services. In most cases the relationship that develops between the broker and the buyer and seller is short-term and only lasts through the purchase. Brokers can be found in the food industry, importing/exporting and real estate. • Agent – Similar to brokers, agents also bring buyers and seller together though they tend to work for clients for an extended period of time. As with brokers, agents generally are paid on commission. A common type of agent is the Manufacturers’ Representative who essentially assumes the role of a sales force for a client. Manufacturers’ Reps may handle several non-competing product lines at the same time and during a single meeting with a perspective buyer may discuss many products. Wholesaler Summary Chart Below us summarizes each wholesale format by using the five categorization characteristics. The characteristics identified for each format should be viewed as the “most likely” case for that format and are not necessarily representative of all wholesalers that fall into this format.
Format Products Carried Promotional Activities Distribution Method Service Level Product Ownership
General Merchandise Specialty Merchandise Contractual Industrial Distributor Cash-and-Carry Truck Rack Jobber Drop Shipper Broker Agent
general specialty general specialty general specialty specialty specialty specialty specialty specialty specialty
limited limited extensive limited limited limited limited limited extensive extensive
stationary not accessible stationary may be accessible stationary not accessible stationary may be accessible stationary accessible non-stationary mobile non-stationary mobile non-stationary no facilities non-stationary no facilities non-stationary no facilities
limited full limited full limited no limited limited limited limited limited
take title take title take title take title take title take title take title take title do not take title do not take title
Managing Product Movement In addition to enlisting the assistance of retailers and wholesalers to make products available to customers, marketers also face additional concerns when trying to meet their distribution objectives. In this section we examine the tasks that must be carried out in order to physically 238
move products to customers. In some cases the marketer will take on the responsibility of carrying out some functions, while other tasks may be assigned to distribution service providers. In this tutorial we explore the movement of product by first examining how physical distribution decisions often involve analyzing the trade-off between the service level the marketer offers to customers versus the costs associated with providing these services. Next we provide an in-depth examination of three major tasks that the marketer or distribution service providers may need to carryout in order to ship products to customers. These tasks include: • Ordering and Inventory Management • Product Storage • Transportation Trade-off Analysis: Service-Level vs. Cost The distribution activities we discuss in this part of the Principles of Marketing tutorial are important elements in the marketer’s overall customer service package. As we will see in a later tutorial, marketers strive to deliver an optimal level of service to their customers. However, “optimal” does not always translate into providing the “best” service options to customers. The service-level marketers’ offer for their distribution activities, like the service-level offered by other company-related activities that impact customers (e.g., customer help desk), is determined using trade-off analysis. With service-level trade-off analysis, the marketer compares the number and quality of distribution features (e.g., speed of delivery, ease of placing orders, order tracking, etc.) they would like to offer versus the cost of providing the features. For instance, when it comes to transportation options (e.g., truck, railroad, air, etc.), trade-off analysis may show that choosing the fastest method for delivery may not make economic sense since options for fast delivery often are very expensive compared to slower methods? While the customer may appreciate having their order arrive quickly, the marketer may find fast delivery to be an expensive proposition that significantly reduces their profit margin. Since most distribution activities are non-revenue producing (i.e., are used to support the selling of a product but do not actually create a sale) and, thus, represent a cost to the marketer, it should be understood that the marketer’s distribution system choice may not be 239
the overall best available in terms of getting the product into customer’s hand as fast as possible. Rather, the marketer’s choice for what is optimal will be determined by analyzing distribution features and costs and evaluating how these fit within the marketer’s overall objectives (e.g., financial objectives, product positioning, etc.). Ordering and Inventory Management Having products available when customers want to make purchases may seem like a relatively straightforward process. All a seller needs to do is make sure there is product (i.e., inventory) in their possession and ready for the customer to purchase. Unfortunately, being prepared for customer purchasing is not always easy. Having the right product available when the customer is ready to buy requires a highly coordinated effort involving order entry and processing systems, forecasting techniques, customer knowledge, strong channel relationships and efficiency at physically handling products. Order Entry and Processing System The marketer must have a system allowing customers to easily place orders. This system can be as simple as a consumer walking to the counter of small food stand to purchase a few vegetables or as complicated as computer automated systems where an electronic order is triggered from a retailer to a manufacturer each time a consumer purchases a product at the retailer’s store. In either case, the order processing system must be able to meet the purchasing needs of the customer. In some cases, efficiently ordering system can be turned into a competitive advantage. Firms such as Amazon.com turned their order handing system into a product feature with the patented “1-click” ordering option that streamlines online ordering by reducing the number of clicks needed to make purchases. Forecasting Inventory management is often an exercise in predicting how customers will respond in the future. By predicting purchase behavior the marketer can respond by making sure the right amount of product is available. For most largescale resellers effective inventory forecasting requires the use of sophisticated statistical tools that look at many variables, such as past purchase history, amount of promotional effort that triggers an increase in customer ordering, and other market criteria to determine how much of the product will be needed to meet customer demand. Customer Knowledge
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Inventory management can be fine-tuned to respond to customer’s needs. As a marketer learns more about a customer they begin to observe trends in how and when purchases are made. Combining customer knowledge with forecasting techniques allows the marketer to better estimate product demand and inventory requirements. As we discussed in Part 1: What is Marketing?, the key to understanding customers is to have in place a customer relationship management (CRM) system that tracks all customer activity and allows for data mining activities that analyze customer information in order to identify patterns in customer activity. Channel Relationships While the marketer who uses channel members to sell consumer products has access to information for their immediate customers (e.g., resellers) they often do not have access to sales and customer behavior information controlled by the party selling to the final consumer (e.g., retailer). Knowing the demand patterns at the final consumer level can give marketers good insight into how the reseller may order. Developing strong relationships with the holder of consumer information can result in the reseller sharing this information with the marketer. In fact, as we noted in Part 8: Distribution Decisions, some retailers allow marketers direct access to real-time, store-level inventory information so the marketer can monitor how products are selling in stores and be in a position to respond quickly if inventory needs change. Physical Product Handling An often overlooked area of inventory management involves the actions and skills needed to prepare a product to move from one point to another. Some products require special attention be given to ensure the product is not damaged during shipment. Such efforts must be carefully balanced against increased costs that arise (e.g., stronger packaging) in order to provide greater protection to products. Because of this, many marketers will accept the fact that some small level of damage to occur during the distribution process. Product Storage The second important element in physical distribution concerns storing products for future delivery. Marketers of tangible products, and even digital products, may have storage concerns. Storage facilities, such as warehouses, play an important role in the distribution process for a number of reasons including:
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Hold Wide Assortment - As noted in Part 8: Distribution Decisions, many resellers allow their customers to purchase small quantities of many different products. Yet to obtain the best prices from suppliers, resellers must purchase in large quantities. The need, thus, exists for storage facilities that not only hold a large volume of product, but also can hold a wide-variety of resellers’ inventory. Additionally, these facilities must be organized in a way that permits resellers to easily fill orders for their customers. • Meet Unanticipated Demand - Holding products in storage offers a safeguard in cases of unexpected increases in demand for products. • Needed for Large Shipping Quantities - As we noted in our discussion of transportation, manufacturers generally prefer to ship in large product quantities in order to more effectively spread transportation costs. This often means manufacturers must create storage areas in which the manufactured goods can build up in the quantities needed for such shipments to occur. • Offer Faster Response - Additional storage facilities, strategically located in different geographical areas, allows a marketing organization to respond quickly to customers’ needs. The ability to respond with quick delivery can be a major value-added feature since it reduces the buyer’s need to maintain large inventory at their own locations. • Security and Backup – For digital products, additional storage facilities are not only needed to offer customers faster access to products (e.g., online content and software) but are also needed to protect against technical glitches and security threats. Types of Warehouses The warehouse is the most common type of storage though other forms do exist (e.g., storage tanks, computer server farms). Some warehouses are massive structures that simultaneously support the unloading of numerous in-bound trucks and railroad cars containing suppliers’ products while at the same time loading multiple trucks for shipment to customers. Below we discuss five types of warehouses: • Private Warehouse - This type of warehouse is owned and operated by a company that is also involved in other aspects of the distribution channel. For
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instance, a major retail chain may have several regional warehouses supplying their stores or a wholesaler will operate a warehouse at which it receives and distributes products. • Public Warehouse - The public warehouse is essentially space that can be leased to solve short-term distribution needs. Retailers that operate their own private warehouses may occasionally seek additional storage space if their facilities have reached capacity or if they are making a special, large purchase of products. For example, retailers may order extra merchandise to prepare for in-store sales or order a large volume of a product that is offered at a low promotional price by a supplier. • Automated Warehouse - With advances in computer and robotics technology many warehouses now have automated capabilities. The level of automation ranges from a small conveyor belt transporting products in a small area all the way up to a fully automated facility where only a few people are needed to handle storage activity for thousands of pounds/kilograms of product. In fact, many warehouses use machines to handle nearly all physical distribution activities such as moving product-filled pallets (i.e., platforms that hold large amounts of product) around buildings that may be several stories tall and the length of two or more football fields. • Climate-Controlled Warehouse - Warehouses handle storage of many types of products including those that need special handling conditions such as freezers for storing frozen products, humidity-controlled environments for delicate products, such as produce or flowers, and dirt-free facilities for handling highly sensitive computer products. • Distribution Center - There are some warehouses where product storage is considered a very temporary activity. These warehouses serve as points in the distribution system at which products are received from many suppliers and quickly shipped out to many customers. In some cases, such as with distribution centers handling perishable food (e.g., produce), most of the product enters in the early morning and is distributed by the end of the day Transportation Features and Modes A key objective of product distribution is to get products into customers’ hands in a timely manner. While delivery of digital products can be handled in a fairly smooth way 243
by allowing customers to access their purchase over the Internet (e.g., download software, gain access to subscription material), tangible products require a more careful analysis of delivery options in order to provide an optimal level of customer service. But as we noted earlier, “optimal” does not always translate into fastest. • In terms of delivering products to customers, there are six distinct modes of transportation: air, digital, pipeline, rail, truck, and water. However, not all modes are an option for all marketers. Each mode offers advantages and disadvantages on key transportation features that include: • Product Options - This feature is concerned with the number of different products that can realistically be shipped using a certain mode. Some modes, such as pipeline, are very limited in the type of products that can be shipped while others, such as truck, can handle a wide-range of products. • Speed of Delivery - This refers to how quickly it takes products to move from the shipper’s location to the buyer’s location. • Accessibility – This transportation feature refers to whether the use of a mode can allow final delivery to occur at the buyer’s desired location or whether the mode requires delivery to be off-loaded onto other modes before arriving at the buyer’s destination. For example, most deliveries made via air must be loaded onto other transportation modes, often trucks, before they can be delivered to the final customer. • Cost – The cost of shipment is evaluated in terms of the cost per item to cover some distance (e.g., mile, kilometer). Often for large shipments of tangible products cost is measured in terms of tons-per-mile or metric-tons-per-kilometer. • Capacity – Refers to the amount of product that can be shipped at one time within one transportation unit. The higher the capacity the more likely transportation cost can be spread over more individual products leading to lower transportation cost per-item shipped. • Intermodal Capable – Intermodal shipping occurs when two or more modes can be combined in order to gain advantages offered by each mode. For instance, in an Intermodal method called piggybacking truck trailers is loaded onto railroad cars without the need to unload the trailer. When the railroad car has reached a certain destination the truck trailers are off-
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loaded onto trucks for delivery to the customer’s location. Modes of Transportation Comparison In the chart below the six main modes of transporting products are compared for each of the key transportation features. Also shown are the estimated percentages of product movement (i.e., freight traffic) that occurs within the United States for the five modes that handle tangible products.
Mode Product Options Speed Accessibility High Moderate Low Moderate Low Very High Cost Moderate Low Very High Very Low Low Very Low Capacity Intermodal % of US Capability Product Movement Low Moderate Very Low Very High Very High Moderate Very High Very High Moderate Very High Very Low Very Low 28% 41% <1% 13% 17% ? Truck Very Broad Moderate Railroad Broad Slow Air Narrow Fast Water Broad Very Slow Pipeline Very Narrow Very Slow Digital Very Narrow Very Fast
What is promotion? Promotion is a form of corporate communication that uses various methods to reach a targeted audience with a certain message in order to achieve specific organizational objectives. Nearly all organizations, whether for-profit or not-for-profit, in all types of industries, must engage in some form of promotion. Such efforts may range from multinational firms spending large sums on securing highprofile celebrities to serve as corporate spokespersons to the owner of a one-person enterprise passing out business cards at a local businessperson’s meeting. Like most marketing decisions, an effective promotional strategy requires the marketer understand how promotion fits with other pieces of the marketing puzzle (e.g., product, distribution, pricing, target markets). Consequently, promotion decisions should be made with an appreciation for how it affects other areas of the company. For instance, running a major advertising campaign for a new product without first assuring there will be enough inventory to meet potential demand generated by the advertising would certainly not go over well with the company’s production department (not to mention other key company executives). Thus, marketers should not work in a vacuum when making promotion decisions. Rather, the overall success of a promotional strategy requires input from others in impacted functional areas. In addition to coordinating general promotion decisions with other business areas, individual promotions must also work together. Under the concept of Integrated Marketing Communication marketers attempt to develop a unified promotional strategy involving the coordination of many
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different types of promotional techniques. The key idea for the marketer who employs several promotional options (we’ll discuss potential options later in this tutorial) to reach objectives for the product is to employ a consistent message across all options. For instance, salespeople will discuss the same benefits of a product as mentioned in television advertisements. In this way no matter how customers are exposed to a marketer’s promotional efforts they all receive the same information. Targets of Marketing Promotions • The audience for an organization’s marketing communication efforts is not limited to just the marketer’s target market. While the bulk of a marketer’s promotional budget may be directed at the target market, there are many other groups that could also serve as useful target of a marketing message. • Targets of a marketing message generally fall into one of the following categories: • Members of the Organization’s Target Market – This category would include current customers, previous customers and potential customers, and as noted, may receive the most promotional attention. • Influencers of the Organization’s Target Market – There exists a large group of people and organizations that can affect how a company’s target market is exposed to and perceives a company’s products. These influencing groups have their own communication mechanisms that reach the target market and the marketer may be able utilize these influencers to its benefit. Influencers include the news media (e.g., offer company stories), special interest groups, opinion leaders (e.g., doctors directing patients), and industry trade associations. • Participants in the Distribution Process – The distribution channel provides services to help gain access to final customers and are also target markets since they must recognize a product’s benefits and agree to handle the product in the same way as final customers who must agree to purchase products. Aiming promotions at distribution partners (e.g., retailers, wholesalers, distributors) and other channel members is extremely important and, in some industries, represents a higher portion of a marketer’s promotional budget than promotional spending directed at the final customer.
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Other Companies – The most likely scenario in which a company will communicate with another company occurs when the marketer is probing to see if the company would have an interest in a joint venture, such as a co-marketing arrangement where two firms share marketing costs. Reaching out to other companies, including companies who may be competitors for other products, could help create interest in discussing such a relationship. • Other Organizational Stakeholders – Marketers may also be involved with communication activities directed at other stakeholders. This group consists of those who provide services, support or, in other ways, impact the company. For example, an industry group that sets industry standards can affect company products through the issuance of recommended compliance standards for product development or other marketing activities. Communicating with this group is important to insure the marketer’s views of any changes in standards are known. Objectives of Marketing Promotions The most obvious objective marketers have for promotional activities is to convince customers to make a decision that benefits the marketer (of course the marketer believes the decision will also benefit the customer). For most forprofit marketers this means getting customers to buy an organization’s product and, in most cases, to remain a loyal long-term customer. For other marketers, such as not-for-profits, it means getting customers to increase donations, utilize more services, change attitudes, or change behavior (e.g., stop smoking campaigns). However, marketers must understand that getting customers to commit to a decision, such as a purchase decision, is only achievable when a customer is ready to make the decision. As we saw in our discussion of consumer and business buying behavior in Parts 3 and 4, customers often move through several stages before a purchase decision is made. Additionally before turning into a repeat customer, purchasers analyze their initial purchase to see whether they received a good value, and then often repeat the purchase process again before deciding to make the same choice. The type of customer the marketer is attempting to attract and which stage of the purchase process a customer is in will affect the objectives of a particular marketing communication effort. And since a marketer often has
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multiple simultaneous promotional campaigns, the objective of each could be different.
Types of Promotion Objectives The possible objectives for marketing promotions may include the following: • Build Awareness – New products and new companies are often unknown to a market, which means initial promotional efforts must focus on establishing an identity. In this situation the marketer must focus promotion to: 1) effectively reach customers, and 2) tell the market who they are and what they have to offer. • Create Interest – Moving a customer from awareness of a product to making a purchase can present a significant challenge. As we saw with our discussion of consumer and business buying behavior, customers must first recognize they have a need before they actively start to consider a purchase. The focus on creating messages that convince customers that a need exists has been the hallmark of marketing for a long time with promotional appeals targeted at basic human characteristics such as emotions, fears, sex, and humor. • Provide Information – Some promotion is designed to assist customers in the search stage of the purchasing process. In some cases, such as when a product is so novel it creates a new category of product and has few competitors, the information is simply intended to explain what the product is and may not mention any competitors. In other situations, where the product competes in an existing market, informational promotion may be used to help with a product positioning strategy. As we discuss in Part 5: Target Markets, marketers may use promotional means, including direct comparisons with competitor’s products, in an effort to get customers to mentally distinguish the marketer’s product from those of competitors. • Stimulate Demand – The right promotion can drive customers to make a purchase. In the case of products that a customer has not previously purchased or has not purchased in a long time, the promotional efforts may be directed at getting the customer to try the product. This is often seen on the Internet where 248
software companies allow for free demonstrations or even free downloadable trials of their products. For products with an established customer-base, promotion can encourage customers to increase their purchasing by providing a reason to purchase products sooner or purchase in greater quantities than they normally do. For example, a pre-holiday newspaper advertisement may remind customers to stock up for the holiday by purchasing more than they typically purchase during non-holiday periods. • Reinforce the Brand – Once a purchase is made, a marketer can use promotion to help build a strong relationship that can lead to the purchaser becoming a loyal customer. For instance, many retail stores now ask for a customer’s email address so that follow-up emails containing additional product information or even an incentive to purchase other products from the retailer can be sent in order to strengthen the customer-marketer relationship. The Communication Process The act of communicating has been evaluated extensively for many, many years. One of the classic analyses of communication took place in the 1940s and 1950s when researchers, including Claude Shannon, Warren Weaver, Wilbur Schramm and others, offered models describing how communication takes place. In general, communication is how people exchange meaningful information. Models that reflect how communication occurs often include the elements shown below:
Communication Participants: For communication to occur there must be at least two participants:
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Message Source – The source of communication is the party intending to convey information to another party. The message source can be an individual (e.g., salesperson) or an organization (e.g., through advertising). In order to convey a message, the source must engage in message encoding, which involves mental and physical processes necessary to construct a message in order to reach a desired goal (i.e., convey meaningful information). This undertaking consists of using sensory stimuli, such as visuals (e.g., words, symbols, images), sounds (e.g., spoken word), and scents (e.g., perform sprayed magazine inserts) to convey a message. Message Receiver – The receiver of communication is the intended target of a message source’s efforts. For a message to be understood the receiver must decode the message by undertaking mental and physical processes necessary to give meaning to the message. Clearly, a message can only be decoded if the receiver is actually exposed to the message. Communication Delivery: Communication takes place in the form of a message that is exchanged between a source and receiver. A message can be shaped using one or a combination of sensory stimuli that work together to convey meaning that meets the objectives of the sender. The sender uses a transmission medium to send the message. In marketing the medium may include the use of different media outlets (e.g., Internet, television, radio, print), promotion-only outlets (e.g., postal mail, billboards), and person-to-person contact (e.g., salespeople). Additionally, communication can be improved if there is a two-way flow of information in the form of a feedback channel. This occurs if the message receiver is able to respond, often quickly, to the message source. In this way, the original message receiver now becomes the message source and the communication process begins again. Obstacles to Effective Communication While a message source may be able to deliver a message through a transmission medium, there are many potential obstacles to the message successfully reaching the receiver the way the sender intends. The potential obstacles that may affect good communication include: Poor Encoding – This occurs when the message source fails to create the right sensory stimuli to meet the objectives of the message. For instance, in person-to-person communication, verbally phrasing words poorly so the intended communication is not what is actually said is the
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result of poor encoding. Poor encoding is also seen in advertisements that are difficult for the intended audience to understand, such as words or symbols that lack meaning or, worse, have totally different meanings within a certain cultural groups. This often occurs when marketers use the same advertising message across many different countries. Differences due to translation or cultural understanding can result in the message receiver having a different frame of reference for how to interpret words, symbols, sounds, etc. This may lead the message receiver to decode the meaning of the message in a different way than was intended by the message sender. Poor Decoding – This refers to a message receiver’s error in processing the message so that the meaning given to the received message is not what the source intended. This differs from poor encoding when it is clear, through comparative analysis with other receivers, that a particular receiver perceived a message differently from others and from what the message source intended. Clearly, as we noted above, if the receiver’s frame of reference is different (e.g., meaning of words are different) then decoding problems can occur. More likely, when it comes to marketing promotions, decoding errors occur due to personal or psychological factors, such as not paying attention to a full television advertisement, driving too quickly past a billboard, or allowing one’s mind to wonder while talking to a salesperson. Medium Failure – Sometimes communication channels break down and end up sending out weak or faltering signals. Other times the wrong medium is used to communicate the message. For instance, trying to educate doctors about a new treatment for heart disease using television commercials that quickly flash highly detailed information is not going to be as effective as presenting this information in a print ad where doctors can take their time evaluating the information. Communication Noise – Noise in communication occurs when an outside force in someway affects delivery of the message. The most obvious example is when loud sounds block the receiver’s ability to hear a message. Nearly any distraction to the sender or the receiver can lead to communication noise. In advertising, many customers are overwhelmed (i.e., distracted) by the large number of advertisements they encountered each day. Such advertising clutter (i.e., noise) makes it difficult for advertisers to get their message through to desired customers. Keys to Effective Communication
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For marketers understanding how communication works can improve the delivery of their message. From the information just discussed, marketers should focus on the following to improve communication with their targeted audience: • Carefully Encode – Marketers should make sure the message they send is crafted in a way that will be interpreted by message receivers as intended. This means having a good understanding of how their audience interprets words, symbols, sounds and other stimuli used by marketers. • Allow Feedback – Encouraging the message receiver to provide feedback can greatly improve communication and help determine if a marketer’s message was decoded and interpreted properly. Feedback can be improved by providing easy-to-use options for responding, such as phone numbers, Internet chat, and email. • Reduce Noise – In many promotional situations the marketer has little control over interference with their message. However, there are a few instances where the marketer can proactively lower the noise level. For instance, salespeople can be trained to reduce noise by employing techniques that limit customer distractions, such as scheduling meetings during non-busy times or by inviting potential customers to an environment that offers fewer distractions, such as a conference facility. Additionally, advertising can be developed in ways that separates the marketer’s ad from others, including the use of white space in magazine ads. • Choose Right Audience – Targeting the right message receiver will go a long way to improving a marketer’s ability to promote their products. Messages are much more likely to be received and appropriately decoded by those who have an interest in the content of the message. Characteristics of Different Promotions The different types of promotion options available to a marketer, it is useful to gain an understanding of the features that set different options apart. For our discussion we isolate seven characteristics on which each promotional option can be judged. While these characteristics are widely understood as being important in evaluating the effectiveness of each type of promotion, they are by no means the only criteria used for evaluation. In fact, as new promotional methods emerge the criteria for evaluating promotional methods will likely change. 252
The following characteristics of a promotional method: 1. Intended Audience: Mass vs. Targeted 2. Payment Model: Paid vs. Non-Paid 3. Interaction Type: Personal vs. Non-Personal 4. Message Flow: One-Way vs. Two-Way 5. Demand Creation: Quick vs. Lagging 6. Message Control 7. Message Credibility 8. Effective Cost of Promotion 1. Intended Audience: Mass Promotion vs. Targeted Promotion Promotions can be categorized based on the intended coverage of a single promotional message. For instance, a single television advertisement for a major sporting event, such as the Super Bowl, World Cup or Olympics, could be seen by millions of viewers at the same time. Such mass promotion, intended to reach as many people as possible, has been a mainstay of marketers’ promotional efforts for a long time. Unfortunately, while mass promotions are delivered to a large number of people, the actual number that fall within the marketer’s target market may be small. Because of this, many who use mass promotion techniques find it to be an inefficient way to reach desired customers. Instead, today’s marketers are turning to newer techniques designed to focus promotional delivery to only those with a high probability of being in the marketer’s target market. For example, Goggle, Yahoo and other Internet search engines employ methods for delivering highly targeted ads to customers as they enter search terms. The assumption made by advertisers is that customers who enter search terms are interested in the information they have entered, especially if they are searching by entering detailed search strings (e.g., phrases rather than a single word). Following this logic, advertisers are much more likely to have their ads displayed to customers within their target market and, thus, receive a higher return on their promotional investment. The movement to highly targeted promotions has gained tremendous traction in recent years and, as new and improved targeting methods are introduced, its importance will continue to grow. 2. Payment Model: Paid Promotion vs. Non-Paid Promotion Most efforts to promote products require marketers to make direct payment to the medium that delivers the message. For instance, a company must pay a magazine publisher to advertise in the magazine. However, there are several forms of promotion that do not involve direct payment in order to distribute a promotional message. While not
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necessarily “free” since there may be indirect costs involved, the ability to have a product promoted without making direct payment to the medium can be a viable alternative to expensive promotion options. 3. Interaction Type: Personal vs. Non-Personal Promotions involving real people communicating with other people are considered personal promotion. While salespeople are a common and well understood type of personal promotion, another type of promotion, called controlled word-of-mouth promotion (a.k.a., buzz marketing), is emerging as a form of personal promotion. Unlike salespeople who attempt to obtain an order from customers, controlled word-of-mouth promotion uses real people to help spread information about a product but is not designed to directly elicit orders. One key advantage personal promotions have is the ability for the message sender to adjust the message as they gain feedback from message receivers (i.e., two-way communication). So if a customer does not understand something in the initial message (e.g., doesn’t fully understand how the product works) the person delivering the message can adjust the promotion to address questions or concerns. Many non-personal forms of promotion, such as a radio advertisement, are inflexible, at least in the shortterm, and cannot be easily adjusted to address questions that arise by the audience experiencing the ad. 4. Message Flow: One-Way vs. Two-Way Communication Promotions can be classified based on whether the message source enables the message receiver to respond with immediate feedback. Such feedback can then be followed with further information exchange between both parties. Most efforts at mass promotion, such as television advertising, offer only a one-way information flow that does not allow for easy response by the message receiver. However, many targeted promotions, such as using a sales force to promote products, allow message recipients to respond immediately to information from the message sender. 5. Demand Creation: Quick vs. Lagging The success of promotional activity may not always be measured by comparing spending to an increase in product sales since marketers may use promotion to achieve other objectives. However, when a marketer is looking to increase demand, certain promotional activities offer advantages in turning exposure to promotion into a quick increase in demand. In general, these activities are most effective when customers are offered an incentive to make the purchase either in a monetary way (e.g., save money) or
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in psychological way (e.g., improves customer’s perceived group role or status level). 6. Message Control Most promotions are controlled by the marketer who encodes the message (or hires specialists such as advertising agencies to create the promotion) and then pays to have the message delivered. However, no marketer can totally control how the news media, customers or others talk about a company or its products. Reporters for magazines, newspaper and websites, as well as posters to Internet forums may discuss a company’s products in ways that can benefit or hinder a company’s marketing efforts. This is particularly true with non-paid promotions where a marketer is looking to obtain a free “mention” by an influential message medium (e.g., newspaper article). 7. Message Credibility The perceived control of the message can influence the target market’s perception of message credibility. For example, many customers viewing a comparative advertisement in which a product is shown to be superior to a competitor’s product may be skeptical about the claims since the company with the superior product is paying for the advertisement. Yet, if the same comparison is mentioned in a newspaper article it may be more favorably viewed since readers may perceive the author of the story has possessing an unbiased point-of-view. 8. Cost Effectiveness Promotional cost is measured in several different ways though the most useful are measured in terms of cost-perimpression (CPI), cost-per-targeted impression (CPTI), and cost-per-action (CPA). The CPI metric relates to how many people are exposed to a promotion in relation to the cost of the promotion. A national or international television advertisement, while expensive to create and broadcast, actually produces a very low CPI given how many people are exposed to the ad. Yet, a low CPI can be misleading if a large percentage of the promotion’s audience is not within the marketer’s target market, in which case the CPTI may be a better metric for gauging promotion effectiveness. The CPTI approach looks at what percentage of an audience is within the marketer’s customer group and, thus, legitimate targets for the promotion. Clearly, CPTI is higher than CPI, but it offers a better indication of how much promotion is reaching targeted customers.
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An even more effective way to evaluate promotional costs is through the cost-per-action metric. With CPA the marketer evaluates how many people actually respond to a promotion. Response may be measured by examining purchase activity, number of phone inquiries, website traffic, clicks on advertisements, and other means within a short time after the promotional message was delivered. Unfortunately, measuring CPA is not always easy and tying it directly to a specific promotion can also be difficult. For example, a customer who purchases a snack product may have first learned about the snack product several weeks before from a television advertisement. The fact that it took the customer several weeks to make the purchase does not mean the advertisement was not effective in generating sales, though if the CPA was measured within a day or two after the ad was broadcast this person’s action would not have been counted.. With the growing trend to more targeted promotions, especially those delivered through the Internet, combined with the development of sophisticated customer tracking techniques, the ability to compare promotion to actual customer activity is bound to one day be the dominant method for measuring promotional effectiveness. Types of Promotion – Promotion Mix Marketers have at their disposal four major methods of promotion. Taken together these comprise the promotion mix. In this section a basic definition of each method is offered while in the next section a comparison of each method based on the characteristics of promotion is presented. • Advertising – Involves non-personal mostly paid promotions often using mass media outlets to deliver the marketer’s message. While historically advertising has involved one-way communication with little feedback opportunity for the customer experiencing the advertisement, the advent of computer technology and, in particular, the Internet has increased the options that allow customers to provide quick feedback. • Sales Promotion – Involves the use of special shortterm techniques, often in the form of incentives, to encourage customers to respond or undertake some activity. For instance, the use of retail coupons with expiration dates requires customers to act while the incentive is still valid. • Public Relations – Also referred to as publicity, this type of promotion uses third-party sources, and 256
particularly the news media, to offer a favorable mention of the marketer’s company or product without direct payment to the publisher of the information. • Personal Selling – As the name implies, this form of promotion involves personal contact between company representatives and those who have a role in purchase decisions (e.g., make the decision, such as consumers, or have an influence on a decision, such as members of a company buying center). Often this occurs face-toface or via telephone, though newer technologies allow this to occur online via video conferencing or text chat. Promotion Summary Table The table below compares each of the promotion mix options on the eight key promotional characteristics. The summary should be viewed only as a general guide since promotion techniques are continually evolving and how each technique is compared on characteristics is subject to change.
Characteristics Directed Coverage Message Flow Payment Model Interaction Type Demand Stimulation Message Control Message Credibility Cost of Promotion Advertising mass & targeted one & two-way paid limited non-paid non-personal lagging good low-medium CPI - Low CPTI - Varies CPA - Varies Sales Promotion mass & targeted one & two-way paid personal & non-personal quick good low-medium CPI - Medium CPTI - Varies CPA - Varies Public Relations mass one-way non-paid non-personal lagging poor high CPI - None CPTI - None CPA - None Personal Selling targeted two-way paid personal quick very good medium-high CPI - High CPTI - High CPA - High
Factors Affecting Promotions Choice With four promotional methods to choose from how does the marketer determine which ones to use? The selection can be complicated by company and marketing decision issues. • Company Issues: • Promotional Objective – As we discussed, there are several different objectives a marketer may pursue with their promotional strategy. Each type of promotion offers different advantages in terms of helping the marketer reach their objectives. For instance, if the objective of a software manufacturer is to get customers to try a product, the use of sales promotion, such as offering the software in a free downloadable form, may yield better results than promoting through Internet advertising. • Availability of Resources – The amount of money and other resources that can be directed to promotion affects the marketer’s choice of promotional methods. 257
Marketers with large promotional budgets may be able to spread spending among all promotion options while marketers with limited funds must be more selective on the promotion techniques they use. • Company Philosophy – Some companies follow a philosophy that dictates where most promotional spending occurs. For instance, some companies follow the approach that all promotion should be done through salespeople while other companies prefer to focus attention on product development and hope word-ofmouth communication by satisfied customers helps to create interest in their product. Marketing Decision Issues: • Target Market – As one might expect, customer characteristics dictate how promotion is determined. Characteristics such as size, location and type of target markets affect how the marketer communicates with customers. For instance, for a small marketer serving business markets with customers widely dispersed, it may be very expensive to utilize a sales force versus using advertising. Product – Different products require different promotional approaches. For the consumer market, products falling into the convenience and shopping goods categories are likely to use mass market promotional approaches while higher-end specialty goods are likely to use personalized selling. Thus, products that are complex and take customers extended time to make a purchase decision may require personal selling rather than advertising. This is often the case with products targeted to the business market. Additionally, as we briefly discussed in Part 7: Managing Products and will later see when we discuss marketing strategy; products pass through different stages in the Product Life Cycle. As a product moves through these stages the product itself may evolve and also promotional objectives will change. This leads to different promotional mix decisions from one stage to the next. Distribution –Marketing organizations selling through channel partners can reach the final customer either directly using a pull promotion strategy or indirectly using a push promotional strategy. The pull strategy is so named since it creates demand for a product by promoting directly to the final customer in the hopes that their interest in the product will help “pull” 258
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more product through the distribution channel. This approach can be used when channel partners are hesitant about stocking a product unless they are assured of sufficient customer interest. The push strategy uses promotion to encourage channel partners to stock and promote the product to their customers. The idea is that by offering incentives to channel members the marketer is encouraging their partners (e.g., wholesalers, retailers) to “push” the product down the channel and into customer’s hands. Most large consumer products companies will use both approaches while smaller firm may find one approach works better. • Price – The higher the price of a product the more likely a marketer will need to engage in personalized promotion compared to lower priced products that can be marketed using mass promotion. Advertising What is advertising? Advertising is a non-personal form of promotion that is delivered through selected media outlets that, under most circumstances, require the marketer to pay for message placement. Advertising has long been viewed as a method of mass promotion in that a single message can reach a large number of people. But, this mass promotion approach presents problems since many exposed to an advertising message may not be within the marketer’s target market, and thus, may be an inefficient use of promotional funds. However, this is changing as new advertising technologies and the emergence of new media outlets offer more options for targeted advertising. Advertising also has a history of being considered a oneway form of marketing communication where the message receiver (i.e., target market) is not in position to immediately respond to the message (e.g., seek more information). This too is changing. For example, in the next few years technologies will be readily available to enable a television viewer to click a button to request more details on a product seen on their favorite TV program. In fact, it is expected that over the next 10-20 years advertising will move away from a one-way communication model and become one that is highly interactive. Another characteristic that may change as advertising evolves is the view that advertising does not stimulate immediate demand for the product advertised. That is, customers cannot quickly purchase a product they see 259
advertised. But as more media outlets allow customers to interact with the messages being delivered the ability of advertising to quickly stimulate demand will improve. Importance of Advertising Spending on advertising is huge. One often quoted statistic by market research firm Zenith Opt media estimates that worldwide spending on advertising exceeds (US) $400 billion. This level of spending supports thousands of companies and millions of jobs. In fact, in many countries most media outlets, such as television, radio and newspapers, would not be in business without revenue generated through the sale of advertising. While worldwide advertising is an important contributor to economic growth, individual marketing organizations differ on the role advertising plays. For some organizations little advertising may be done, instead promotional money is spent on other promotion options such a personal selling through a sales team. For some smaller companies advertising may consist of occasional advertisement and on a very small scale, such as placing small ads in the classified section of a local newspaper. But most organizations, large and small, that rely on marketing to create customer interest are engaged in consistent use of advertising to help meet marketing objectives. This includes regularly developing advertising campaigns, which involve a series of decisions for planning, creating, delivering and evaluating an advertising effort. Managing Advertising Decisions Delivering an effective marketing message through advertising requires many different decisions as the marketer develops their advertising campaign. For small campaigns, that involve little creative effort, one or a few people may handle the bulk of the work. In fact, the Internet has made do-it-yourself advertising an easy to manage process and has especially empowered small businesses to manage their advertising decisions. As we will see, not only can small firms handle the creation and placement of advertisements that appear on the Internet, new services have even made it possible for a single person to create advertisements that run on local television. For instance, a company called Spot Runner allows users to select from a list of high-quality television ads that can be customized and then placed within local cable television programming. For larger campaigns the skills needed to make sound advertising decisions can be quite varied and may not be
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easily handled by a single person. While larger companies manage some advertising activities within the company, they are more likely to rely on the assistance of advertising professionals, such as those found at advertising agencies, to help bring their advertising campaign to market. Advertising Agency Functions Professionals at advertising agencies and other advertising organizations offer a number of functions including: • Account Management – Within an advertising agency the account manager or account executive is tasked with handling all major decisions related to a specific client. These responsibilities include locating and negotiating to acquire clients. Once the client has agreed to work with the agency, the account manager works closely with the client to develop an advertising strategy. For very large clients, such as large consumer products companies, an advertising agency may assign an account manager to work full-time with only one client and, possibly, with only one of the client’s product lines. For smaller accounts an account manager may simultaneously manage several different, though non-competing, accounts. • Creative Team –The principle role of account managers is to manage the overall advertising campaign for a client, which often includes delegating selective tasks to specialists. For large accounts one task account managers routinely delegate involves generating ideas, designing concepts and creating the final advertisement, which generally becomes the responsibility of the agency’s creative team. An agency’s creative team consists of specialists in graphic design, film and audio production, copywriting, computer programming, and much more. • Researchers – Full-service advertising agencies employ market researchers who assess a client’s market situation, including understanding customers and competitors, and also are used to test creative ideas. For instance, in the early stages of an advertising campaign researchers may run focus group sessions with selected members of the client’s target market in order to get their reaction to several advertising concepts. Researchers are also used following the completion of an advertising campaign to measure whether the campaign reached its objectives. • Media Planners – Once an advertisement is created, it must be placed through an appropriate advertising media. Each advertising media, of which there are 261
thousands, has its own unique methods for accepting advertisements, such as different advertising cost structures (i.e., what it costs marketers to place an ad), different requirements for accepting ad designs (e.g., size of ad), different ways placements can be purchased (e.g., direct contact with media or through third-party seller), and different time schedules (i.e., when ad will be run). Understanding the nuances of different media is the role of a media planner, who looks for the best media match for a client and also negotiates the best deals. Types of Advertising If you ask most people what is meant by “type” of advertising, invariably they will respond by defining it in terms of how it is delivered (e.g., television ad, radio ad, etc.). But in marketing, type of advertising refers to the primary “focus” of the message being sent and falls into one of the following four categories: Product-Oriented Advertising Most advertising spending is directed toward the promotion of a specific good, service or idea, what we have collectively labeled as an organization’s product. In most cases the goal of product advertising is to clearly promote a specific product to a targeted audience. Marketers can accomplish this in several ways from a low-key approach that simply provides basic information about a product (informative advertising) to blatant appeals that try to convince customers to purchase a product (persuasive advertising) that may include direct comparisons between the marketer’s product and its competitor’s offerings (comparative advertising). However, sometimes marketers intentionally produce product advertising where the target audience cannot readily see a connection to a specific product. Marketers of new products may follow this “teaser” approach in advance of a new product introduction to prepare the market for the product. For instance, one week before the launch of a new product a marketer may air a television advertisement proclaiming “After next week the world will never be the same” but do so without any mention of a product or even the company behind the ad. The goal is to create curiosity in the market and interest when the product is launched Image Advertising Image advertising is undertaken primarily to enhance an organization’s perceived importance to a target market. Image advertising does not focus on specific products as much as it presents what an organization has to offer. In
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these types of ads, if products are mentioned it is within the context of “what we do” rather than a message touting the benefits of a specific product. Image advertising is often used in situations where an organization needs to educate the targeted audience on some issue. For instance, image advertising may be used in situations where a merger has occurred between two companies and the newly formed company has taken on a new name, or if a company has received recent negative publicity and the company wants to let the market know that they are about much more than this one issue. Advocacy Advertising Organizations also use advertising to send a message intended to influence a targeted audience. In most cases there is an underlying benefit sought by an organization when they engage in advocacy advertising. For instance, an organization may take a stand on a political issue which they feel could negatively impact the organization and will target advertisements to voice their position on the issue. Public Service Advertising In some countries, not-for-profit organizations are permitted to run advertisements through certain media outlets free-of-charge if the message contained in the ad concerns an issue viewed as for the “greater good” of society. For instance, ads directed at social causes, such as teen-age smoking, illegal drug use and mental illness may run on television, radio and other media without cost to organizations sponsoring the advertisement. Advertising Trends Like most areas of marketing, advertising is changing rapidly. Some argue that change has affected advertising more than any other marketing function. The more important trends in advertising include: Digital Convergence While many different media outlets are available for communicating with customers, the ability to distinguish between outlets is becoming more difficult due to the convergence of different media types. In advertising convergence, and more appropriately digital convergence, refers to a growing trend for using computer technology to deliver media programming and information. Convergence allows one media outlet to take advantage of features and benefits offered through other media outlets. For instance, in many areas around the world television programming is now delivered digitally via cable, telephone or satellite hookup. This delivery method uses the same
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principles of information delivery that is used to allow someone to connect the Internet. The convergence of television and Internet opens many potential opportunities for marketers to target customers in ways not available with traditional television advertising. For example, technology may allow ads delivered to one household to be different than ads delivered to a neighbor’s television even though both households are watching the same program. But convergence is not limited to just television. Many media outlets are experiencing convergence as can be seen with print publications that now have a strong web presence. The future holds even more convergence opportunities. These include outdoor billboards that alter displays as cars containing geographic positioning systems (GPS) and other recognizable factors (e.g., GPS tied to satellite radio) pass by or direct mail postcards that carry a different message based on data that matches a household’s address with television viewing habits. Focus on Audience Tracking The movement to digital convergence provides marketers with the basic resources needed to monitor user’s activity, namely, digital data. Any media outlet that relies on computer technology to manage the flow of information does so using electronic signals that eventually form computer data. In simple form, electronic data is represented by either an “on” or “off” electronic signal. In computer language this is further represented by two numbers “0” and “1” and, consequently, is known as digital information. All digital information can be stored and later evaluated. For media outlets delivering information in digital form, the potential exists for greater tracking and matching this with information about the person receiving the digital data. And tracking does not stop with what is delivered; it also works with information being sent from the customer. For instance, as we noted earlier, by clicking on their television screen viewers will soon be able to instantly receive information about products they saw while watching a television show. This activity can be tracked then used in future marketing efforts. Audience Concern with Tracking While media convergence offers marketers more options for tracking response to advertisements, such activity also raises ethical and legal concerns. Many consumers are not pleased to learn their activities are being monitored when they engage a media outlet. Yet consider the following examples of how marketers are tracking users:
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Television Viewing – As we noted, the advent of digitally delivered television allows cable, telephone and satellite providers to track user activity through the set-top boxes connected to a subscriber’s television. Future innovation will make the user television experience even more interactive and, consequently, open to even more tracking. • Television recording – The days of television videotape recording are quickly coming to an end, replaced by recording using computer technology. A digital video recorder (DVR), such as TiVo, can track users recording habits and, based on a viewer’s past activity, make suggestions for programs they may want to record. Additionally, advertising services can program the DVR to insert special advertisements within a program targeted to a particular viewer. • Internet Spy ware – Downloading entertainment from the Internet, such as games, video and software, may contain a hidden surprise – spy ware. Spy ware is a special program that runs in the background of a user’s computer and regularly forwards information over the Internet to the spy ware’s company. In some cases spy ware keeps track of websites the user has visited. The information is then used to gain an understanding of the user’s interests, which then results in delivery of special ads when a user visits a certain site. Ad Skipping and Blocking As noted above, television recording devices offer marketers tremendous insight into viewers’ habits and behavior. Yet from the consumer side, the DVR is changing how people view television programs by allowing them to watch programming at a time that is most convenient for them. Viewer convenience is not the only advantage of the DVR. The other main reason consumers are attracted to the DVR is their ability to quickly skip over commercials. Of course this presents major issues for advertisers who are paying for advertisements. As more DVR devices with ad skipping or even ad blocking features are adopted by mainstream consumers the advertiser’s concern with whether they are getting the best value for the advertising money becomes a bigger issue. Advertisers who feel frustrated with television ad-skipping may opt to invest their promotional funds in other media outlets where consumers are more likely to be exposed to an advertisement. Changing Media Choices 265
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There is a major cultural shift occurring in how people use media for entertainment, news and information. Many traditional media outlets, such as newspapers and major commercial television networks, are seeing their customer base eroded by the emergence of new media outlets. The Internet has become the major driver of this change. In particular, a number of important applications tied to the Internet are creating new media outlets and drawing the attention of many, mostly younger, consumers. Examples include: • Pod casting Audio – This involves delivering programming via downloadable online audio that can be listened to on music players, such as Apple’s iPod. Many news websites and even other information site, such as blogs, offer free downloadable audio programming. • Pod casting Video – While audio downloading has been available for some time, the downloading of video to small, handheld devices, including cell phones, is in its infancy. Many television networks are now experimenting with making their programming available for download, albeit, for a fee. • RSS Feeds – This is an Internet information distribution technology that allows for news and content to be delivered instantly to anyone who has signed up for delivery. Clearly those registering for RSS feeds represent a highly targeted market since they requested the content. • Networked Gaming – While gaming systems have been around for some time, gaming systems attached to the Internet for group play is relatively new and becoming more practical as more people move to faster Internet connections. This type of setup will soon allow marketers to insert special content, such as advertising, within game play. For marketers these new technologies should be monitored closely as they become accepted alternatives to traditional media outlets. While these technologies are currently not major outlets for advertising, they may soon offer such opportunity. As these technologies gain momentum and move into mainstream acceptance marketers may need to consider shifting advertising spending. Marketers should also be aware that new media outlets will continue to emerge as new applications are developed. The bottom line for marketers is they must stay informed of new developments and understand how their customers are using these in ways that may offer advertising opportunities. 266
Managing the Advertising Campaign Whether a marketer employs a professional advertising agency to handle its advertising campaign or chooses to undertake all advertising tasks on its own, a successful campaign requires a number of important decisions including: • Setting the Advertising Objective • Setting the Advertising Budget • Creating a Message • Selecting Media for Message Delivery • Evaluating Campaign Results For major consumer products companies that spend large sums to promote their products each of these decisions will be intensely evaluated. On the other hand, smaller companies with limited budgets may be forced to focus what little money they have on only one key decision, such as selecting media, and give less attention to other areas. In either case, knowledge of all advertising campaign decisions is important and should be well understood by all marketers. Setting the Advertising Objective Promotion Decisions, marketing promotion, which includes advertising, can be used to address several broad objectives including: building product awareness, creating interest, providing information, stimulating demand and reinforcing the brand. To achieve one or more of these objectives, advertising is used to send a message containing information about some element of the marketer’s offerings. For example: • Message About Product – Details about the product play a prominent role in advertising for new and existing products. In fact, a very large percentage of product-oriented advertising includes some mention of features and benefits offered by the marketer’s product. Advertising can be used to inform customers of changes that take place in existing products. For instance, if a beverage company has purchased the brands of another company resulting in a brand name change, an advertising message may stress “New Name but Same Great Taste”. • Message About Price – Companies that regularly engage in price adjustments, such as running short term sales (i.e., price markdown), can use advertising to let the market know of price reductions. Alternatively, advertising can be used to encourage customers to
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purchase now before a scheduled price increase takes place. • Message About Other Promotions – Advertising often works hand-in-hand with other promotional mix items. For instance, special sales promotions, such as contests, may be announced within an advertisement. Also, advertising can help salespeople gain access to new accounts if the advertising precedes the salesperson’s attempt to gain an appointment with a prospective buyer. This may be especially effective for a company entering a new market where advertising may help reduce the uncertainty a buyer has about a new company. • Message About Distribution – Within distribution channels, advertising can help expand channel options for a marketer by making distributors aware of the marketer’s offerings. Also, advertising can be used to let customers know locations where a product can be purchased. Setting the Advertising Budget Setting an advertising objective is easy, but achieving the objective requires a well-thought out strategy. One key factor affecting the strategy used to achieve advertising objectives is how much money an organization has to spend. The funds designated for advertising make up the advertising budget and it reflects the amount an organization is willing (i.e., approved by high-level management) to commit to achieve its advertising objectives. Organizations use several methods for determining advertising budgets including: • Percentage of Sales – Under this approach advertising spending is set based on either a percentage of previous sales or a percentage of forecasted sales. For example, an organization may set next year’s advertising budget at 10% of this year’s sales level. One problem with this approach is that the budget is based on what has already happened and not what is expected to occur. If the overall market grows rapidly in the following year, the 10% level from the previous year may be well below what is necessary for the company to maintain or increase its market share. Alternatively, companies may consider allocating advertising funds based on a percentage of forecasted sales. In this way advertising is viewed as a driver of future sales and spending on advertising is linked directly to meeting future sales forecasts. However, since future sales are not guaranteed, the actual 268
percentage spent may be considerably higher than expected if the sales forecast is greater than what actually occurs. • What is Affordable – Many smaller companies find spending of any kind to be constraining. In this situation, advertising may be just one of several tightly allocated spending areas and, thus, the level spent on advertising may vary over time. For these companies, advertising may only occur when extra funds are available. • Best Guess – Companies entering new markets often lack knowledge of how much advertising is needed to achieve their objectives. In cases where the market is not well understood, marketers may rely on their best judgment (i.e., executive’s experience) of what the advertising budget should be. Selecting Media Outlets With an objective and a budget in place, the advertising campaign will next need to focus on developing the message. However, before effort is placed in developing a message the marketer must first determine which media outlets will be used to deliver their message since the choice of media outlets guides the type of message that can be created and how frequently the message will be delivered. An advertising message can be delivered via a large number of media outlets. These range from traditional outlets, such as print publications, radio and television, to newly emerging outlets, such as the Internet and mobile devices. However, each media outlet possess different characteristics and, thus, offer marketers different advantages and disadvantages. The characteristics by which different media outlets can be assessed include the following seven factors: • Creative Options • Creative Cost • Media Market Reach • Message Placement Cost • Length of Exposure • Advertising Clutter • Response Tracking Creative Options An advertisement has the potential to appeal to four senses – sight, sound, smell and touch. (It should be noted that promotion can also appeal to the sense of taste but generally these efforts generally fall under the category of sales promotion which we will discuss in a later 269
tutorial.) However, not all advertising media have the ability to deliver multi-sensory messages. Traditional radio, for example, is limited to delivering audio messages while roadside billboards offer only visual appeal. Additionally, some media may place limits on when particular options can be used. For instance, some search engines or websites may only accept graphical-style ads, such as images, if these conform to certain large dimensions and limit small advertising to text-only ads. Creative Cost The media type chosen to deliver a marketer’s message also impacts the cost of creating the message. For media outlets that deliver a multi-sensory experience (e.g., television and Internet for sight and sound; print publications for sight, touch and smell) creative cost can be significantly higher than for media targeting a single sensory experience. But creative costs are also affected by the expectation of quality for the media that delivers the message. In fact, media outlets may set minimal production standards for advertisements and reject ads that do not meet these standards. Television networks, for example, may set high production quality levels for advertisements they deliver. Achieving these standards requires expensive equipment and high cost labor, which may not be feasible for small businesses. Conversely, creating a simple text only Internet advertisement requires very little cost that almost anyone is capable of creating. Media Market Reach The number of customers exposed to a single promotional effort within a target market is considered the reach of a promotion. Some forms of advertising, such as television advertising, offer an extensive reach, while a single roadside billboard on a lightly traveled road offers very limited reach. Market reach can be measured along two dimensions: 1) channels served and, 2) geographic scope of a media outlet. • Channels Served - This dimension relates to whether a media outlet is effective in reaching the members within the marketer’s channel of distribution. Channels can be classified as: • Consumer Channel – Does the media outlet reach the final consumer market targeted by the marketer? • Trade Channel – Does the media outlet reach a marketer’s channel partners who help distribute their product?
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Business-to-Business – Does the media outlet reach customers in the business market targeted by the marketer? • Geographic Scope – This dimension defines the geographic breadth of the channels served and includes: • International – Does the media outlet have multicountry distribution? • National – Does the media outlet cover an entire country? • Regional – Does the media outlet have distribution across multiple geographic regions such as counties, states, provinces, territories, etc.? • Local – Does the media outlet primarily serve a limited geographic area? • Individual – Does the media outlet offer individual customer targeting? Message Placement Cost Creative development is one of two major spending considerations for advertising. The other cost is for media placement; the purchase of ad time, space or location with media outlets that deliver the message. Advertising placement costs vary widely from very small amounts for certain online advertisements to exorbitant fees for advertising on major television programs. For example, in the United States the highest cost for advertising placement occurs with television ads shown during the National Football League’s Super Bowl championship game where ad rates for a single 30-second advertisement exceed (US) $2.5 million. By contrast, ads placed through online search engines may cost less than (US) $1 dollar. Media outlets set placement cost using several factors though the most important are determined by audience size, audience type and an advertisement’s production characteristics: • Audience Size – Refers to the number of people who experience the media outlet during a particular time period. For example, for television outlets audience size is measured in terms of number of program viewers, for print publications audience is measured by number of readers, and for websites audience is measured by number of visitors. In general, the more people experiencing a media outlet, the more the outlet can charge for ads. However, actual measurement of the popularity of media outlets is complicated by many factors to the point where the 271
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media outlets are rarely trusted to give accurate figures reflecting their audience. Today nearly all media outlets rely on third-party audit organizations to measure audiences and most marketers rely on these auditors to determine whether the cost of placement is justified given the audited audience size. • Audience Type – As we have discussed many times in the Principles of Marketing tutorial, the key to marketing is aligning marketing decisions to satisfy the needs of a target market. A well-defined target market is critical to successful marketing and vital to a successful advertising campaign. When choosing a media outlet, selection is evaluated based on the outlet’s customer profile (i.e., viewers, readers, website visitors) and whether these match the characteristics sought by the marketer’s desired target market. The more selectively targeted the audience, the more valuable this audience is to advertisers since with targeted advertising promotional funds are being spent on those with the highest potential to respond to the advertiser’s message. The result is that media outlets, whose audience shares very similar characteristics (e.g., age, education level, political views, etc.), are in a position to charge higher advertising rates than media outlets that do not appeal to such a targeted group. • Characteristics of the Advertisement – Media outlet also charge different rates based on creative characteristics of the message. Characteristics that create ad rate differences include: • Run Time (e.g., length of television or radio ads ) • Size (e.g., print ads size, billboard size) • Print Style (e.g., black-and-white vs. color) • Location in Media (e.g., back magazine cover vs. inside pages) Length of Exposure Some products require customers be exposed to just a little bit of information in order to build customer interest. For example, the features and benefits of a new snack food can be explained in a short period of time using television or radio commercials. However, complicated products need to present more information for customers to fully understand the product. Consequently, advertisers of these products well seek media formats that allot more time to deliver the message.
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Media outlets vary in how much exposure they offer to their audience. Magazines and other publications provide opportunities for longer exposure times since these media types can be retained by the audience (i.e., keep old magazines) while exposure on television and radio are generally limited to the time the ad was broadcast. Advertising Clutter In order to increase revenue, media outlets often include a large number of ads within a certain time, space or location. For instance, television programs may contain many ads inserted during the scheduled run-time of a program. A large number of advertisements create an environment of advertising clutter, which makes it difficult for viewers to recognize and remember particular advertisements. To break through the clutter advertisers may be required to increase the frequency of their advertising efforts (i.e., run more ads). Yet greater advertising frequency increases advertising expense. Alternatively, advertisers may seek opportunities that offer less clutter where an ad has a better chance of standing out from others. This can be seen with online downloads (e.g., pod casts) of sports and news programming where a 5-10 minute story will be presented with a single 30-60 second ad. Response Tracking Advertising, marketers are embracing new technologies that make it easier to track audience response to advertisements. Newer media developed using Internet technology offer effective methods for tracking audience response compared to traditional media. But Internet-media are not alone in providing response tracking. Other advertising outlets, such as advertising by mail and television infomercial programming, also provide useful measures of audience reaction. Type of Media Outlets While just a few years ago marketers needed to be aware of only a few media outlets, today’s marketers must be wellversed in a wide range of media options. The reason for the growing number of media outlets lays with advances in communication technology, in particular, the Internet. The numbers of media outlets will continue to grow as new technologies emerge. Next we provide an overview of 10 leading media outlets: 1. Television 2. Radio 3. Print Publications 4. Internet
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5. Direct Mail 6. Signage 7. Product Placement 8. Mobile Devices 9. Sponsorships 10. Others Television Advertising Television advertising offers the benefit of reaching large numbers in a single exposure. Yet because it is a mass medium capable of being seen by nearly anyone, television lacks the ability to deliver an advertisement to highly targeted customers compared to other media outlets. Television networks are attempting to improve their targeting efforts. In particular, networks operating in the pay-to-access arena, such as those with channels on cable and satellite television, are introducing more narrowly themed programming (i.e., TV shows geared to specific interest groups) designed to appeal to selective audiences. However, television remains an option that is best for products that targeted to a broad market. The geographic scope of television advertising ranges from advertising within a localized geographic area using feebased services, such as cable and fiber optic services, to national coverage using broadcast programming. Television advertising, once viewed as the pillar of advertising media outlets, is facing numerous challenges from alternative media (e.g., Internet) and the invasion of technology devices, such as digital video recorders that have empowered customers to be more selective on the advertisements they view. Additionally, television lacks effective response tracking which has led many marketers to investigate other media that offer stronger tracking options. Radio Advertising Promotion through radio has been a viable advertising option for over 80 years. Radio advertising is mostly local to the broadcast range of a radio station, however, at least three options exist that offer national and potentially international coverage. First, in many countries there are radio networks that use many geographically distinct stations to broadcast simultaneously. In the United States such networks as Disney (children’s programming) and ESPN (sports programming) broadcast nationally either through a group of company-owned stations or through a syndication arrangement (i.e., business agreement) with partner stations. Second, within the last few years the emergence of radio
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programming delivered via satellite has become an option for national advertising. Finally, the potential for national and international advertising may become more attractive as radio stations allow their signals to be broadcast over the Internet. In many ways radio suffers the same problems as television, namely, a mass medium that is not highly targeted and offers little opportunity to track responses. But unlike television, radio presents the additional disadvantage of limiting advertisers to audio-only advertising. For some products advertising without visual support is not effective. Print Publication Advertising Print publications such as magazines, newspapers and Special Issue publications offer advertising opportunities at all geographic levels. Magazines, especially those that target specific niche or specialized interest areas, are more narrowly targeted compared to broadcast media. Additionally, magazines offer the option of allowing marketers to present their message using high quality imagery (e.g., full color) and can also offer touch and scent experiences (e.g., perfume). Newspapers have also incorporated color advertisements, though their main advantage rests with their ability to target local markets. Special Issue publications can offer very selective targeting since these often focus on extremely narrow topics (e.g., auto buying guide, tour guides, college and university ratings, etc.). Internet Advertising The fastest growing media outlet for advertising is the Internet. Compared to spending in other media, the rate of spending for Internet advertising is experiencing tremendous growth. However, total spending for Internet advertising remains relatively small compared to other media. Yet, while Internet advertising is still a small player, its influence continues to expand and each year more major marketers shift a larger portion of their promotional budget to this medium. Two key reasons for this shift rest with the Internet’s ability to: 1) narrowly target an advertising message and, 2) track user response to the advertiser’s message. The Internet offers many advertising options with messages delivered through websites or by email. • Website Advertising - Advertising tied to a user’s visit to a website accounts for the largest spending on Internet advertising. For marketers, website advertising offers many options in terms of: 275
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Creative Types – Internet advertising allows for a large variety of creative types including text-only, image-only, multimedia (e.g., video) and advanced interactive (e.g., advertisement in the form of online games). Size – In addition to a large number of creative types, Internet advertisements can be delivered in a number of different sizes (measured in screen pixels) ranging from full screen to small square ads that are only a few pixels in size. The most popular Internet ad sizes include banner ads (468 x 60 pixels), leader board (728 x 90 pixels) and skyscraper (160 x 600 pixels). Placement – The delivery of an Internet advertisement can occur in many ways including fixed placement in a certain website location (e.g., top of page), processed placement where the ad is delivered based on user characteristics (e.g., entry of words in a search box, recognition of user via Internet tracking cookies), or on a separate webpage where the user may not see the ad until they leave a site or close their browser (e.g., pop-under). Delivery – When it comes to placing advertisements on websites marketers can, in some cases, negotiate with websites directly to place an ad on the site or marketers can place ads via a third-party advertising network, which has agreements to place ads on a large number of partner websites. Email Advertising – Using email to deliver an advertisement affords marketers the advantage of low distribution cost and potentially high reach. In situations where the marketer possesses a highly targeted list, response rates to email advertisements may be quite high. This is especially true if those on the list have agreed to receive email, a process known as “opt-in” marketing. Email advertisement can take the form of a regular email message or be presented within the context of more detailed content, such as an electronic newsletter. Delivery to a user’s email address can be viewed as either plain text or can look more like a website using web coding (i.e., HTML). However, as most people are aware, there is significant downside to email advertising due to highly publicized issues related to abuse (i.e., spam).
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Direct Mail This method of advertising uses postal and other delivery services to ship advertising materials, including postcards, letters, brochures, catalogs and flyers, to a physical address of targeted customers. Direct mail is most effective when it is designed in a way that makes it appear to be special to the customer. For instance, a marketer using direct mail can personalize mailings by including a message recipient’s name on the address label or by inserting their name within the content of marketer’s message. Direct mail can be a very cost-effective method of advertising, especially if mailings contain printed material. This is due to cost advantages obtained by printing in high volume since the majority of printing costs are realized when a printing machine is initially setup to run a print job and not the because of the quantity of material printed. Consequently, the total cost of printing 50,000 postcards is only slightly higher than printing 20,000 postcards but when the total cost is divided by the number of cards printed the cost per-card drops dramatically as more pieces are printed. Obviously there are other costs involved in direct mail, primarily postage expense. While direct mail can be seen as offering the benefit of a low cost-per-contact, the actual cost-per-impression can be quite high as large numbers of customers may discard the mailing before reading. This has led many to refer to direct mail as “junk mail” and due to the name some marketers view the approach as ineffective. However, direct mail, when well-targeted, can be an extremely effective promotional tool. Signage and Billboards The use of signs to communicate a marketer’s message places advertising in geographically identified areas in order to capture customer attention. The most obvious method of using signs is through billboards, which are generally located in high traffic areas. Outdoor billboards come in many sizes, though the most well-known are large structures located near transportation points intending to attract the interest of people traveling on roads or public transportation. Indoor billboards are often smaller than outdoor billboards and are designed to attract the attention of foot traffic (i.e., those moving past the sign). For example, smaller signage in airports, train terminals and large commercial office space fit this category.
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While billboards are the most obvious example of signage advertising, there are many other forms of signage advertising include: • Sky writing where airplanes use special chemicals to form words • Plane banners where large signs are pulled behind an airplane • Mobile billboards where signs are placed on vehicles, such as buses and cars, or even carried by people • Plastic bags used to protect newspapers delivered to homes • Advertisements attached to grocery carts Product Placement Advertising Product placement is an advertising approach that intentionally inserts products into entertainment programs such as movies, TV programs and video games. Placement can take several forms including: • visual imagery in which the product appears within the entertainment program • Actual product use by an actor in the program. • Words spoken by an actor that include the product name. Product placement is gaining acceptance among a growing number of marketers for two main reasons. First, in most cases the placement is subtle so as not to divert significant attention from the main content of the program or media outlet. This approach may lead the audience to believe the product was selected for inclusion by program producers and not by the marketer. This may heighten the credibility of the product in the minds of the audience since their perception, whether accurate or not, is that product was selected by an unbiased third-party. Second, as we discuss in Part 13: Advertising, entertainment programming, such as television, is converging with other media, particularly the Internet. In the future a viewer of a television program may be able to easily request information for products that appear in a program by simply pointing to the product on the screen. With the information they may get the option to purchase the product. As this technology emerges it is expected that product placement opportunities will become a powerful promotional option for many marketers. Mobile Device Advertising Handheld devices, such as cell phones, personal digital assistants (PDAs) and other wireless devices, make up the growing mobile device market. Such devices allow customers to stay informed, gather information and communicate with 278
others without being tied to a physical location. While the mobile device market is only beginning to become a viable advertising medium, it may soon offer significant opportunity for marketers to reach customers at anytime and anyplace. Also, with geographic positioning features included in newer mobile devices, the medium has the potential to provide marketers with the ability to target customers based on their geographic location. Currently, the most popular advertising delivery method to mobile devices is through plain text messaging, however, over the next few years multimedia advertisements are expected to become the dominant message format. Sponsorships A subtle method of advertising is an approach in which marketers pay, or offer resources and services, for the purpose of being seen as a supporter of an organization’s event, program or product offering (e.g., section of a website). Sponsorships are intended not to be viewed a blatant advertisement and in this way may be appealing for marketers looking to establish credibility with a particular target market. However, many sponsorship options lack the ability to tie spending directly to customer response. Additionally, the visibility of the sponsorship may be limited to relatively small mentions especially if the marketer is sharing sponsorship with many other organizations. Others • While the nine media outlets discussed above represent the overwhelming majority of advertising methods, there are several more including: • advertising using telephone recordings (e.g., political candidate’s messages) • advertising via fax machine (though there may be certain legal issues with this method) • advertising through inserted material in product packaging (e.g., inside credit card bill) • advertising imprinted on retail receipts (e.g., grocery store, cash machine) Creating a Message Marketing Communication, effective communication requires the message source to create (encoding) a message that can be interpreted (decoding) by the intended message receiver. In advertising, the act of creating a message is often considered the creative aspect of carrying out an advertising campaign. And because it is a creative
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process, the number of different ways a message can be generated is limited only by the imagination of those responsible for developing the message. When creating an advertising message the marketer must consider such issues as: • General Message Factors • Message Structure • Message Testing General Message Factors When developing the message the marketer must take into consideration several factors including: Characteristics of the Target Audience – The makeup of the target audience (e.g., age, location, attitudes, etc.) impacts what is conveyed in the message. Type of Media Used – The media outlet (e.g., television, print, Internet, etc.) used to deliver the message impacts the way a message will be created. Product Factors – Products that are highly complex require a different message than simpler products. Additionally, the target market’s familiarity with a product affects what is contained in a message. For instance, a new product attempting to gain awareness in the market will have a message that is much different than a product that is wellknown. Overall Advertising Objective – As mentioned, the objective of the advertising campaign can affect the type of ad that is designed. For example, an advertisement with the objective of stimulating immediate sales for an existing product will be different than an advertisement that seeks to build initial awareness of a new product. Message Structure Most advertising messages share common components within the message including: The Appeal – This refers to the underlying idea that captures the attention of a message receiver. Appeals can fall into such categories as emotional, fearful, humorous, and sexual. Value Proposition – The advertising message often contains a reason for customers to be interested in the product which often means the ad will emphasize the benefits obtained from using the product. Slogan – To help position the product in customer’s mind and distinguish it from competitors’ offerings, advertisements will contain a word or phrase that is repeated across several different messages and different media outlets. Message Testing 280
Before choosing a specific message marketers running large advertising campaigns will want to have confidence in their message by having potential members of the targeted audience provide feedback. The most popular method of testing advertising for the marketer (or their ad agency) is to conduct focus groups where several advertising messages are presented. On the Internet, advertising delivery technology allows for testing of ads by randomly exposing website visitors to different ads and then measuring their response. Evaluating Campaign Results The final step in an advertising campaign is to measure the results of carrying out the campaign. In most cases the results measured relate directly to the objectives the marketer is seeking to achieve with the campaign. Consequently, whether a campaign is judged successful is not always tied to whether product sales have increased since the beginning of the campaign. In some cases, such as when the objective is to build awareness, a successful campaign may be measured in terms of how many people are now aware of the product. In order to evaluate an advertising campaign it is necessary for two measures to take place. First, there must be a pre-campaign or pre-test measure that evaluates conditions prior to campaign implementation. For instance, prior to an advertising campaign for Product X a random survey may be undertaken of customers within a target market to see what percentage are aware of Product X. Once the campaign has run, a second, post-campaign or post-test measure is undertaken to see if there is an increase in awareness. Such pre and post testing can be done no matter what the objective including measuring the campaign’s impact on total product sales. Sales Promotion In a time when customers are exposed daily to a nearly infinite amount of promotional messages, many marketers are discovering that advertising alone is not enough to move members of a target market to take action, such as getting them to try a new product. Instead, marketers have learned that to meet their goals they must use additional promotional methods in conjunction with advertising. Other marketers have found that certain characteristics of their target market (e.g., small but geographically dispersed) or characteristics of their product (e.g., highly complex) make advertising a less attractive option. For these marketers better results may be obtained using
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other promotional approaches and may lead to directing all their promotional spending to non-advertising promotions. Finally, the high cost of advertising may drive many to seek alternative, lower cost promotional techniques to meet their promotion goals. Sales promotions are used widely in many industries and especially by marketers selling to consumers. We will see that the objectives of sales promotion are quite different than advertising and are specifically designed to encourage customer response. What is Sales Promotion? Sales promotion describes promotional methods using special short-term techniques to persuade members of a target market to respond or undertake certain activity. As a reward, marketers offer something of value to those responding generally in the form of lower cost of ownership for a purchased product (e.g., lower purchase price, money back) or the inclusion of additional value-added material (e.g., something more for the same price). Sales promotions are often confused with advertising. For instance, a television advertisement mentioning a contest awarding winners with a free trip to a Caribbean island may give the contest the appearance of advertising. While the delivery of the marketer’s message through television media is certainly labeled as advertising, what is contained in the message, namely the contest, is considered a sales promotion. The factors that distinguish between the two promotional approaches are: • whether the promotion involves a short-term value proposition (e.g., the contest is only offered for a limited period of time), and • The customer must perform some activity in order to be eligible to receive the value proposition (e.g., customer must enter contest). The inclusion of a timing constraint and an activity requirement are hallmarks of sales promotion. Sales promotions are used by a wide range of organizations in both the consumer and business markets, though the frequency and spending levels are much greater for consumer products marketers. Objectives of Sales Promotion Sales promotion is a tool used to achieve most of the five major promotional objectives • Building Product Awareness – Several sales promotion techniques are highly effective in exposing customers to products for the first time and can serve as key promotional components in the early stages of new 282
product introduction. Additionally, as part of the effort to build product awareness, several sales promotion techniques possess the added advantage of capturing customer information at the time of exposure to the promotion. In this way sales promotion can act as an effective customer information gathering tool (i.e., sales lead generation), which can then be used as part of follow-up marketing efforts. • Creating Interest – Marketers find that sales promotions are very effective in creating interest in a product. In fact, creating interest is often considered the most important use of sales promotion. In the retail industry an appealing sales promotions can significantly increase customer traffic to retail outlets. Internet marketers can use similar approaches to bolster the number of website visitors. Another important way to create interest is to move customers to experience a product. Several sales promotion techniques offer the opportunity for customers to try products for free or at low cost. Providing Information – Generally sales promotion techniques are designed to move customers to some action and are rarely simply informational in nature. However, some sales promotions do offer customers access to product information. For instance, a promotion may allow customers to try a fee-based online service for free for several days. This free access may include receiving product information via email. Stimulating Demand – Next to building initial product awareness, the most important use of sales promotion is to build demand by convincing customers to make a purchase. Special promotions, especially those that lower the cost of ownership to the customer (e.g., price reduction), can be employed to stimulate sales. Reinforcing the Brand – Once customers have made a purchase sales promotion can be used to both encourage additional purchasing and also as a reward for purchase loyalty (see loyalty programs below). Many companies, including airlines and retail stores, reward good or “preferred” customers with special promotions, such as email “special deals” and surprise price reductions at the cash register.
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• Types of Sales Promotion Sales promotion can be classified based on the primary target audience to whom the promotion is directed. These include: • Consumer Market Directed - Possibly the most wellknown methods of sales promotion are those intended to appeal to the final consumer. Consumers are exposed to sales promotions nearly everyday, and as discussed later, many buyers are conditioned to look for sales promotions prior to making purchase decisions. • Trade Market Directed – Marketers use sales promotions to target all customers including partners within their channel of distribution. Trade promotions are initially used to entice channel members to carry a marketer’s products and, once products are stocked, marketers utilize promotions to strengthen the channel relationship. • Business-to-Business Market Directed – A small, but important, sub-set of sales promotions are targeted to the business-to-business market. While these promotions may not carry the glamour associated with consumer or trade promotions, B-to-B promotions are used in many industries. Consumer Sales Promotion Consumer sales promotions encompass a variety of short-term promotional techniques designed to induce customers to respond in some way. The most popular consumer sales promotions are directly associated with product purchasing. These promotions are intended to enhance the value of a product purchase by either reducing the overall cost of the product (i.e., get same product but for less money) or by adding more benefit to the regular purchase price (i.e., get more for the money). While tying a promotion to an immediate purchase is a major use of consumer sales promotion, it is not the only one. As we noted above, promotion techniques can be used to achieve other objectives such as building brand loyalty or creating product awareness. Consequently, a marketer’s promotional toolbox contains a large variety of consumer promotions. Following 11 types of consumer sales promotions: 1Coupons 2. Rebates 3. Promotional Pricing 4. Trade-In 5. Loyalty Programs 6. Sampling and Free Trials 284
7. Free Product 8. Premiums 9. Contests and Sweepstakes 10.Demonstrations 11.Personal Appearances Coupons Most consumers are quite familiar with this form of sales promotion, which offers purchasers price savings or other incentives when the coupon is redeemed at the time of purchase. Coupons are short-term in nature since most (but not all) carry an expiration date after which the value may not be received. Also, coupons require consumer involvement in order for value to be realized. In most cases involvement consists of the consumer making an effort to obtain the coupon (e.g., clip from newspaper) and then presenting it at the time of purchase. Coupons are used widely by marketers across many retail industries and reach consumers in a number of different delivery formats including: • Free-Standing Inserts (FSI) – Here coupon placement occurs loosely (i.e., inserted) within media, such as newspapers and direct mail, and may or may not require the customer to cut away from other material in order to use. • Cross-Product – These consist of coupons placed within or on other products. Often a marketer will use this method to promote one product by placing the coupon inside another major selling product. For example, a pharmaceutical company may imprint a coupon for a cough remedy on the box of a pain medication. Also, this delivery approach is used when two marketers have struck a cross promotion arrangement where each agrees to undertake certain marketing activity for the other. • Printout – A delivery method that is common in many food stores is to present coupons to a customer at the conclusion of the purchasing process. These coupons, which are often printed on the spot, are intended to be used for a future purchase and not for the current purchase which triggered the printing. • Product Display – Some coupons are nearly impossible for customers to miss as they are located in close proximity to the product. In some instances coupons may be contained within a coupon dispenser fastened to the shelf holding the product while in other cases coupons may be attached to a special display (see POP display below) where customers can remove them (e.g., tear off). 285
Internet – Several specialized websites, such as HotCoupons.com, and even some manufacturer’s sites, allow customers to print out coupons. These coupons are often the same ones appearing in other media, such as newspapers or direct mail. In other cases, coupons may be sent via email, though to be effective the customer’s email program must be able to receive HTML email (and not text only) in order to maintain required design elements (e.g., bar code). • Electronic – The Internet is also seeing the emergence of new non-printable coupons redeemable through website purchases. These electronic coupons are redeemed when the customer enters a designated coupon code during the purchase process. • Rebates Rebates, like coupons, offer value to purchasers typically by lowering the customer’s final cost for acquiring the product. While rebates share some similarities with coupons, they differ in several keys aspects. First, rebates are generally handed or offered (e.g., accessible on the Internet) to customers after a purchase is made and cannot be used to obtain immediate savings in the way coupons are used. (So called “instant rebates”, where customers receive price reductions at the time of purchase, have elements of both coupons and rebates, but for our purposes we will classify these as coupons due to the timing of the reward to the customer.) Second, rebates often request the purchaser to submit personal data in order to obtain the rebate. For instance, customer identification, including name, address and contact information, is generally required to obtain a rebate. Also, the marketer may ask those seeking a rebate to provide additional data such as indicating the reason for making the purchase. Third, unlike coupons that always offer value when used in a purchase (assuming it is accepted by the retailer), receiving a rebate only guarantees value if the customer takes actions. Marketers know that not all customers will respond to a rebate. Some will misplace or forget to submit the rebate while others may submit after a required deadline. Marketers factor in the non-redemption rate as they attempt to calculate the cost of the rebate promotion. Finally, rebates tend to be used as a value enhancement in higher priced products compared to coupons. For instance, rebates are a popular promotion for automobiles and computer software where large amounts of money may be returned to the customer. 286
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Promotional Pricing One of the most powerful sales promotion techniques is the short-term price reduction or, as known in some areas, “on sale” pricing. Lowering a product’s selling price can have an immediate impact on demand, though marketers must exercise caution since the frequent use of this technique can lead customers to anticipate the reduction and, consequently, withhold purchase until the price reduction occurs again. Promotional pricing is also considered within the framework of the Price marketing mix component. More on of this technique will be provided in that discussion. Trade-In Trade-in promotions allow consumers to obtain lower prices by exchanging something the customer possess, such as an older product that the new purchase will replace. While the idea of gaining price breaks for trading in another product is most frequently seen with automobile sales, such promotions are used in other industries, such as computers and golf equipment, where the customer’s exchanged product can be resold by the marketer in order to extract value. Loyalty Programs Promotions that offer customers a reward, such as price discounts and free products, for frequent purchasing or other activity are called loyalty programs. These promotions have been around for many years but grew rapidly in popularity when introduced in the airline industry as part of frequent-filer programs. Loyalty programs are also found in numerous other industries, including grocery, pizza purchasing and online book purchases, where they may also be known as club card programs since members often must use a verification card as evidence of enrollment in the program. Many loyalty programs have become ingrained as part of the value offered by a marketer. That is, a retailer or marketing organization may offer loyalty programs as general business practice. Under this condition loyalty program does not qualify as a sales promotion since it does not fit the requirement of offering a short-term value (i.e., it is always offered). However, within a general business practice loyalty program a sales promotion can be offered, such as special short-term offer that lowers the number of points needed to acquire a free product. Sampling and Free Trials
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Enticing members of a target market to try a product is often easy when the trial comes at little or no cost to the customer. The use of samples and free trials may be the oldest of all sales promotion techniques dating back to when society advanced from a culture of self-subsistence to a culture of trade. Sampling and free trials give customers the opportunity to experience products, often in small quantities or for a short duration, without purchasing the product. Today, these methods are used in almost all industries and are especially useful for getting customers to try a product for the first time. Free Product Some promotional methods offer free products but with the condition that a purchase be made. The free product may be in the form of additional quantities of the same purchased product (e.g., buy one, get one free) or specialty packages (e.g., value pack) that offer more quantity for the same price as regular packaging. Premiums Another form of sales promotion involving free merchandise is premium or “give-away” items. Premiums differ from samples and free product in that these often do not consist of the actual product, though there is often some connection. For example, a cell phone manufacturer may offer access to free downloadable ring tones for those purchasing a cell phone. Contests and Sweepstakes Consumers are often attracted to promotions where the potential value obtained is very high. In these promotions only a few lucky consumers receive the value offered in the promotion. Two types of promotions that offer high value are contests and sweepstakes. Contests are special promotions awarding value to winners based on skills they demonstrate compared to others. For instance, a baking company may offer free vacations to winners of a baking contest. Contest award winners are often determined by a panel of judges. Sweepstakes or drawings are not skill based but rather based on luck. Winners are determined by random selection. In some cases the chances of winning may be higher for those who make a purchase if entry into the sweepstake occurs automatically when a purchase is made. But in most cases, anyone is free to enter without the requirement to make a purchase. A sub-set of both contests and sweepstakes are games, which come in a variety of formats such as scratch-off cards and
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collection of game pieces. Unlike contests and sweepstakes, which may not require purchase, to participate in a game customers may be required to make a purchase. In the United States and other countries, where eligibility is based on purchase, games may be subjected to rigid legal controls and may actually fall under that category of lotteries, which are tightly controlled. Demonstrations Many products benefit from customers being shown how products are used through a demonstration. Whether the demonstration is experienced in-person or via video form, such as over the Internet, this promotional technique can produce highly effective results. Unfortunately, demonstrations are very expensive to produce. Costs involved in demonstrations include paying for the expense of the demonstrator, which can be high if the demonstrator is well-known (e.g., nationally known chef), and also paying for the space where the demonstration is given. Personal Appearances An in-person appearance by someone of interest to the target market, such as an author, sports figure or celebrity, is another form of sales promotion capable of generating customer traffic to a physical location. However, as with demonstrations, personal appearance promotion can be expensive since the marketer normally must pay a fee for the person to appear. Trade Sales Promotions Promotion Decisions, certain promotions can help “push” a product through the channel by encouraging channel members to purchase and also promote the product to their customers. For instance, a trade promotion aimed at retailers may encourage retailers to instruct their employees to promote a marketer’s brand over competitors’ offerings. With thousands of products competing for limited shelf space, spending on trade promotion is nearly equal that spent on consumer promotions. Many sales promotions aimed at building relationships with channel partners follow similar designs as those directed to consumers including promotional pricing, contests and free product. In addition to these, several other promotional approaches are specifically designed to appeal to trade partners. These approaches include: • Point-of-Purchase Displays • Advertising Support Programs • Short Term Allowances • Sales Incentives or Push Money
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• Promotional Products • Trade Shows Point-of-Purchase Displays Points of purchase (POP) displays are specially designed materials intended for placement in retail stores. These displays allow products to be prominently presented, often in high traffic areas, and thereby increase the probability the product will standout. POP displays come in many styles, though the most popular are ones allowing a product to stand alone, such as in the middle of a store aisle or sit at the end of an aisle (i.e., end-cap) where it will be exposed to heavy customer traffic. For channel partners, POP displays can result in significant sales increases compared to sales levels in a normal shelf position. Also, many marketers will lower the per-unit cost of products in the POP display as an incentive for retailers to agree to include the display in their stores. Advertising Support Programs In addition to offering promotional support in the form of physical displays, marketers can attract channel members’ interest by offering financial assistance in the form of advertising money. These funds are often directed to retailers who then include the company’s products in their advertising. In certain cases the marketer will offer to pay the entire cost of advertising, but more often, the marketer offers partial support known as co-op advertising funds. Short Term Trade Allowances This promotion offers channel partners price breaks for agreeing to stock the product. In most cases the allowance is not only given as encouragement to purchase the product but also as an inducement to promote the product in other ways such as by offering attractive shelf space or store location, highlighting the product in company-produced advertising or website display, or by agreeing to have the retailer’s sales personnel “talk-up” the product to customers. Allowances can be in the form price reductions (a.k.a. offinvoice promotion) and buy-back guarantees if the product does not sell in certain period of time. Sales Incentives or Push Money Since sales promotions are intended to stimulate activity that leads to meeting promotional objectives, it makes sense that these can also apply to those in the organization who also affect sales. Thus, sales promotions are commonplace among an organization’s sales force and 290
customer service staff where they are used as incentives to help sell more of the marketer’s product. Sometimes called push money, these promotions typically offer employees cash or prizes, such as trips, for those that meet sales requirements. Promotional Products Among the most widely used methods of sales promotions is the promotional product; products labeled with the brand or company name that serve as reminders of the actual product. For instance, companies often hand out free calendars, coffee cups and pens that contain the product logo. Trade Shows One final type of trade promotion is the industry trade show (a.k.a. exhibitions, conventions). Trade shows are organized events that bring both industry buyers and sellers together in one central location. Spending on trade shows is one of the highest of all sales promotions. In fact, the Promotion Marketing Association estimates that over (US) $20 billion is spent annually by marketers to participate in trade shows. Marketers are attracted to trade shows since these offer the opportunity to reach a large number of potential buyers in one convenient setting. At these events most sellers attempt to capture the attention of buyers by setting up a display area to present their product offerings and meet with potential customers. These displays can range from a single table covering a small area to erecting specially built display booths that dominate the trade show floor. Business-to-Business Sales Promotions The use of sales promotion is not limited to consumer products marketing. In business-to-business markets sales promotions are also used as a means of moving customers to action. However, the promotional choices available to the B-to-B marketer are not as extensive as those found in the consumer or trade markets. For example, most B-to-B marketers do not use coupons as a vehicle for sales promotion with the exception of companies that sell to both consumer and business customers (e.g., products sold through office supply retailers). Rather, the techniques more likely to be utilized include: • price-reductions • free product • trade-in • promotional products • trade shows
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Of the promotions listed, trade shows are by far the mostly widely used sales promotion for B-to-B marketers. Trends in Sales Promotion Marketers who employ sales promotion as a key component in their promotional strategy should be aware of how the climate for these types of promotions is changing. The important trends in sales promotion include: Customers Expectations The onslaught of sales promotion activity over the last several decades has eroded the value of the short-term requirement to act on sales promotions. Many customers are conditioned to expect a promotion at the time of purchase otherwise they may withhold or even alter their purchase if a promotion is not present. For instance, food shoppers are inundated on a weekly basis with such a wide variety of sales promotions that their loyalty to certain products has been replaced by their loyalty to current value items (i.e., products with a sales promotion). For marketers the challenge is to balance the advantages short-term promotions offer versus the potential to erode loyalty to the product. Electronic Delivery Sales promotions are delivered to customers in many ways such as by mail, in-person or within print media. However, the Internet and mobile technologies, such as cell phones, present marketers with a number of new delivery options. For examples, the combination of mobile devices and geographic positioning technology will soon permit marketers to target promotions to a customer’s physical location. This will allow retailers and other businesses to issue sales promotions, such as electronic coupons, to a customer’s mobile device when they are near the location where the coupon can be used. Tracking Tracking customer’s response to marketers’ promotional activity is critical for measuring success of an advertisement. In sales promotion, tracking is also used. For instance, grocery retailers, whose customers are in possession of loyalty cards, have the ability to match customer sales data to coupon use. This information can then be sold to coupon marketers who may use the information to get a better picture of the buying patterns of those responding to the coupon. Internet Communication For many years consumers typically became aware of sales promotions in passive ways. That is, most customers obtained promotions not through an active search but by
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being a recipient of a marketer’s promotion activity (e.g., received coupons in the mail). The Internet is changing how customers obtain promotions. In addition to websites that offer access to coupons, there are a large number of community forum sites where members share details about how to obtain good deals which often include information on how or where to find a sales promotion. Monitoring these sites may offer marketers insight into how customers feel about certain promotions and may even suggest ideas for future sales promotions. Clutter and Need for Creativity In the same way an advertisement competes with other ads for customers’ attention, so to do sales promotions. This is particularly an issue with inserted coupon promotions that may be included in mailing or printed media along with numerous other offerings. The challenge facing marketers is to find creative ways to separate their promotions from those offered by their competitors. Public Relations Of the four promotional mix options available to marketers public relations (PR) is probably the least understood and, consequently, often receives the least amount of attention. Many marketers see public relations as only handling rudimentary communication activities, such as issuing press releases and responding to questions from the news media. But in reality, in a time when customers are inundated with thousands of promotional messages everyday, public relations offers powerful methods for cutting through the clutter. What is Public Relation? Public relations involve the cultivation of favorable relations for organizations and products with its key publics through the use of a variety of communications channels and tools. Traditionally, this meant public relations professionals would work with members of the news media to build a favorable image by publicizing the organization or product through stories in print and broadcast media. But today the role of public relations is much broader and includes: • building awareness and a favorable image for a company or client within stories and articles found in relevant media outlets • closely monitoring numerous media channels for public comment about a company and its products • managing crises that threaten company or product image
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building goodwill among an organization’s target market through community, philanthropic and special programs and events Finally, in most large companies, investor relations (IR) or financial public relations is a specialty in itself guided by specific disclosure regulations? However, coverage of this type of PR will not be provided here. Advantages of PR Public relations offers several advantages not found with other promotional options. First, PR is often considered a highly credible form of promotion. One of PR’s key points of power rests with helping to establish credibility for a product, company or person (e.g., CEO) in the minds of targeted customer groups by capitalizing on the influence of a third-party -- the media. Audiences view many media outlets as independent-party sources that are unbiased in their coverage, meaning that the decision to include the name of the company and the views expressed about the company is not based on payment (i.e., advertisement) but on the media outlet’s judgment of what is important. For example, a positive story about a new product in the business section of a local newspaper may have greater impact on readers than a full-page advertisement for the product since readers perceive the news media as presenting an impartial perspective of the product. Second, a well-structured PR campaign can result in the target market being exposed to more detailed information than they receive with other forms of promotion. That is, media sources often provide more space and time for explanation of a product. Third, depending on the media outlet, a story mentioning a company may be picked up by a large number of additional media, thus, spreading a single story to many locations. Finally, in many cases public relations objectives can be achieved at very low cost when compared to other promotional efforts. This is not to suggest public relations is not costly, it may be, especially when a marketer hires PR professionals to handle the work. But when compared to the direct cost of other promotions, in particular advertising, the return on promotional expense can be quite high. Disadvantages of PR While public relations hold many advantages for marketers, there are also concerns when using this promotional technique. First, while public relations uses many of the same channels as advertising, such as newspapers, magazines, radio, TV and Internet, it differs significantly 294
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from advertising in that marketers do not have direct control over whether a message is delivered and where it is placed for delivery. For instance, a marketer may spend many hours talking with a magazine writer, who is preparing an industry story, only to find that their company is never mentioned in the article. Second, while other promotional messages are carefully crafted and distributed as written through a pre-determined placement in a media vehicle, public relations generally conveys information to a member of the news media (e.g., reporter) who then redrafts the information as part of a news story or feature. Thus, the final message may not be precisely what the marketer planned. Third, while a PR campaign has the potential to yield a high return on promotional expense, it also has the potential to produce the opposite if the news media feels there is little value in running a story pitched (i.e., suggested via communication with the news outlet) by the marketer. Fourth, with PR there is always a chance that a well devised news event or release will get “bumped” from planned media coverage because of a more critical breaking news story, such as wars, severe weather or serious crime. Finally, in some areas of the world the impact of traditional news outlets is fading forcing public relations professionals to scramble to find new ways to reach their target markets. Objectives of Public Relations Like other aspects of marketing promotion, public relations are used to address several broad objectives including: • Building Product Awareness – When introducing a new product or re launching an existing product, marketers can use a PR element that generates consumer attention and awareness through media placements and special events. • Creating Interest – Whether a PR placement is a short product article or is included with other products in “round up” article, stories in the media can help entice a targeted audience to try the product. For example, around the holiday season, a special holiday food may be promoted with PR through promotional releases sent to the food media or through special events that sample the product. • Providing Information – PR can be used to provide customers with more in depth information about products and services. Through articles, collateral materials, newsletters and websites, PR delivers 295
information to customers that can help them gain understanding of the product. • Stimulating Demand – A positive article in a newspaper, on a TV news show or mentioned on the Internet, often results in a discernable increase in product sales. • Reinforcing the Brand – In many companies the public relations function is also involved with brand reinforcement by maintaining positive relationships with key audiences, and thereby aiding in building a strong image. Today it is ever more important for companies and brands to build a good image. A strong image helps the company build its business and it can help the company in times of crises as well. Public Relations Tools Marketers should be aware of the tools used in the public relations function. While some marketers may prefer to handle their own PR tasks, many others will seek the assistance of outside PR professionals rather than attempt to handle these activities themselves. Skilled PR professionals offer many advantages for marketers with their two most important being: 1) their ability to understand and unearth good stories about a company and its product, and 2) their knowledge of the media market may place them in a better position to match stories to the news angles media reporters look for. Whether handling PR internally or hiring professionals, marketers should be familiar with the tools available for public relations: Before choosing among the various tools marketers should begin by identifying their key targeted audiences (e.g., target markets) and key messages they wish to send. These should align with the messages and audiences identified for the product being promoted or corporate goals for non-specific product promotions, such as corporate image promotions. The key messages are used in the development of public relations materials and supporting programs described below. The purpose of key messages is to provide a consistent point of view over time and across numerous PR methods that reinforce product positioning (i.e., customer's perceptions) and reach the desired target audience. The key tools available for PR include: • Media Relations • Media Tours • Newsletters
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• Special Events • Speaking Engagements • Sponsorships • Employee Relations • Community Relations and Philanthropy Media Relations Historically the core of public relations, media relations, includes all efforts to publicize products or the company to members of the press — TV and Radio, newspaper, magazine, newsletter and Internet. In garnering media coverage, PR professionals work with the media to place stories about products, companies and company spokespeople. This is done by developing interesting and relevant story angles that are pitched to the media. It is important to remember that media placements come with good stories and no payment is made to the media for placements. In fact, in order to maintain the highest level of credibility, many news organizations bar reporters from accepting even the smallest gifts (e.g., free pencils with product logo) from companies. Key tools used in media relations include: • Press Kits - Include written information such as a news release, organization background, key spokesperson biographies and other supporting materials that provide information useful to reporters. • Audio or Video News Releases - These are prerecorded features distributed to news media that may be included within media programming. For instance, a local news report about amusement parks may include portions of a video news release from a national amusement park company. • Matte Release - Some media, especially small local newspapers, may accept articles written by companies often as filler material when their publication lacks sufficient content. PR professionals submit matte releases through syndicated services (i.e., services that supply content to many media outlets) or directly to targeted media via email, fax or snail mail. • Website Press Room - While hard copies of materials are used and preferred by some media, marketers are well served by an online press room that caters to media needs and provides company contact information. As PR people know, many story ideas for newspapers, magazines and television news often start with a suggestion from a PR person. If things work out, a reporter or editor 297
will, at best, write a positive story with the company as a key feature or, at minimum, include the company’s name somewhere within an industry-focused article. Media Tour Some new products can be successfully publicized when launched with a media tour. On a media tour a company spokesperson travels to key cities to introduce a new product by being booked on TV and radio talk shows and conducting interviews with print and Internet reporters or influencers (e.g., bloggers). The spokesperson can be a company employee or someone hired by the company, perhaps a celebrity or “expert” who has credibility with the target audience. One common use of the media tour is the book tour, where an author travels the country to promote a newly released book. A media tour may include other kinds of personal appearances in conjunction with special events, such as public appearances, speaking engagements or autograph signing opportunities. Newsletters Marketers who have captured names and addresses of customers and potential customers can use a newsletter for regular contact with their targeted audience. Newsletters can be directed at trade customers, final consumers or business buyers and can be distributed either by regular mail or electronic means (i.e., e-newsletters delivered via email or rss feed). Marketers using newsletters strive to provide content of interest to customers as well as information on products and promotions. A bookstore may include reviews of new books, information on online book chats and information on in-store or online promotions. A food manufacturer may include seasonal recipes, information on new products and coupons. Online newsletters offer the opportunity to link to a sales page that directs to store carrying product or to a direct online store. Effective newsletters are sought out by and well received by interested audiences. Special Events These run the gamut from receptions to elegant dinners to stunts. Special events can be designed to reach a specific narrow target audience, such as individuals interested in college savings plans to major events like a strawberry festival designed to promote tourism and regional agriculture. Stunts, such as building the world’s largest ice cream sundae during National Ice Cream month captures the attention of an audience in the immediate area, but also attracts the attention of mass media such as TV news and major newspapers, which provide broad reach. The
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Oscar Mayer Weiner mobile is a classic example, providing a recognizable icon that travels the country garnering attention wherever it visits. As with all PR programs, special event planners must work hard to ensure the program planned conveys the correct message and image to the target audience. Speaking Engagements Speaking before industry conventions, trade association meetings, and other groups provides an opportunity for company experts to demonstrate their expertise to potential clients/customers. Generally these opportunities are not explicitly for company or product promotion; rather they are a chance to talk on a topic of interest to potential customers and serve to highlight the speaker’s expertise in a field. Often the only mention of the company or its products is in the speaker biography. Nevertheless, the right speaking engagement puts the company in front of a good target audience and offers networking opportunities for generating customer leads. Sponsorships Companies and brands use sponsorships to help build goodwill and brand recognition by associating with an event or group. Marketers can examine sponsorship opportunities to find those that reach target groups, fit within a specified budget and provide sponsorship benefits that suit the marketer’s objectives. There are numerous local, regional, national and international sponsorship opportunities ranging from a local art center or theatre to the Olympics. Most organizations seeking company sponsors provide information on the variety of sponsorship levels which include data on event audience, exposure opportunities, which can include signage, T-shirts, public announcements and numerous other opportunities, receptions and much more. Marketers can use this information to help match sponsorship opportunities with the company’s objectives. Employee Communications For many companies communicating regularly with employees is important in keeping employees informed of corporate programs, sales incentives, personnel issues, as well as keeping them updated on new products and programs. Companies use a variety of means to communicate with employees, including Intranet, email, online and print newsletters. In larger firms an in-house PR department often works in conjunction with the Human Resources Department to develop employee communications.
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Community Relations and Philanthropy For many companies fostering good relations with key audiences includes building strong relationships with their regional community. Companies implement programs supportive of the community ranging from supporting local organizations and institutions (e.g., arts organizations, community activities, parks) to conducting educational workshops (e.g., for teachers, parents) to donating product for community events and charitable fundraisers. The goal is generally to develop a positive relationship with members of the community (i.e., be known as a good neighbor). Effective community relations can help a company weather bad publicity or a crisis situation that can unexpectedly arise due to a problem with a product, unethical behavior by management, or even by false rumors. Some companies also make an effort to contribute to charitable organizations, often organizations that have some relationship to the company’s mission or to a key principal of the company. Additional PR Activities In addition to serving as means for helping to achieve marketing objectives, public relations professionals may undertake additional activities, aimed at maintaining a positive image for an organization. These activities include: Market Monitoring Monitoring public comment about a company and its products is becoming increasingly important especially with the explosion of information channels on the Internet. Today monitoring includes watching what is written and reported in traditional print and broadcast media and also keeping an eye on discussions occurring through various Internet outlets such as forums, chat rooms, blogs and other public messaging areas. Marketers must be prepared to respond quickly to erroneous information and negative opinions about products as it can spin out of control very quickly through the new technology channels. Failure to correct misinformation can be devastating to a product or company’s reputation. It should be noted that specialized monitoring services can be contracted to help companies keep track of “buzz” about the company and its products. Crisis Management Marketers need to be prepared to respond quickly to negative information about the company. When a problem with a product arises — in fact or substantiated only by rumor — a marketer’s investment in a product and brand can be in serious jeopardy. Today, with the prevalence of the
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Internet and wireless communications, negative information can spread rapidly. Through monitoring marketers can track the issues and respond in a timely fashion. To manage response effectively, many companies have crises management plans in place that outline steps to take and company spokespeople to speak on behalf of the company should an event occur. Trends in Public Relations Until recently most public relations activity involved person-to-person contact between PR professionals and members of the media, such as journalists and television news reporters. However, several trends are developing that alter the tasks performed by PR people. In most cases these changes are the result of new Internet technologies that are quickly gaining widespread acceptance among Internet users and are becoming new media outlets in their own right. The important trends in public relations include: Voicing Opinion Developing websites has long been a time-consuming and often overly technical undertaking for the vast majority of marketers. But this changed with the evolution of easier to use site development applications which allow for quick creation and convenient updating of site content. Additionally, the move toward easier to use website software has changed the purpose of having a presence on the Internet. Where previously the main objective of a website was for advertising, delivering information and ecommerce, the web now serves as a platform for people to voice their opinions. There are two key applications that fall into this category – blogs and forums. Blogs Blogs, short for web logs, are a phenomenon that shows just how powerful and influential the Internet has become as a communication medium. Millions of blogs are now available and specialized search engines have been developed to search millions of postings. Blogs may be most famous as a tool for political discussion, but they are also becoming an important communication tool for public relations. Many companies in both technical fields, such as eBay, Google, and Microsoft, and non-technical fields, such as General Motors, McDonalds and Well Fargo Bank, now produce in-house blogs that report on happenings at the company. These blogs allow company employees, including CEOs and marketers, to post messages
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updating company developments and, thus, serve as useful PR tool. Forums Web forums are the child of the old Internet bulletin board services where people can post their opinion often anonymously. Forums pose both opportunities and threats for those involved in PR. A presence in an influential forum helps build credibility for an organization as forum members recognize a company’s effort to reach out to the public. On the other hand, forums can cause major problems as a breeding ground for rumor and accusation. Public relations personnel must continually monitor forums and respond to misguided comments posted on a web discussion board to help squelch rumors before they can catch fire. RSS Feeds An important trend for delivering company information is through an Internet technology known by the acronym RSS (what it stands for depends on who you ask but most accepted name is Really Simple Syndication). This technology makes it easy for people to know when new content is posted to a website. While there are several flavors of RSS, the basic concept has content providers, such as news sites, corporate websites, blogs, etc., creating RSS documents that provide basic details of new content, such as content title, authorship information, description and links to the full content. The nature of the technology allows anyone who links to the RSS feed to instantly receive details of the content. Many journalists and other media members are finding this to be a more convenient way to acquire information, particularly if they follow a specific industry and can identify specific information websites to monitor. By subscribing to relevant RSS feeds they have information delivered rather than spending time searching. Pod casting The emergence of the Apple iPod and other digital audio players has significantly altered how people listen to music by allowing easy downloading of desired songs. But the use of audio players is not limited to music downloads; a fast growing application is to deliver other content including programming. Public relations may soon find pod casting to be a quick and easy way to send out audio news releases and other promotional material. Search Engine Optimization Publicity is about getting media outlets to mention the name of a product, company or person. For several years Internet marketers have recognized the importance of
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getting their company and products listed in the top rankings in search engines. So called efforts at Search Engine Optimization (SEO) involve concerted efforts and specific techniques to attain higher rankings. While at first glance SEO may not seem like a responsibility of public relations, it would appear to contain the main characteristics for making it so, namely getting a third-party media outlet (i.e., search engine) to mention the company (i.e., search rankings) at no direct cost the company (i.e., no payment for ranking). And, just as PR people can use methods to affect coverage within traditional media, optimizing a website can work to influence results in search engines by using techniques that allow a website to fit within ever-changing search engine ranking criteria. In this way SEO does what PR professionals do, namely obtain good placement in thirdparty media outlet. Consequently, SEO may soon become an important PR function. Personal Selling How marketers can use advertising, sales promotion and public relations to reach a large number of customers. While these methods of promotion offer many advantages, they each share one major disadvantage: they are a nonpersonal form of communication. And whether a company is in retailing or manufacturing, sells goods or services, is a large multi-national or a local startup, is out to make a profit or is a non-profit, in all probability at some point they will need to rely on personal contact with customers. In other words, they will need to promote using personal selling. Unfortunately, personal selling is widely misunderstood. For instance, many customers think salespeople possess traits that include being manipulative, arrogant, aggressive and greedy. While many marketers believe salespeople are only out to make a quick sale intended to increase their income and that they often do this by making unscrupulous deals undermining the marketer’s attempt to build strong brands. While there certainly are some salespeople that fit these descriptions, today the most successful salespeople are those who work hard to understand their customers’ needs with the ultimate goal of ensuring that customer’s needs are satisfied at a high level. And, more importantly, personal selling holds a key role in the promotional activities of a large number of organizations. In fact, in the business market where one company sells products to
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another company, money spent to support the selling function far exceeds spending on advertising. What is Personal Selling? Personal selling is a promotional method in which one party (e.g., salesperson) uses skills and techniques for building personal relationships with another party (e.g., those involved in a purchase decision) that results in both parties obtaining value. In most cases the “value” for the salesperson is realized through the financial rewards of the sale while the customer’s “value” is realized from the benefits obtained by consuming the product. However, getting a customer to purchase a product is not always the objective of personal selling. For instance, selling may be used for the purpose of simply delivering information. Because selling involves personal contact, this promotional method often occurs through face-to-face meetings or via a telephone conversation, though newer technologies allow contact to take place over the Internet including using video conferencing or text messaging (e.g., online chat). Among marketing jobs, more are employed in sales positions than any other marketing-related occupation. In the U.S. alone, the U.S. Department of Labor estimates that over 14 million or about 11% of the overall labor force are directly involved in selling and sales-related positions. Worldwide this figure may be closer to 100 million. Yet these figures vastly under-estimate the number of people who are actively engaged in some aspect of selling as part of their normal job responsibilities. While millions of people can easily be seen as holding sales jobs, the promotional techniques used in selling are also part of the day-to-day activities of many who are usually not directly associated with selling. For instance, top corporate executives whose job title is CEO or COO are continually selling their company to major customers, stock investors, government officials and many other stakeholders. The techniques they employ to gain benefits for their company are the same used by the front-line salesperson to sell to a small customer. Consequently, our discussion of the promotional value of personal selling has implications beyond marketing and sales departments. Advantages of Personal Selling One key advantage personal selling has over other promotional methods is that it is a two-way form of communication. In selling situations the message sender (e.g., salesperson) can adjust the message as they gain feedback from message receivers (e.g., customer). So if a
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customer does not understand the initial message (e.g., doesn’t fully understand how the product works) the salesperson can make adjustments to address questions or concerns. Many non-personal forms of promotion, such as a radio advertisement, are inflexible, at least in the shortterm, and cannot be easily adjusted to address audience questions. The interactive nature of personal selling also makes it the most effective promotional method for building relationships with customers, particularly in the businessto-business market. This is especially important for companies that either sell expensive products or sell lower cost but high volume products (i.e., buyer must purchase in large quantities) that rely heavily on customers making repeat purchases. Because such purchases may take a considerable amount of time to complete and may involve the input of many people at the purchasing company (i.e., buying center), sales success often requires the marketer develop and maintain strong relationships with members of the purchasing company. Finally, personal selling is the most practical promotional option for reaching customers who are not easily reached through other methods. The best example is in selling to the business market where, compared to the consumer market, advertising, public relations and sales promotions are often not well received. Disadvantages of Personal Selling Possibly the biggest disadvantage of selling is the degree to which this promotional method is misunderstood. Most people have had some bad experiences with salespeople who they perceived were overly aggressive or even downright annoying. While there are certainly many salespeople who fall into this category, the truth is salespeople are most successful when they focus their efforts on satisfying customers over the long term and not focusing own their own selfish interests. A second disadvantage of personal selling is the high cost in maintaining this type of promotional effort. Costs incurred in personal selling include: High cost-per-action (CPA) – As noted in Part 12: Promotion Decisions, CPA can be an important measure of the success of promotion spending. Since personal selling involves person-to-person contact, the money spent to support a sales staff (i.e., sales force) can be steep. For instance, in some industries it costs well over (US) $300 each time a salesperson contacts a potential customer. This cost is incurred whether a sale is made or not! These
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costs include compensation (e.g., salary, commission, bonus), providing sales support materials, allowances for entertainment spending, office supplies, telecommunication and much more. With such high cost for maintaining a sales force, selling is often not a practical option for selling products that do not generate a large amount of revenue. Training Costs – Most forms of personal selling require the sales staff be extensively trained on product knowledge, industry information and selling skills. For companies that require their salespeople attend formal training programs, the cost of training can be quite high and include such expenses as travel, hotel, meals, and training equipment while also paying the trainees’ salaries while they attend. A third disadvantage is that personal selling is not for everyone. Job turnover in sales is often much higher than other marketing positions. For companies that assign salespeople to handle certain customer groups (e.g., geographic territory), turnover may leave a company without representation in a customer group for an extended period of time while the company recruits and trains a replacement. Objectives of Personal Selling Personal selling is used to meet the five objectives of promotion in the following ways: • Building Product Awareness – A common task of salespeople, especially when selling in business markets, is to educate customers on new product offerings. In fact, salespeople serve a major role at industry trades shows (see Part 15: Sales Promotion) where they discuss products with show attendees. But building awareness using personal selling is also important in consumer markets. As we will discuss, the advent of controlled word-of-mouth marketing is leading to personal selling becoming a useful mechanism for introducing consumers to new products. • Creating Interest – The fact that personal selling involves person-to-person communication makes it a natural method for getting customers to experience a product for the first time. In fact, creating interest goes hand-in-hand with building product awareness as sales professionals can often accomplish both objectives during the first encounter with a potential customer. • Providing Information – When salespeople engage customers a large part of the conversation focuses on product information. Marketing organizations provide their sales staff with large amounts of sales support 306
including brochures, research reports, computer programs and many other forms of informational material. • Stimulating Demand – By far, the most important objective of personal selling is to convince customers to make a purchase. In our next tutorial we will see how salespeople accomplish this when we offer detailed coverage of the selling process used to gain customer orders. • Reinforcing the Brand – Most personal selling is intended to build long-term relationships with customers. A strong relationship can only be built over time and requires regular communication with a customer. Meeting with customers on a regular basis allows salespeople to repeatedly discuss their company’s products and by doing so helps strengthen customers’ knowledge of what the company has to offer. Classifying Selling Roles Worldwide millions of people have careers that fit in the personal selling category. However, the actual functions carried out by someone in sales may be quite different. Below we discuss the four major types of selling roles: order getters, order takers, order influencers, and sales support. It should be noted that these roles are not mutually exclusive and that a salesperson can perform more than one and possibly all activities. Order Getters The role most synonymous with selling is a position in which the salesperson is actively engaged in using their skills to obtain orders from customers. Such roles can be further divided into: • New Business Development– A highly challenging yet potentially lucrative sales position is one where the main objective is to find new customers. Sales jobs in this category are often in fields that are very competitive, but offer high rewards for those that are successful. The key distinguishing factor of these positions is that once a sale is made new business salespeople pass customers on to others in their organization who handle account maintenance. These positions include: • Business Equipment Sales - These salespeople are often found in industries where a company’s main profits come from the sale of supplies and services that come after an initial equipment purchase. The key objective of business equipment salespeople is to get buyers to purchase the main piece of equipment for 307
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which supplies and service are needed in order for the equipment to function. For instance, in the photocopier industry certain salespeople only seek out new accounts and once a photocopier sale is made they pass along the account to other sales personnel who handle the sales of maintenance and supply products. Telemarketing – This category includes product sales over the phone, whether aimed at business or consumer. While in the US laws restrict unsolicited phone selling, the practice is still widely used in the business market. Consumer Selling – Certain companies are very aggressive in their use of salespeople to build new consumer business. These include: retailers selling certain high priced consumer products including furniture, electronics and clothing; housing products including real estate, security services, building replacement products (e.g., windows); and in-home product sellers including those selling door-to-door and products sold at “home party” events such as cosmetics, kitchenware and decorative products. Account Management – Most people engaged in sales are not only involved in gaining the initial order, but work to build and maintain relationships with clients that are intended to last a long time. Salespeople involved in account management are found across a broad range of industries. Their responsibilities involve all aspects of building customer relationships from initial sale to follow-up account servicing. These include: Business-to-Business Selling – These salespeople sell products for business use with an emphasis on followup sales. In many cases, business-to-business salespeople have many different items available for sale (i.e., broad and/or deep product line) rather than a single product. So while the initial sale may only result in the buyer purchasing a few products, the potential exists for the buyer to purchase many other products as the buyer-seller relationship grows. Trade Selling – Sales professionals working for consumer products companies normally do not sell to the final user (i.e., consumer). Instead their role is focused on first getting distributors, such wholesalers and retailers, to handle their products and once this is accomplished, helping distributors
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sell their product by offering ideas for product advertising, in-store display and sales promotions. Order Takers Selling does not always require a salesperson use methods designed to encourage customers to make a purchase. In fact, the greatest number of people engaged in selling are not order getters, rather they are considered order takers. In this role, salespeople primarily assist customers with a purchase in ways that are much less assertive than order getters. As might be expected, compensation for order takers is generally lower than that of order getters. Among those serving an order taker role are: • Retail Clerks – While some retail salespeople are involved in new business selling, the vast majority of retail employees handle order taking tasks, which range from directing customers to products to handling customer checkout. • Industrial Distributor Clerks – Industrial purchase situations, such as distributors of building products, will also have clerks to handle customer purchases. • Customer Service – Order taking is also handled in non face-to-face ways through customer service personnel. Usually this occurs via phone conversations, though newer technologies are allowing for these tasks to be handled through electronic means such as online chat. Order Influencers Some salespeople are not engaged in direct selling activities at all. That is, they do not sell directly to the person who is the ultimate purchaser for their product. Instead these salespeople concentrate on selling activity that targets those who influence purchases made by the final customer. The primary example of an order influencer is the missionary salesperson: • Missionary - These salespeople are used in industries where customers make purchases based on the advice or requirements of others. Two industries in which missionary selling is commonly found are pharmaceuticals, where salespeople, known as product detailers, discuss products with doctors (influencers) who then write prescriptions for their patients (final customer) and higher education, where salespeople call on college professors (influencers) who make requirements to students (final customer) for specific textbooks. Sales Support
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A final group involved in selling mostly assist with the selling activities of other sales professionals. These include: • Technical Specialists - When dealing with the sale of technical products, particularly in business markets, salespeople may need to draw on the expertise of others to assist with the process. This is particularly the case when the buying party consists of a buying center. In Part 4: Business Buying Behavior we indicated that in business selling many people from different functional areas may be involved in the purchase decision. If this buying center includes technical people, such as scientists and engineers, a salesperson may seek assistance from members of their own technical staff, who can help address specific questions. • Office Support – Salespeople also may receive assistance from their company’s office staff in the form of creating promotional materials, setting up sales appointments, finding sales leads, arranging meeting space or organizing trade shows exhibits. Trends While the basic premise of personal selling, building relationships, has not changed much in the last 50 years, there are a number of developments that are impacting this method of promotion including: Controlled Word-of-Mouth Promotion One of the most influential forms of promotion occurs when one person speaks highly of a product to someone else, particularly if the message sender is considered an unbiased source of information. Until recently, marketers have had little control over person-to-person promotion that did not involve salespeople (i.e., biased source). However, marketers are beginning to experiment with new methods of promotion that strategically takes advantage of the benefits offered by word-of-mouth promotion. Unlike salespeople who attempt to obtain an order from customers, controlled word-of-mouth promotion uses real people to help spread information about a product but do not directly elicit customer orders. With controlled word-of-mouth promotion a marketer hires individuals to spread positive information about a product but in a way that does not make it obvious to others that they are being paid to do so. The technique is especially useful when building awareness of new products and this approach has been dubbed “buzz” marketing as a way to describe its objective of building a high level of 310
awareness for a product. For example, a brewer may form a team of word-of-mouth marketers who visit local taverns and night spots. As part of their job these marketers may “talk up” a new beer sold by the brewer and even purchase the product for some customers. But in the course of doing so they do not directly disclose that they are being compensated by the brewer for their efforts. Controlled word-of-mouth has received a great deal of publicity though much of it has focused on potential ethical concerns. Some have expressed concern that paying people to “act” as if they are interested in a product without any indication of their relationship with the product breaches ethical standards. As more companies explore controlled word-of-mouth marketing it is expect to become an even more scrutinized form of personal selling. Customer Information Sharing Possibly the most dramatic change to occur in how salespeople function on a day-to-day basis involves the integration of customer relationship management (CRM) systems into the selling arena. CRM is the name given to both the technology and the philosophy that drives companies to gain a better understanding of their customers with the goal of building stronger long-term relationships. The essential requirement for an effective CRM system is the need for all customer contact points (e.g., salespeople, customer service, and websites) to gather information so that this can be shared with others in the company. But CRM has faced some rough times within the sales force for the exact reason it is important: salespeople must share their information. Salespeople have historically been very good at developing relationships and learning about customers, but often loath sharing this since, in effect, information is what makes them important. In the minds of some salespeople, letting go of the information reduces their importance to the company. For example, some salespeople feel that sharing all they know about a customer will make them expendable as a salesperson since a company can simply insert someone new into their spot at anytime. While the attitude toward CRM has made its implementation difficult in many companies, salespeople should understand that it is not going away. CRM and information sharing has proven to be critical for maintaining strong customer relations and salespeople must learn to adapt to it. Mobile Technology and Web-Based Computing
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The move to an information sharing approach is most effective when salespeople have access to information sharing features when they need it most. Mobile technologies, such as wireless internet (WiFi) and cellular Internet access, allow salespeople to retrieve needed information at any time. For example, if a salesperson takes a customer to lunch, the salesperson can quickly access company material to respond to questions such as how long it may take to receive product if an order is placed. Additionally, there is a growing trend to make key business applications available through a browser rather than having programs loaded on a salesperson’s computer. This allows for the application to be accessed from anywhere at anytime. For example, many companies have moved to webbased CRM systems where simply having Internet access allows salespeople to enter and retrieve information. Also, many new office productivity applications, such as word processing and spreadsheets, are now becoming webaccessible. New generation cell phones or smart phones along with other handheld devices, such as personal digital assistants (PDA), lighten the burden of carrying laptop computers. But because these handheld devices are web-enabled they provide access to much of the same information as a standard computer. While the computing power of handheld devices is still underpowered compared to conventional computers, the move to web-based computing may some day make the handheld the main instrument for inputting and outputting information? Electronic Sales Presentations Technology is also playing a major role in how sales professionals reach prospects and existing customers. While audio/video conferencing has been available for many years using high-end telecommunication hookups, it has only been within the last few years that improvements in Internet access speeds, computing power and meeting software have made this method for reaching customers a practical alternative to face-to-face sales meetings. These options include: • Online Video Conferencing – Online conferencing essentially acts in the same way as telecommunications videoconferencing, with one big exception; it is delivered over the Internet. Anyone who has an Internet connection knows that trying to deliver video over the Internet can be a trying experience as video often appears to be slow, jittery and sometimes not even recognizable. But these problems are quickly 312
disappearing and while real time Internet video conferencing (i.e., television quality video and audio) is still not routinely accessible to most salespeople, this is expected to change. • Web/Phone Conferencing – To offset the problems associated with Internet delivery of real time audio and video, many companies deliver sales presentations using a combination of web and telecommunications. The most widely used services use the Internet, to deliver visual material (typically a slide presentation) and telecommunications, to allow for voice conversation. The process has a salesperson arrange for a conferencing time with a prospect who enters the conference by: 1) using their web browser to gain access to the visual presentation and 2) using their telephone to call into an audio conference. Splitting the visual and audio feeds allows for smoother presentations since the conference participants’ computers need only process the visual material. It should be noted, that while audio access is now being carried out over telephone connections, the emergence of telephone over the Internet (i.e., VOIP - voice over Internet Protocol) may soon help resolve some of the problems that have been encountered when delivering both. • Online Text Chat - Online chat allows for real time communication between multiple participants using text messaging. While this form of buyer-seller communication may not be very effective at getting customers to agree to make a purchase, it has proven very effective in building initial product interest. For example, potential customers visiting a website may use the chat feature to ask a few questions about the company’s products. Engaging a customer this way can then lead to the customer agreeing to receive a phone call from a salesperson to further discuss the product. Electronic Sales Training • Developing the skills and techniques needed to be successful at selling requires an extensive commitment by the individual seller and the seller's company to sales training. Sales training is the hallmark of professional selling. If there is one thing that separates the truly successful salesperson from those who are not, it is the amount of training and preparation they engage in.
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Most organizations that employ a sales force offer new salespeople an extensive formal training program often held at dedicated training facilities. These training programs can range from a few days to many months depending on the industry. But once a salesperson has made the move to the field, training does not stop. Those involved in selling must continue to stay abreast of their products, customers, markets and competitors. While many companies may continue to employ the same methods used when they first trained their salespeople, a large number of firms are finding that ongoing training can be just as effective using electronic options such as delivering training over the Internet, through downloadable computer programs or through interactive CDs or DVDs. • While feedback using electronic means is not as personal as it might be with in-person training, sophisticated electronic training programs are effective in educating and testing trainee’s knowledge. Also, a live trainer can be contacted very quickly via e-mail, online chat or by a phone call if a question does arise. • Using electronic delivery, the cost to the company for adding or updating training material is inexpensive and quick compared to the cost and time needed to produce and ship paper-based materials. Additionally, the use of RSS feeds or email enables salespeople to be quickly notified when new training material is available. This is useful when the sales force must be made aware of a recent change that will impact how products are promoted such as a price change, new information to be used as comparison to competitor’s products, a potential problem that has arisen when installing or using a product or some other adjustment. Use of Customer Sales Teams Salespeople may require the assistance of others in their organization to effectively deal with prospects. In fact, many companies are moving away from the traditional sale force arrangement, where a single salesperson handles nearly all communication with an account, in favor of a team approach where multiple people are involved. Teams consist of individuals from several functional areas such as marketing, manufacturing, distribution, and customer service. In some configurations all members share bonuses if the team meets sales goals. Clearly to be effective a team approach requires the implementation of
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customer relationship management systems that we discussed earlier. The Selling Process Many sales positions do not include a strong emphasis on generating customer sales, rather these positions help meet promotional objectives in other ways, such as communicating with people who influence the final buyer, responding to customer-initiated inquiry (e.g., customer carrying product to a retail counter) or serving as support for the Yet, for a large percentage of marketers seeking the benefits of personal selling as a promotional tool, success is measured in terms of products sold as a direct result of personal selling efforts (i.e., order getters). For this reason it is important that all marketers fully understand how ordergenerated selling occurs. Additionally, understanding the selling process is beneficial for many others who do not view themselves in sales roles. For instance, a product manager must convince the VP of Marketing to fund a major market research study. Though what the product manager must do may seem far removed from what most people perceive as selling, the key is whether one person is persuading another person to make a decision. Whether it is convincing someone to make a purchase, accept a point-of-view, change attitudes or an infinite number of other behavioral decisions, it all comes down to mastering persuasive communication or selling. Activities in the Selling Process The selling process is a set of activities undertaken to successfully obtain an order and begin building long-term customer relations. While the activities we discuss apply to all forms of selling and can be adapted to most selling situations (including non-product selling such as selling an idea), we will mainly concentrate on the activities carried out by professional salespeople. For our purposes, we define professional salespeople as those whose principle occupation involves selling products (i.e., goods and services) to buyers and do so for organizations that appreciate and support sellers who are well-trained and ethically responsible. 1. The selling activities undertaken by professional salespeople include: 1. Generating Sales Leads 2. Qualifying Leads 3. Preparation for the Sales Call 4. The Sales Meeting 5. Handling Buyer Resistance
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6. Closing the Sale 7. Account Maintenance Additionally, salespeople often find circumstances in which all activities are required but the order these are carried out may be disrupted. For instance, salespeople are often confronted with a buyer who is resistant to making a purchase even before the salesperson has made a presentation (e.g., “I don’t think I’m interested in what you’re selling”). This will likely force the salesperson to adjust his or her selling process. In this example it will require the salesperson address the buyer’s resistance before beginning to present the product. Generating Sales Leads Selling begins by locating potential customers. A potential customer or “prospect” is first identified as sales lead, which simply means the salesperson has obtained information to suggest that someone exhibits key characteristics that lend them to being a prospect. For certain sales positions, locating leads may not be a major task undertaken by the sales force as these activities are handled by others in company. For instance, salespeople may receive a list of sales leads based on inquiries through the company’s website. However, for a large percentage of salespeople lead generation consumes a significant portion of their everyday work. For salespeople actively involved in generating leads, they are continually on the look out for potential new business. In fact, for salespeople whose chief role is that of order getter, there is virtually no chance of being successful unless they can consistently generate sales leads. Sales leads can come from many sources including: • Prospect Initiated – Includes leads obtained when prospects initiate contact such as when they fill out a website form enter a trade show booth or respond to an advertisement. • Profile Fitting – Uses market research tools, such as company profiles, to locate leads based on customers that fit a particular profile likely to be a match for the company’s products. The profile is often based on the profile of previous customers. • Market Monitoring – Through this approach leads are obtained by monitoring media outlets, such as news articles, Internet forums and corporate press releases.
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Canvassing – Here leads are gathered by cold-calling (i.e., contacting someone without pre-notification) including in-person, by telephone or by email. • Data Mining – This technique uses sophisticated software to evaluate information (e.g., in a corporate database) previously gathered by a company in hopes of locating prospects. • Personal and Professional Contacts – A very common method for locating sales leads uses referrals. Such referrals may come at no cost to the salesperson or, to encourage referrals, salespeople may offer payment for referrals. Non-paying methods including asking acquaintances (e.g., friends, business associates) and networking (e.g., joining local or professional groups and associations). Paid methods may include payment to others who direct leads that eventually turn into customers including using Internet affiliate programs (i.e., paid for website referrals). • Promotions – The method uses free gifts to encourage prospect to provide contact information or attend a sales meeting. For example, offering free software for signing up for a demonstration of another product. Qualifying Sales Leads Not all sales leads hold the potential for becoming sales prospects. There are many reasons for this including: • Cannot be Contacted – Some prospects may fit the criteria for being a prospect but gaining time to meet with them may be very difficult (e.g., high-level executives). • Need Already Satisfied - Prospects may have already purchased a similar product offered by a competitor and, thus, may not have the need for additional products. • Lack Financial Capacity - Just because someone has a need for a product does not mean they can afford it. Lack of financial capacity is major reason why sales leads do not become prospects. • May Not Be Key Decision Maker - Prospects may lack the authority to approve the purchase. • May Not Meet Requirements to Purchase - Prospects may not meet the requirements for purchasing the product (e.g., lack other products needed for seller’s product to work properly). The process of determining whether a sales lead has the potential to become a prospect is known as “qualifying” the lead. In some cases, a sales lead can be qualified by the 317
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seller prior to making first contact. For instance, this can be done through the use of research reports, such as an evaluation of a company’s financial position using publicly available financial reporting services. More likely, sellers will not be in a position to qualify leads until they establish contact with a lead, which may occur in activities associated with either Preparation for the Sales Call or The Sales Meeting. Preparation for the Sales Call If a prospect has been qualified or if qualifying cannot take place until additional information is obtained (e.g., when first talking to the prospect), a salesperson’s next task is to prepare for an eventual sales call. This activity in the selling process has two main objectives: Learn More about the Customer While during the lead generation and qualifying portion of the selling process a seller may have gained a great deal of knowledge about a customer, invariably there is much more to be known that will be helpful once an actual sales call is made. The salesperson will use their research skills to learn about such issues as: • who is the key decision maker • what is the customer’s organizational structure • what products are currently being purchased • how are purchase decisions made Salespeople can attempt to gather this information through several sources including: corporate research reports, information on the prospect’s website, conversations with non-competitive salespeople who have dealt with the prospect, website forums where industry information is discussed, and by asking questions when setting up sales meetings. Gaining this information can help prepare the salesperson for the sales presentation. For example, if the salesperson learns which competitor currently supplies the prospect then the salesperson can tailor promotional material in a way that compares the seller’s products against products being purchased by the prospect. Additionally, having more information about a prospect allows the salesperson to be more confident in his/her presentation and, consequently, come across as more knowledgeable when meeting with the prospect. Arranging Prospect Contact With some information about the prospect in-hand, the salesperson must then move to make initial contact. In a few cases a salesperson may be fortunate to have the prospect contact her/him but in most cases salespeople will
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need to initiate contact. In many ways arranging for contact is as much as selling effort as selling a product. There are two main approaches to arranging contact: • Cold Calling for Presentation – A challenging way to contact a prospect is to attempt to conduct a sales meeting through a straight cold call. In this approach the intention is to not only contact the prospect but to also give a sales presentation during this first contact period. This approach can be difficult since the prospect may be irritated by having unannounced salespeople interrupt them and take time out of their busy work schedule to sit for a sales meeting. • Cold Calling for Appointment – A better approach for most salespeople is to contact a prospect to set up an appointment in advance of the sales meeting. The main advantages of making appointments is that it gives the salesperson additional time to prepare for the meeting and also, in the course of discussing an appointment, the salesperson may have the opportunity to gain more information from the prospect. Of course, this way also has the added advantage of having the prospect agree to the sit for the meeting, which may make them more receptive to the product than if the salesperson had followed the Cold Calling for Presentation approach. The Sales Meeting The heart of the selling process is the meeting that takes place between the prospect and the salesperson. At this stage of the selling process the salesperson will spend a considerable amount of time presenting the product. While the word “presenting” may imply the seller is taking center stage and does most of the talking by discussing the product’s features and benefits, in actuality successful sellers find effective presentations to be more of a giveand-take conversation. Additionally, the meeting is not just about the seller discussing the product, rather much more takes place during this part of the selling process including: • Establishing Rapport with the Prospect – Successful salespeople know that jumping right into a discussion of their product is not the best why to build relationships. Often it is important that, upon first greeting the prospect, the salesperson spend a short period of time in a friendly conversation to help establish a rapport with the potential buyer.
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Gaining Background Information – The salesperson will use questioning skills to learn about the prospect and the prospect’s company and industry. • Access Prospect’s Needs - Taking what is learned from the prospect’s response to questions, the salesperson can determine the prospect’s needs. To accomplish this task successfully, sellers must be skilled at listening and understanding responses. • Presenting the Product – The salesperson will stimulate a prospect’s interest by discussing a product’s features and benefits in a way that is tailored to the needs of the customer. Part of this discussion may include a demonstration of the product. • Assess the Prospect - Throughout the presentation the seller will use techniques, including interpreting non-verbal cues (e.g., body language), to gauge the prospect understands and acceptance of what is discussed. Handling Buyer Resistance It is a rare instance when a salesperson does not receive resistance from a prospect. By resistance we are referring to a concern a prospect has regarding the product (or company) and how it will work for their situation. In most cases the resistance is expressed verbally (e.g., “I don’t see how this can help us.”) but other times the resistance presents itself in a non-verbal fashion (e.g., prospect facial expression shows puzzlement). While handling sales resistance may sound like a difficult part of selling, most successful salespeople actually welcome and even encourage it as part of the selling process. Why? Because it is an indication the prospect is paying attention to the presentation and may even have an interest in the product if the resistance can be effectively addressed. To overcome resistance, salespeople are trained to make sure they clearly understand the prospect’s concern. Sometimes prospects say one thing that appears to be an objection to the product but, in fact, they have another issue that is preventing them from agreeing to a purchase. Salespeople are rarely able to make the sale unless resistance is overcome. Closing the Sale Most people involved in selling acknowledge that this part of the selling process is the most difficult. Closing the sale is the point when the seller asks the prospect to agree to make the purchase. It is also the point at which many customers are unwilling to make a commitment and, 320
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consequently, respond to the seller’s request by saying no. For anyone involved in sales such rejection can be very difficult to overcome, especially if it occurs on a consistent basis. Yet the most successful salespeople will say that closing the sale is actually fairly easy if the salesperson has worked hard in developing a relationship with the customer. Unfortunately some buyers, no matter how satisfied they are with the seller and their product, may be insecure or lack confidence in making buying decisions. For these buyers, salespeople must rely on persuasive communication skills that help assist and even persuade a buyer to place an order. The use of persuasive communication techniques is by far the most controversial and most misunderstood concept related to the selling process. Why? Because to many people the act of persuasion is viewed as an attempt to manipulate someone into doing something they really do not want to do. However, for sales professionals this is not what persuasive communication is about. Instead, persuasion is a skill for assisting someone in making a decision; it is not a technique for making someone make a decision. The difference is important. Where one is manipulative, the other is helpful and designed to benefit the buyer. And as we noted, persuasion does not always occur. Many times buyers take the lead in closing a sale since they are convinced the product is right for them. For salespeople, understanding when it is time to close a sale and what techniques should be used takes experience. In any event, the close is not the end of the selling process but is the beginning of building a relationship. Account Maintenance While account maintenance is listed as the final activity in the selling process, it really amounts to the beginning of the next sale and, thus, the beginning of a buyer-seller relationship. In selling situations where repeat purchasing is a goal (compared to a one-time sale), following up with a customer is critical to establishing a long-term relationship. After a sale, salespeople should work hard to insure the customer is satisfied with the purchase and determine what other ways the salesperson can help the customer be even more satisfied with the purchase. The level and nature of after-sale follow-up will often depend on the product sold. Expensive, complex purchases that require installation and training may result in the salesperson spending considerable time with the customer after the sale while
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smaller purchases may have the seller follow-up with simple email correspondence. By maintaining contact after the sale the seller is in a position to become more accepted by the customer who invariably leads to the salesperson learning more about the customer and the customer’s business. With this knowledge the salesperson will almost always be presented with more selling opportunities. Pricing Decisions What do the following words have in common? Fare, dues, tuition, interest, rent, and fee. The answer is that each of these is a term used to describe what one must pay to acquire benefits from another party. More commonly, most people simply use the word price to indicate what it costs to acquire a product. The pricing decision is a critical one for most marketers, yet the amount of attention given to this key area is often much less than is given to other marketing decisions. One reason for the lack of attention is that many believe price setting is a mechanical process requiring the marketer to utilize financial tools, such as spreadsheets, to build their case for setting price levels. While financial tools are widely used to assist in setting price, marketers must consider many other factors when arriving at the price for which their product will sell. In Part 19 of our highly detailed Principles of Marketing tutorial we begin a two-part discussion of the fourth marketing mix variable - price. For some marketers more time is spent agonizing over price than any other marketing decision. In this tutorial we look at why price is important and what factors influence the pricing decision. What is Price? In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction. In fact, price means different things to different participants in an exchange: • Buyers’ View – For those making a purchase, such as final customers, price refers to what must be given up to obtain benefits. In most cases what is given up is financial consideration (e.g., money) in exchange for acquiring access to a good or service. But financial consideration is not always what the buyer gives up. Sometimes in a barter situation a buyer may acquire a 322
product by giving up their own product. For instance, two farmers may exchange cattle for crops. Also, as we will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn to use the product). • Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit. For marketing organizations price also serves as a marketing tool and is a key element in marketing promotions. For example, most retailers highlight product pricing in their advertising campaigns. Price is commonly confused with the notion of cost as in “I paid a high cost for buying my new plasma television”. Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For marketing organizations seeking to make a profit the hope is that price will exceed cost so the organization can see financial gain from the transaction. Finally, while product pricing is a main topic for discussion when a company is examining its overall profitability, pricing decisions are not limited to forprofit companies. Not-for-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though it is often not as apparent. For instance, charities seeking to raise money may set different “target” levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other benefits. While a charitable organization may not call it a price in their promotional material, in reality these donations are equivalent to price setting since donors are required to give a contribution in order to obtain something of value. Price vs. Value For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value. Value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s 323
perceived value of marketer’s pricing to view value as a Value = perceived
a product will be affected by a decision. Any easy way to see this is calculation: benefits received perceived price paid For the buyer value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial it can also involve other things that a buyer may be giving up. For example, in addition to paying money a customer may have to spend time learning to use a product, pay to have an old product removed, and close down current operations while a product is installed or incur other expenses. However, for the purpose of this tutorial we will limit our discussion to how the marketer sets the financial price of a transaction. Importance of Pricing When marketers talk about what they do as part of their responsibilities for marketing products, the tasks associated with setting price are often not at the top of the list. Marketers are much more likely to discuss their activities related to promotion, product development, market research and other tasks that are viewed as the more interesting and exciting parts of the job. Yet pricing decisions can have important consequences for the marketing organization and the attention given by the marketer to pricing is just as important as the attention given to more recognizable marketing activities. Some reasons pricing is important include: • Most Flexible Marketing Mix Variable – For marketers price is the most adjustable of all marketing decisions. Unlike product and distribution decisions, which can take months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very rapidly. The flexibility of pricing decisions is particularly important in times when the marketer seeks to quickly stimulate demand or respond to competitor price actions. For instance, a marketer can agree to a field salesperson’s request to lower price for a potential prospect during a phone conversation. Likewise a marketer in charge of online operations can raise prices on hot selling products with the click of a few website buttons. • Setting the Right Price – Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the marketing 324
organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target market is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the marketer is attempting to take advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasing the product. Setting the right price level often takes considerable market knowledge and, especially with new products, testing of different pricing options. • Trigger of First Impressions - Often times customers’ perception of a product is formed as soon as they learn the price, such as when a product is first seen when walking down the aisle of a store. While the final decision to make a purchase may be based on the value offered by the entire marketing offering (i.e., entire product), it is possible the customer will not evaluate a marketer’s product at all based on price alone. It is important for marketers to know if customers are more likely to dismiss a product when all they know is its price. If so, pricing may become the most important of all marketing decisions if it can be shown that customers are avoiding learning more about the product because of the price. • Important Part of Sales Promotion – Many times price adjustments are part of sales promotions that lower price for a short term to stimulate interest in the product. However, as we noted in our discussion of promotional pricing in Part: 15: Sales Promotion tutorial, marketers must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again. Factors Affecting Pricing Decision For the remainder of this tutorial we look at factors that affect how marketers set price. The final price for a product may be influenced by many factors which can be categorized into two main groups: Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, 325
can be altered. However, while the organization may have control over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time. External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market. Internal Factors The pricing decision can be affected by factors that are controlled by the marketing organization. These factors include: Company and Marketing Objectives Marketing decisions are guided by the overall objectives of the company. While we will discuss this in more detail when we cover marketing strategy in a later tutorial, for now it is important to understand that all marketing decisions, including price, work to help achieve company objectives. Corporate objectives can be wide-ranging and include different objectives for different functional areas (e.g., objectives for production, human resources, etc). While pricing decisions are influenced by many types of objectives set up for the marketing functional area, there are four key objectives in which price plays a central role. In most situations only one of these objectives will be followed, though the marketer may have different objectives for different products. The four main marketing objectives affecting price include: • Return on Investment (ROI) – A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product. This level of return along with an estimate of sales will help determine appropriate pricing levels needed to meet the ROI objective.
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Cash Flow – Firms may seek to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs. This is most likely to occur with new products where the organizational objectives allow a new product to simply meet its expenses while efforts are made to establish the product in the market. This objective allows the marketer to worry less about product profitability and instead directs energies to building a market for the product. • Market Share – The pricing decision may be important when the firm has an objective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objective the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market (we will discuss this marketing strategy in further detail in our next tutorial). For existing products, firms may use price decisions to insure they retain market share in instances where there is a high level of market competition and competitors who are willing to compete on price. • Maximize Profits – Older products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a level that optimizes profits. This is often the case when the marketer has little incentive to introduce improvements to the product (e.g., demand for product is declining) and will continue to sell the same product at a price premium for as long as some in the market is willing to buy. Marketing Strategy Marketing strategy concerns the decisions marketers make to help the company satisfy its target market and attain its business and marketing objectives. Price, of course, is one of the key marketing mix decisions and since all marketing mix decisions must work together, the final price will be impacted by how other marketing decisions are made. For instance, marketers selling high quality products would be expected to price their products in a range that will add to the perception of the product being at a high-level. It should be noted that not all companies view price as a key selling feature. Some firms, for example those seeking to be viewed as market leaders in product quality, will deemphasize price and concentrate on a strategy that highlights non-price benefits (e.g., quality, durability, 327
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service, etc.). Such non-price competition can help the company avoid potential price wars that often break out between competitive firms that follow a market share objective and use price as a key selling feature. Costs For many for-profit companies, the starting point for setting a product’s price is to first determine how much it will cost to get the product to their customers. Obviously, whatever price customer’s pay must exceed the cost of producing a good or delivering a service otherwise the company will lose money. When analyzing cost, the marketer will consider all costs needed to get the product to market including those associated with production, marketing, distribution and company administration (e.g., office expense). These costs can be divided into two main categories: • Fixed Costs - Also referred to as overhead costs, these represent costs the marketing organization incurs that are not affected by level of production or sales. For example, for a manufacturer of writing instruments that has just built a new production facility, whether they produce one pen or one million they will still need to pay the monthly mortgage for the building. From the marketing side, fixed costs may also exist in the form of expenditure for fielding a sales force, carrying out an advertising campaign and paying a service to host the company’s website. These costs are fixed because there is a level of commitment to spending that is largely not affected by production or sales levels. • Variable Costs – These costs are directly associated with the production and sales of products and, consequently, change has the level of production or sales changes. Typically variable costs are evaluated on a per-unit basis since the cost is directly associated with individual items. Most variable costs involve costs of items that are either components of the product (e.g., parts, packaging) or are directly associated with creating the product (e.g., electricity to run an assembly line). However, there are also marketing variable costs such as coupons, which are likely to cost the company more as sales increase (i.e., customers using the coupon). Variable costs, especially for tangible products, tend to decline as more units are produced. This is due to the producing company’s ability to purchase product components for lower prices since component suppliers 328
often provide discounted pricing for large quantity purchases. Determining individual unit cost can be a complicated process. While variable costs are often determined on a per-unit basis, applying fixed costs to individual products is less straightforward. For example, if a company manufactures five different products in one manufacturing plant how would it distribute the plant’s fixed costs (e.g., mortgage, production workers’ cost) over the five products? In general, a company will assign fixed cost to individual products if the company can clearly associate the cost with the product, such as assigning the cost of operating production machines based on how much time it takes to produce each item. Alternatively, if it is too difficult to associate to specific products the company may simply divide the total fixed cost by production of each item and assign it on percentage basis. External Market Factors The pricing decision can be affected by factors that are not directly controlled by the marketing organization. These factors include: Elasticity of Demand Marketers should never rest on their marketing decisions. They must continually use market research and their own judgment to determine whether marketing decisions need to be adjusted. When it comes to adjusting price, the marketer must understand what effect a change in price is likely to have on target market demand for a product. Understanding how price changes impact the market requires the marketer have a firm understanding of the concept economists call elasticity of demand, which relates to how purchase quantity changes as prices change. Elasticity is evaluated under the assumption that no other changes are being made (i.e., “all things being equal”) and only price is adjusted. The logic is to see how price by itself will affect overall demand. Obviously, the chance of nothing else changing in the market but the price of one product is often unrealistic. For example, competitors may react to the marketer’s price change by changing the price on their product. Despite this, elasticity analysis does serve as a useful tool for estimating market reaction. Elasticity deals with three types of demand scenarios: • Elastic Demand – Products are considered to exist in a market that exhibits elastic demand when a certain percentage change in price results in a larger percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the 329
demand for the product is likely to decline (rise) by greater than 10%. • Inelastic Demand – Products are considered to exists in an inelastic market when a certain percentage change in price results in a smaller percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by less than 10%. • Unitary Demand – This demand occurs when a percentage change in price results in an equal percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by 10%. For marketers the important issue with elasticity of demand is to understand how it impacts company revenue. In general the following scenarios apply to making price changes for a given type of market demand: • For elastic markets – increasing price lowers total revenue while decreasing price increases total revenue. • For inelastic markets – increasing price raises total revenue while decreasing price lowers total revenue. • For unitary markets – there is no change in revenue when price is changed. Customer and Channel Partner Expectations Possibly the most obvious external factor that influences price settings are the expectations of customers and channel partners. As we discussed, when it comes to making a purchase decision customers assess the overall “value” of a product much more than they assess the price. When deciding on a price marketers need to conduct customer research to determine what “price points” are acceptable. Pricing beyond these price points could discourage customers from purchasing. Firms within the marketer’s channels of distribution also must be considered when determining price. Distribution partners expect to receive financial compensation for their efforts, which usually means they will receive a percentage of the final selling price. This percentage or margin between what they pay the marketer to acquire the product and the price they charge their customers must be sufficient for the distributor to cover their costs and also earn a desired profit. Competitive and Related Products
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Marketers will undoubtedly look to market competitors for indications of how price should be set. For many marketers of consumer products researching competitive pricing is relatively easy, particularly when Internet search tools are used. Price analysis can be somewhat more complicated for products sold to the business market since final price may be affected by a number of factors including if competitors allow customers to negotiate their final price. Analysis of competition will include pricing by direct competitors, related products and primary products. • Direct Competitor Pricing – Almost all marketing decisions, including pricing, will include an evaluation of competitors’ offerings. The impact of this information on the actual setting of price will depend on the competitive nature of the market. For instance, products that dominate markets and are viewed as market leaders may not be heavily influenced by competitor pricing since they are in a commanding position to set prices as they see fit. On the other hand in markets where a clear leader does not exist, the pricing of competitive products will be carefully considered. Marketers must not only research competitive prices but must also pay close attention to how these companies will respond to the marketer’s pricing decisions. For instance, in highly competitive industries, such as gasoline or airline travel, competitors may respond quickly to competitors’ price adjustments thus reducing the effect of such changes. • Related Product Pricing - Products that offer new ways for solving customer needs may look to pricing of products that customers are currently using even though these other products may not appear to be direct competitors. For example, a marketer of a new online golf instruction service that allows customers to access golf instruction via their computer may look at prices charged by local golf professionals for inperson instruction to gauge where to set their price. While on the surface online golf instruction may not be a direct competitor to a golf instructor, marketers for the online service can use the cost of in-person instruction as a reference point for setting price. • Primary Product Pricing - As we discussed in Part 6: Product Decisions, marketers may sell products viewed as complementary to a primary product. For example, Bluetooth headsets are considered complementary to the primary product cell phones. The pricing of 331
complementary products may be affected by pricing changes made to the primary product since customers may compare the price for complementary products based on the primary product price. For example, companies that sell accessory products for the Apple iPod may do so at a cost that is only 10% of the purchase price of the iPod. However, if Apple were to dramatically drop the price, for instance by 50%, the accessory at its present price would now be 20% of the of iPod price. This may be perceived by the market as a doubling of the accessory’s price. To maintain its perceived value the accessory marketer may need to respond to the iPod price drop by also lowering the price of the accessory Government Regulation Marketers must be aware of regulations that impact how price is set in the markets in which their products are sold. These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. Price regulations can come from any level of government and vary widely in their requirements. For instance, in some industries, government regulation may set price ceilings (how high price may be set) while in other industries there may be price floors (how low price may be set). Additional areas of potential regulation include: deceptive pricing, price discrimination, predatory pricing and price fixing. Finally, when selling beyond their home market, marketers must recognize that local regulations may make pricing decisions different for each market. This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. Consequently marketers must have a clear understanding of regulations in each market they serve. Setting Price Like all other marketing decisions, market research is critical to determining the optimal selling price. Consequently, the process laid out here is intended to open the marketer’s eyes to the options to consider when setting price and is in no way presented as a guide for setting the “perfect” price. Steps in the Price Setting Process We view price setting as a series of decisions the marketer makes in order to determine the price direct and indirect customers pay to acquire the product. Direct customers are those who purchase products directly from the marketer.
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For example, consider the direct pricing decisions that take place when a new novel is sold: Publisher of the book must decide at what price they will charge their immediate customers in the channel of distribution such as online booksellers (e.g., Amazon.com). Booksellers must decide at what price they will sell the book to their immediate customers which are typically final consumers (e.g., website shopper). As we see with the bookseller example, many companies also sell indirectly to the final customer through a network of resellers such as retailers. For marketers selling through resellers the pricing decision is complicated by resellers’ need to earn a profit and the marketer’s need to have some control over the product’s price to the final customer. In these cases setting price involves more than only worrying about what the direct customer is willing pay since the marketer must also evaluate pricing to indirect customers (e.g., resellers’ customers). Clearly sales can be dramatically different than what the marketer forecasts if the selling price to the final customer differs significantly from what the marketer expects. For instance, if the marketing organization has forecasted to sell 1,000,000 novels if the price to the final customer is one price and resellers decide to raise the price 25% higher than that price the marketer’s sales may be much lower then forecasted. With an understanding that marketers must consider many factors when setting price, we now turn to the process by which price is set. We present this as a five-step approach. As we noted earlier, while not all marketers follow these steps, what is presented does cover the methods used by many marketers. The steps we cover include: 1. Examine Company and Marketing Objectives 2. Determine an Initial Price 3. Set Standard Price Adjustments 4. Determine Promotional Pricing 5. State Ownership and Payment Options Step 1: Examine Company and Marketing Objectives Pricing Decisions, marketing decisions including price are driven by the objectives set by the management of the organization. These objectives come at two levels. First, the overall objectives of the company guide all decisions for all functional areas (e.g., marketing, production, human resources, finance, etc.). Guided by these objectives the marketing department will set its own
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objectives which may include return on investment, cash flow, market share and maximize profits to name a few. Pricing decisions like all other marketing decisions will be used to help the department meet its objectives. For instance, if the marketing objective is to build market share it is likely the marketer will set the product price at a level that is at or below the price of similar products offered by competitors. Also, the price setting process looks to whether the decisions made are in line with the decisions made for the other marketing decisions (i.e., target market, product, distribution, promotion). Thus, if a company with a strong brand name targets high-end consumers with a high quality, full-featured product, the pricing decision would follow the marketer’s desire to have the product be considered a high-end product. In this case the price would be set high relative to competitors’ products that do not offer as many features or do not have an equally strong brand name. Step 2: Determine an Initial Price With the objectives in Step 1 providing guidance for setting price, the marketer next begins the task of determining an initial price level. We say initial because in many industries this step involves setting a starting point from which further changes may be made before the customer pays the final price. Sometimes called list price or published price, marketers will often use this as a promotional or negotiating tool as they move through the other price setting steps. For companies selling to consumers, this price also leads to a projection of the recommended selling price at the retail level often called the manufacturer’s suggested retail price (MSRP). The MSRP may or may not be the final price for which products are sold. For strong brands that are highly sought by consumers the MSRP may in fact be the price at which the product will be sold. But in many other cases, as we will see, the price setting process results in the price being different based on adjustments made by the marketer and others in the channel of distributions. Speaking of distribution channels, as we discussed in Part 8: Distribution Decisions, some marketers will utilize multiple channel partners to handle product distribution. When resellers are involved marketers must recognize that all members of the channel will seek to profit when a sale is made. If a marketer seeks to sell the product at a certain retail price (e.g., MSRP) then the price charged to the first channel member to handle the product can potentially influence the final selling price. To see how
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this can cause problems, assume a marketer sets an MSRP of (US) $1.99 for a product that sells through a distribution channel. This channel consists of wholesalers, who must pay the marketer $1.89 to purchase the product, and retailers who in turn buy the product from wholesalers. In this example it is unlikely the retailer will sell the product at the MSRP since the wholesaler will add to the $1.89 purchase price and most likely raise the price charged to the retailer to a point that is higher than the MSRP. The retailer in turn will add to their purchase price when selling to consumers. In this scenario it is possible the final price to the consumer will be closer to $2.99 than the $1.99 MSRP. As this example shows marketers must take care in setting the initial price so that all channel partners feel it is worth their effort to handle the product. Marketers have at their disposal several approaches for setting the initial price which include: • Cost Pricing • Market Pricing • Competitive Pricing • Bid Pricing Cost Pricing Under cost pricing the marketer primarily looks at production costs as the key factor in determining the initial price. This method offers the advantage of being easy to implement as long as costs are known. But one major disadvantage is that it does not take into consideration the target market’s demand for the product. This could present major problems if the product is operating in a highly competitive market where competitors frequently alter their prices. There are several types of cost pricing including: Markup Pricing This pricing method used by many resellers, who acquire products from suppliers, is one in which final price is determined by adding a certain percentage to the cost of the product. For many resellers, such as retailers, who purchase thousands of products it is far easier to use a markup pricing approach due to its simplicity than it would be to determine what the market is willing to pay for each product (see market pricing below). Resellers differ in how they use markup pricing with some using the markup on cost method and others using the markup on selling price method. We will demonstrate each using an item that costs a reseller (US) $50 to purchase from a supplier. 335
Markup on Cost – Using this method price is determined by simply multiplying the cost of each item by a predetermined percentage then adding the result to the cost. A major general retailer, such as Wal-Mart, may apply a set percentage for each product category (e.g., women’s clothing, automotive, garden supplies, etc.) making the pricing consistent for all like-products. Alternatively, the predetermined percentage may be a number that is identified with the marketing objectives (e.g., required 20% ROI). The calculation for markup on cost is: Item Cost + (Item Cost x Markup Percentage) = Price $50 + (50 x .30) = $65 Markup on Selling Price – Many resellers, and in particular retailers, discusses their markup not in terms of markup on product cost but as a reflection of price. The calculation for markup on selling price is: Item Cost = Price (1.00 – Markup Percentage) $50 = $71.43 (1.00 – .30) The astute reader should recognize that the information in markup of selling price contains the same information in markup of cost. So why do some use one and not the other? One answer is that it is a traditional way for resellers in certain industries to discuss how they arrive at price (e.g., “We only make 5% of the price of the product.”). But many feel the reason is that markup of selling price serves as an aid to company promotion because the amount of money a reseller makes is in percentage terms always lower when calculated using markup on selling price than it is with markup on cost. For example, in the markup on cost example where the markup is 30% the gross profit is $15 ($65-$50). If the reseller using markup on selling price received a gross profit of $15 their markup would only be 23% ($50/[1.00-.231] = $65). Consequently, a retailer’s advertisement may say: “We Make Little, But Our Customers Save A Lot” and back this up by saying they only make a small percentage on each sale. When in reality how much they really make in monetary terms may be equal to another retailer who uses markup on cost and reports a higher percentage. Cost-Plus Pricing In the same way markup pricing arrives at price by adding a certain percentage to the product’s cost, cost-plus pricing also adds to the cost by using a fixed monetary amount rather than percentage. For instance, a contractor hired
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to renovate a homeowner’s bathroom will estimate the cost of doing the job by adding their total labor cost to the cost of the materials used in the renovation. The homeowner’s selection of ceramic tile to be used in the bathroom is likely to have little effect on the labor needed to install it whether it is a low-end, low priced tile or a high-end, premium priced tile. Assuming most material in the bathroom project are standard sizes and configuration, any change in the total price for the renovation is a result of changes in material costs while labor costs are constant. Breakeven Pricing Breakeven pricing is associated with breakeven analysis, which is a forecasting tool used by marketers to determine how many products must be sold before the company starts realizing a profit. Like the markup method, breakeven pricing does not directly consider market demand when determining price, however it does indicate the minimum level of demand that is needed before a product will show a profit. From this the marketer can then assess whether the product can realistically achieve these levels. The formula for determining breakeven takes into consideration both variable and fixed costs (discussed in Part 19: Price Decisions) as well as price, and is calculated as follows: Fixed Cost = # of Units to Breakeven Price – Variable Cost per Unit For example, assume a company operates a single-product manufacturing plant that has a total fixed cost (e.g., purchase of equipment, mortgage, etc.) per year of (US) $3,000,000 and the variable cost (e.g., raw materials, labor, electricity, etc.) is $45.00 per unit. If the company sells the product directly to customers for $120, it will require the company to sell 40,000 units to breakeven. $3,000,000 = 40,000 units $120 - $45 Again we must emphasize that marketers must determine whether the demand (i.e., number of units needed to breakeven) is realistically attainable. Simply plugging in a number for price without knowing how the market will respond to that figure means that this method has little value. (Note: A common mistake when performing this analysis is to report the breakeven in a monetary value such a breakeven in dollars (e.g., $40,000). The calculation presented above is a measure of units that need
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to be sold. Clearly it is easy to turn this into a revenue breakeven analysis by multiplying the units needed by the selling price. In our example, 40,000 units x $120 = $4,800,000.) Market Pricing Under the market pricing method cost is not the main factor driving price decisions; rather initial price is based on analysis of market research in which customer expectations are measured. The main goal is to learn what customers in an organization’s target market are likely to perceive as an acceptable price. Of course this price should also help the organization meet its marketing objectives. Market pricing is one of the most common methods for setting price, and the one that seems most logical given marketing’s focus on satisfying customers. So if this is the most logical approach why don’t all companies follow it? The main reason is that using the market pricing approach requires a strong market research effort to measure customer reaction. For many marketers it is not feasible to spend the time and money it takes to do this right. Additionally for some products, especially new high-tech products, customers are not always knowledgeable about the product to know what an acceptable price level should be. Consequently, some marketers may forego market pricing in favor of other approaches. For those marketers who use market pricing, options include: • Backward Pricing • Psychological Pricing • Price Lining Backward pricing in some marketing organizations the price the market is willing to pay for a product is an important determinant of many other marketing decisions. This is likely to occur when the market has a clear perception of what it believes is an acceptable level of pricing. For example, customers may question a product that carries a price tag that is double that of a competitor’s offerings but is perceived to offer only minor improvements compared to other products. In these markets it is important to undertake research to learn whether customers have mentally established a price range or reference price for products in a certain product category. The marketer can learn this by surveying customers with such questions as: “How much do you think these types of products should cost you?” In situations where a price range is ingrained in the market, the marketer may need to use this price as the starting point for many decisions and work backwards to 338
develop product, promotion and distribution plans. For instance, assume a company sells products through retailers. If the market is willing to pay (US)$199 for a product but is resistant to pricing that is higher, the marketer will work backwards factoring out the profit margin retailers are likely to want (e.g., $40) and as well as removing the marketer’s profit (e.g., $70). From this, the product cost will remain ($199 -$40-$70= $89). The marketer must then decide whether they can create a product with sufficient features and benefits to satisfy customers’ needs at this cost level. Psychological Pricing For many years researchers have investigated customers’ response to product pricing. Some of the results point to several interesting psychological effects price may have on customers’ buying behavior and on their perception of individual products. We stress that certain pricing tactics “may” have a psychological effect since the results of some studies have suggested otherwise. But enough studies have shown an effect that this topic is worthy of discussion. • Odd-Even Pricing - One effect dubbed “odd-even” pricing relates to whole number pricing where customers may perceive a significant difference in product price when pricing is slightly below a whole number value. For example, a product priced at (US) $299.95 may be perceived as offering more value than a product priced at $300.00. This effect can also be used to influence potential customers who receive product information from others. Many times a buyer will pass along the price as being lower than it is either because they recall it being lower than the even number or they want to impress others with their success in obtaining a good value. For instance, in our example a buyer who pays $299.95 may tell a friend they paid “a little more than $200” for the product when in fact it was much closer to $300. • Prestige Pricing - Another psychological effect, called prestige pricing, points to a strong correlation between perceived product quality and price. The higher the price the more likely customers are to perceive it has being higher quality compared to a lower priced product. (Although there is point at which customers will begin to question the value of the product if the price is too high.) In fact, the less a customer knows about a product the more likely they are to judge the product as being of higher 339
quality based on only knowing the price. Prestige pricing can also work with odd-even pricing as marketers, looking to present an image of high quality, may choose to price products at even levels (e.g., $10 rather than $9.99). Price Lining As we have discussed many times throughout the Principles of Marketing tutorial, marketers must appeal to the needs of a wide variety of customers (see Part 4: Target Markets for more details). The difference in the “needs-set” between customers often leads marketers to realization that the overall market is really made up of a collection smaller market segments. These segments may seek similar products but with different sets of product features, which are presented in the form of different models (e.g., different quality of basketball sneakers) or service options (e.g., different hotel room options). Price lining or product line pricing is a method that primarily uses price to create the separation between the different models. With this approach, even if customers possess little knowledge about a set of products, customers may perceive they are different based on price alone. The key is whether the prices for all products in the group are perceived as representing distinct price points (i.e., enough separation between each). For instance, a marketer may sell a base model, an upgraded model and a deluxe model each at a different price. If the differences in features for each model is not readily apparent to a customer, such as differences that are inside the product and not easily viewed (e.g., difference between laptop computers), then price lining will help the customer recognize that differences do exist as long as the prices are noticeably different. Price lining can also be effective as a method for increasing profitability. In many cases the cost to the marketer for adding different features to create different models or service options does not alone justify a big price difference. For instance, an upgraded model may cost 10% more to produce than a base model but using the price lining method the upgraded product price may be 20% higher and thus more profitable than the base model. The increase in profitability offered by price lining is one reason marketers introduce multiple models, since it allows the company to not only satisfy the needs of different segments but also presents an option for a customer to “buy up” to a higher priced and more profitable model. Competitive Pricing
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As we noted in Part 19: Pricing Decisions, how competitors price their products can influence the marketer’s pricing decision. Clearly when setting price it makes sense to look at the price of competitive offerings. For some, competitor’s price serves as an important reference point from which they set their price. In some industries, particularly those in which there are a few dominant competitors and many small companies, the top companies are in the position of holding price leadership roles where they are often the first in the industry to change price. Smaller companies must then assume a price follower role and react once the big companies adjust their price. When basing pricing decisions on how competitors are setting their price, firms may follow one of the following approaches: Below Competition Pricing - A marketer attempting to reach objectives that require high sales levels (e.g., market share objective) may monitor the market to insure their price remains below competitors. Above Competition Pricing - Marketers using this approach are likely to be perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is higher than what competitors offer. Parity Pricing - A simple method for setting the initial price is to price the product at the same level competitor’s price their product. Bid Pricing Not all selling situations allow the marketer to have advanced knowledge of the prices offered by competitors. While the Internet has made researching competitor pricing a relatively routine exercise, this is not the case in markets where bid pricing occurs. Bid pricing typically requires a marketer to submit a price to a potential buyer that is sealed or unseen by competitors. It is not until all bids are obtained and unsealed that the marketer is informed of the price listed by competitors. Bid pricing occurs in several industries though it is a standard requirement when selling to local, national and international governments. In these situations the marketer’s pricing strategy depends on the projected winning bid price, which is generally the lowest price. However, price alone is only the deciding factor if the bidder meets certain qualifications. The fact that marketers often operate in the dark in terms of available competitor research, makes this type pricing one of the most challenging of all pricing setting methods. Step 3: Set Standard Price Adjustments
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With the first round of pricing decisions now complete, the marketer’s next step is to consider whether there are benefits to making adjustments to the list or published price. For our purposes we will consider two levels of price adjustments – standard and promotional. The first level adjustments are those we label as “standard” since these are consistently part of the marketer’s pricing program and not adjustments that appear only occasionally as part of special promotions (see Step 4: Determine Promotional Pricing). In most cases standard adjustments are made to reduce the list price in an effort to either stimulate interest in the product or to indirectly pay channel partners for the services they offer when handling the product. In some circumstances the adjustment goes the other way and leads to price increases in order cover additional costs incurred when selling to different markets. It should be noted that many companies do not make adjustments to their list price, particularly those selling directly to final customers. There are two key reasons for this. First, the product is in high demand and therefore the marketer sees little reason to lower the price. Second, the marketer believes the product holds sufficient value for customers at its current list price and the marketer feels reducing the price may actually lead buyers to question the quality of the product (e.g., “How can they offer all those features for such a low price? Something must be wrong with it.”). In such cases holding fast to the list price allows the marketer to maintain some control over the product’s perceived image. For firms that do make standard price adjustments, options include: • Quantity Discounts • Trade Allowances • Geographic Pricing • Special Segment Discounts Quantity Discounts This adjustment offers buyers an incentive of lower perunit pricing as more products are purchased. Most quantity or volume discounts are triggered when a buyer reaches certain purchase levels. For instance, a buyer may pay the list price when they purchase between 1-99 units but receive a 5% discount off the list price when the purchase exceeds 100 units. Options for offering price adjustments based on quantity ordered include:
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Discounts at Time of Purchase – The most common quantity discounts exist when a buyer places an order that exceeds a certain minimum level. While quantity discounts are used by marketers to stimulate higher purchase levels, the rational for using these often rests in the cost of product shipment. Shipping costs tend to decrease per item shipped. Why? Think about a large truck carrying product. In most cases the expenses (e.g., truck driver expense, fuel, road tolls, etc.) required to move a truck from one point to another does not radically change as more product is shipped in the truck trailer (i.e., container). In other words, the total shipping cost is only a little higher if 1,000 items (assuming all can fit in a trailer) are carried in the truck compared to hauling just 10 items. Consequently, the transportation cost per item drops as more are ordered thus allowing the supplier to offer lower prices for higher quantity. • Discounts on Cumulative Purchases – This method allows the buyer to receive a discount as more products are purchased over time. For instance, if a buyer regularly purchases from a supplier they may see a discount once the buyer has reached predetermined monetary or quantity levels. The key reason to use this adjustment is to create an incentive for buyers to remain loyal and purchase again. Trade Discounts Manufacturers who rely on channel partners to distribute their products (e.g., retailers, wholesalers) offer trade discounts off of list price. These discounts function as an indirect form of payment for a channel member’s work in helping to market the product (e.g., keep product stocked, talk to customers about the product, provide feedback to the manufacturer, etc.). Essentially the difference between the trade discounted prices paid by the reseller and the price the reseller charges its customer will be the reseller’s profit. For example, let’s assume the maker of snack products sells a product to retailers that carries a stated MSRP of (US) $2.95 but offers resellers a trade discounted price of $1.95. If the retailer indeed sells the product for the MSRP, the retailer will realize a 33% markup on selling price ($1.95/ (1-.33) = $2.95). Obviously this percentage will be different if the retailer sells the product at a price that is different than the MSRP, but the important point to understand is that marketers must factor in what reseller’s expect to earn when they are setting trade 343
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discounts. This amount needs to be sufficient to entice the reseller to agree to handle and possibly promote the product. Special Segment Pricing In some industries special classes of customers within a target market are offered pricing that differs from the rest of the market. The main reasons for doing this include: building future demand by appealing to new or younger customers; improving the brand’s image as being sensitive to customer’s needs; and rewarding long time customers with price breaks. For instance, many companies including movie theaters, fitness facilities and pharmaceutical firms offer lower prices to senior citizens. Some marketers offer non-profit customers lower prices compared to that charged to forprofit firms. Other industries may offer lower prices to students or children. Another example used by service firms is to offer pricing differences based on convenience and comfort enjoyed by customers when experiencing the service such as seat location at a sporting or entertainment event. Geographic Pricing Products requiring marketers to pay higher costs that are affected by geographic area in which a product is sold may result in adjustments to compensate for the higher expense. The most likely cause for charging a different price rests with the cost of transporting a product from the supplier’s distribution location to the buyer’s place of business. If the supplier is incurring all costs for shipping then they may charge a higher price for products in order to cover the extra transportation costs. For instance, shipping products by air to Hawaii may cost a Los Angeles, California manufacturer a much higher transportation cost than a shipment made to San Diego. Transportation expense is not the only cost that may raise a product’s price. Special taxes or tariffs may be imposed on certain products by local, regional or international governments which a seller passes along in the form of higher prices. Step 4: Determine Promotional Pricing The final price may be further adjusted through promotional pricing. Unlike standard adjustments, which are often permanently part of a marketer’s pricing strategy and may include either a decrease or increase in price, promotional pricing is a temporary adjustment that only involves price reductions. In most cases this means the marketer is
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selling the product at levels that significantly reduce the profit they make per unit sold. As one would expect, the main objective of promotional pricing is to stimulate product demand. But as we noted back in Part 15: Sales Promotion, marketers should be careful not to overuse promotional programs that temporarily reduce selling price. If promotional pricing is used too frequently customers may become conditioned to anticipate the reduction. This results in buyers withholding purchases until the product is again offered at a lower price. Since promotional pricing often means the marketing organization is making very little profit off of each item sold, consistently selling at a low price could jeopardize the company’s ability to meet their financial objectives. The options for promotional pricing include: • Markdowns • Loss Leaders • Bundle Pricing • Dynamic Pricing • Sales Promotions Markdowns The most common method for stimulating customer interest using price is the promotional markdown method, which offers the product at a price that is lower than the product’s normal selling price. There are several types of markdowns including: • Temporary Markdown – Possibly the most familiar pricing method marketers use to generate sales is to offer a temporary markdown or “sale’ pricing. These markdowns are normally for a specified period of time the conclusion of which will result in the product being raised back to the normal selling price. • Permanent Markdown – Unlike the temporary markdown where the price will eventually be raised back to a higher price, the permanent markdown is intended to move the product out of inventory. This type of markdown is used to remove old products that: are perishable and close to being out of date (e.g., donuts); are an older model and must be sold to make room for new models; or are products that the marketer no longer wishes to sell. • Seasonal – Products that are primarily sold during a particular time of the year, such as clothing, gardening products, sporting goods and holiday-
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specific items, may see price reductions at the conclusion of its prime selling season. Loss Leaders An important type of pricing program used primarily by retailers is the loss leader. Under this method a product is intentionally sold at or below the cost the retailer pays to acquire the product from suppliers. The idea is that offering such a low price will entice a high level of customer traffic to visit a retailer’s store or website. The expectation is that customers will easily make up for the profit lost on the loss leader item by purchasing other items that are not following loss leader pricing. For instance, a convenience store may advertise a very low price for cups of coffee in order to generate traffic to the store with the hope that customers will purchase regularly priced products to go along with the coffee purchase. Marketers should beware that some governmental agencies view loss leaders as a form of predatory pricing and thus consider it illegal. Predatory pricing occurs when an organization is deliberately selling products at or below cost with the intention of driving competitors out of business. Of course, this differs from our discussion which considers loss leader pricing as a form of promotion and not a form of anti-competitor activity. In the U.S. several state governments have passed laws under the heading Unfair Sales Act, which prohibits the selling of certain products below cost. The main intention of these laws is to protect small firms from below-cost pricing activities of larger companies. Some states place this restriction on specific product categories (e.g., gasoline, tobacco) but Oklahoma places this restriction on most products and goes as far as requiring the pricing of products be at least 6% above cost. Bundle Pricing Another pricing adjustment designed to increase sales is to offer discounted pricing when customers purchase several different products at the same time. Termed bundle pricing, the technique is often used to sell products that are complementary to a main product. For buyers, the overall cost of the purchase shows a savings compared to purchasing each product individually. For example, a camera retailer may offer a discounted price when customers purchase both a digital camera and a how-to photography DVD that is lower than if both items were purchased separately. In this example the retailer may promote this as: “Buy both
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the digital camera and the how-to photography DVD and save 25%.” Bundle pricing is also used by marketers as a technique that avoids making price adjustments on a main product for fear that doing so could affect the product’s perceived quality level (see our discussion above under Step 3: Set Standard Price Adjustments). Rather, the marketer may choose to offer adjustments on other related or complementary products. In our example the message changes to: “Buy the digital camera and you can get the how-to photography DVD for 50% less.” With this approach the marketer is presenting a price adjustment without the perception of it lowering the price of the main product. Dynamic Pricing The concept of dynamic pricing has received a great deal of attention in recent years due to its prevalent use by Internet retailers. But the basic idea of dynamic pricing has been around since the dawn commerce. Essentially dynamic pricing allows for the point-of-sale (i.e., at the time and place of purchase) price adjustments to take place for customers meeting certain criteria established by the seller. The most common and oldest form of dynamic pricing is haggling; the give-and-take that takes place between buyer and seller as they settle on a price. While the word haggling may conjure up visions of transactions taking place among vendors and customers in a street market, the concept is widely used in business markets as well where it carries the more reserved label of negotiated pricing. Advances in computer hardware and software present a new dimension for the use of dynamic pricing. Unlike haggling, where the seller makes price adjustments based on a personto-person discussion with a buyer, dynamic pricing uses sophisticated computer technology to adjust price. It achieves this by combining customer data (e.g., who they are, how they buy) with pre-programmed price offerings that are aimed at customers meeting certain criteria. For example, dynamic pricing is used in retail stores where customers’ use of loyalty cards triggers the store’s computer to access customer information. If customers’ characteristics match requirements in the software program they may be offered a special deal such as 10% off if they also purchase another product. Dynamic pricing is also widely used in airline ticket purchasing where type of customer (e.g., business vs. leisure traveler) and date of purchase can affect pricing. On the Internet, marketers may use dynamic pricing to entice first time visitors to make a purchase by offering a
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one-time discount. This is accomplished by comparing information stored in the marketer’s computer database with identifier information gathered as the person is visiting a website. One way this is done is for a website to leave small data files called “cookies” on a visitor’s computer when they first access the marketer’s website. A cookie can reside on the visitors computer for some time and allows the marketer to monitor the user’s behavior on the site such as how often they visit, how long they spend on the site, what WebPages they access and much more. The marketer can then program special software, often called campaign management software, to send visitors a special offer such as a discount. For instance, the marketer may have a discount offered if the visitor has come to the site at least five times in the last six months but has never purchased. Step 5: State Ownership and Payment Options With the price decided, the final step for the marketer is to determine in what form and in what timeframe customers will make payment. As one would expect payment is most often in a monetary form though in certain situations the payment may be part of a barter arrangement in which products or services are exchanged. Form of Payment The monetary payment decision can be a complex one. First marketers must decide in what form payments will be accepted. These options include cash; check, money orders, credit card, online payment systems (e.g., Pay Pal) or, for international purchases, bank drafts, letters of credit, and international reply coupons, to name a few. Timeframe of Payment One final pricing decision considers when payment will be made. Many marketers find promotional value in offering options to customers for the date when payment is due. Such options include: • Immediate Payment in Full – Requires the customer make full payment at the time the product is acquired. • Immediate Partial Payment – Requires the customer make a certain amount or percentage of payment at the time the product is acquired. This may be in the form of a down payment. Subsequent payments occur either in one lump sum or at agreed intervals (e.g., once per month) through an installment plan. • Future Payment – Provides the buyer with the opportunity to acquire use of the product with payment occurring some time in the future. Future payment may require either payment in full or partial payment. 348
Other Considerations Marketers must consider many factors when making a pricing decision. Several other issues that can impact how price is set. These include: • Ownership Options • Early Payment Incentives • Currency Considerations • Auction Pricing Ownership Options An important decision faced by marketers as they are formulating their marketing strategy deals with who will have ownership of the product (i.e., holds legal title) once an exchange has taken place. The options available include: • Buyer Owns Product Outright – The most common ownership option is for the buyer to make payment and then obtain full ownership. • Buyer Has Right to Use but Does Not Have Ownership – Many products, especially those labeled as services, permit customers to make payment in exchange for the right to use a product but not to own it. This is seen in the form of usage, rental or lease payment for such goods and services as: mobile phone services, manufacturing equipment and Internet access. It should be noted that under some lease or rental plans there may be an option for customers to buy the product outright (e.g., car lease) though this often requires a final payment. Early Payment Incentives For many years marketers operating primarily in the business market offered incentives to encourage their customers to pay early. Typically, business customers are given a certain period of time, normally 30 or 60 days, before payment is due. To encourage customers to pay earlier, and thus allow the seller to obtain the money quicker, marketers have offered early payment discounts often referred to as “cash terms”. This discount is expressed in a form that indicates how much discount is being offered and in what timeframe. For example, the cash terms 2/10 net 30 indicates that if the buyer makes payment within 10 days of the date of the bill then they can take a 2% discount off some or all of the items on the invoice, otherwise the full amount is due in 30 days. • While this incentive remains widely used, its effectiveness in getting customers to pay early has greatly diminished. Instead, many customers,
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especially large volume buyers, simply remove the discount from the bill’s total and then pay within the required “net” timeframe (or later!). For this reason many companies are discontinuing offering this discount. Currency Considerations Product pricing can be dramatically altered by international monetary exchange rates. A company that desires to be a low-price market leader may find this strategy works in their home market but currency differences may move their product’s price to a mid-price level in other countries. This could dramatically impact the perceived value of the product by customers in these markets. Any marketer selling internationally must be very aware of the price their product takes on in foreign countries once the price has been converted into the local currency. Auction Pricing One pricing approach that does not fit neatly into the price setting process we’ve described is the auction pricing model. Auction pricing is the reverse of bid pricing, which we discussed earlier, since it is the buyer who in large part sets the final price. This pricing method has been around for hundreds of years, but today it is most well known for its use in the auction marketplace business models such as eBay and business-to-business marketplaces. While marketers selling through auctions do not have control over final price, it is possible to control the minimum price by establishing a price floor or reserve price. In this way the product is only sold if someone’s bid is at least equal to the floor price. Managing External Forces The bulk of material covered in the first 20 sections of the Principles of Marketing tutorial is intended to give those new to marketing a basic understanding of the decisions marketers make as they work to successfully satisfy customer needs. Now that we have laid out the important marketing decision areas, we begin a new section that examines additional issues facing marketers as they manage their marketing efforts. Up until this point our attention has focused mostly on decisions marketers control such as product design, advertising message, type of distribution, setting price, etc. In this tutorial we explore factors that are outside of the marketer’s control but play a major role in shaping marketers’ strategies and tactics. The external forces we discuss present both opportunities and threats with some
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holding the potential to dramatically alter how an industry conducts its business. For example, newspaper marketers are experiencing a major shift in how consumers obtain their news in large part due to technological innovation (e.g., Internet, cell phones). Newspapers that understand this key external factor have embraced it as an opportunity and have expanded their delivery of news to meet the needs of customers using these new technologies. Other newspapers, which have been slow to recognize new methods for distributing news, now face serious threats to their survival as customers by-pass them in favor of new media outlets. The lesson here is that marketers must continually monitor and respond to external forces. Importance of External Forces As we noted, most external forces are beyond the direct control of the marketing organization. By “direct control” we mean marketers lack the power to determine the direction and intensity of a change in these forces. Instead, marketers must treat external forces as something to be monitored and responded to when necessary. While marketers lack direct control over external forces, in some cases they can exercise a small amount of influence over these factors. For instance, Apple’s iPod has played an important role in changing how consumers listen to music, and for some, how they acquire information (e.g., news pod casts). But while Apple is credited with being the catalyst for changing a social behavior (an external force) they represent just one of several organizations (e.g., music publishers, manufacturers of other music players) and others (e.g., bloggers, pod casters, news media) whose actions were necessary for behavior to change across a large group. Thus, while one company can market products and services with the intention of changing how a target market behaves, it is nearly impossible for one company alone to control the change. For marketers the key to dealing with external forces is to engage in continual market research. For larger companies this may involve dedicated research personnel, who watch these factors as part of their day-to-day responsibilities. A research staff dedicated to monitoring external forces may offer marketers the ability to better predict changes and respond well in advance of a change. For example, researchers may be able to predict how the economy (an external force) will change over the next one to two years and through this information allow the marketing organization to respond (e.g., new products, reduced price, etc.).
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For small organizations that do not have the luxury of market research staff, monitoring change is difficult and often means they react after a change has occurred. However, new innovative products (an external force) are making the monitoring task much easier allowing small companies to respond quicker than in the past. The External Forces Facing Marketing For our discussion we will highlight seven important external forces: • Demographics • Economic Conditions • Governmental Environment • Influential Stakeholders • Cultural and Societal Change • Innovation • Competitors Each external force is described in detail though these are not presented in order of importance. In fact, the importance of each force may vary depending on the marketing organization and the industry in which they compete. For instance, a company manufacturing technology products may feel innovative forces are more important than demographic changes. While a financial services firm may more aggressively monitor and react to economic conditions. Demographics Demography involves the study of characteristics of a population and how these change over time. The characteristics that are of most interest to marketers fall into two categories: • Total Population – These characteristics take a very broad view of the population as a whole in terms of size (e.g., number of people, number of businesses) and location (e.g., geographic region). • Personal Variables – These characteristics look at how the population is changing based on individual factors such as gender, age, income, level of education, family situation (e.g., single, married, cohabitation), sexual preference, ethnicity, occupation, and social class. Targeting Markets demographics is a key variable used to segment both consumer and business markets. In particular, demographic variables are an important component in creating customer profiles. These profiles are based on both demographic and non-demographic (e.g., customer behavior, attitudes, lifestyles) factors and are used for grouping customers into definable market segments from 352
which a marketer then selects its target markets. Since demographics is tied directly to identifying target markets, monitoring how demographics change is critical for making marketing decisions. Most demographic shifts do not occur rapidly so marketers will not see dramatic changes in a short period of time in the manner that other external forces can impact an organization (e.g., impact of a new law). However, over the long term, demographics can reshape a target market requiring marketing organizations to rework their marketing strategy in an effort to appeal to a changing market. Adjusting to Demographic Trends While demographic change occurs slowly, marketers can begin to see indicators of potential change by identifying small trends that may suggest a larger shift over time. By paying close attention to these trends organizations can prepare their long-term marketing strategy to be ready when the shift becomes more apparent. To illustrate how a marketer may respond, let’s consider the demographic characteristic birthrate. In some countries the overall birthrate is declining while the average age of the population is growing (i.e., people living longer). For a company targeting the youth market with sporting products this trend may suggest that in coming years they will see shrinkage in demand for their products within the youth market as the population of this market declines. On the other hand demographic data may signal to the company that another market (i.e., older market), which they may not have previously targeted, may hold potential for new products. If it is predicted that the shift will occur over several years the marketer can slowly move into the new market by offering products geared toward older adults. Economic Conditions Since most marketers are engaged in activities designed to entice customers to spend their money, it makes sense that an important external force is economic conditions. Economic analysis looks at the how a defined group produces, distributes and consumes goods and services. For an economist a defined group can be any group that consumes something of value (e.g., products, natural resources such as water). These groupings can range from those defined very broadly (e.g., country) to those defined narrowly (e.g., small town). Of course the production, distribution and consumption of products are also of high interest to marketers and, in fact, many leading scholars of marketing first studied
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economics before moving to marketing. In very simple terms (and with apologies to both marketers and economist) the major difference between the marketer and economist is that marketers are engaged in activity that make things happen to individual customers (e.g., create demand for products) while economists are engaged in activity showing the result of marketers’ decisions on a group. (e.g., study how much is being spent by certain groups). Additionally, economists whose job it is to study a group may use hundreds of economic variables when assessing how a group is responding. Marketers tend to evaluate far fewer economic variables preferring to concentrate on those variables that affect spending behavior of consumers and businesses. The economic conditions of most interest to marketers include: • Income – how much is being earned • Spending – what consumers and businesses are doing with their money • Interest Rates – the cost of borrowing money • Inflation – how prices for products and services are changing • Cost of Living – the financial requirements of living in a certain geographic area • Employment Rates – the percentage of employable people who are working • Exchange Rates – how the value of currencies are changing between countries and regions Importance of Economic Conditions For many marketers there is a relationship between level of sales and how customers are doing financially. For most products this relationship is a direct one – as customers’ financial condition improves so will selling opportunities for the marketer. A clear example of this can be seen with the sale of luxury products where marketers are likely to see their sales improve as the target market’s economic condition improves. However, other products may see improvement as economic conditions decline. For instance, marketers of business certification programs (e.g., financial planning, quality management) or career preparation services (e.g., resume development help) may see increased interest in their programs during weak economic conditions as those who are unemployed or concerned about job stability seek additional credentials to make them more marketable to potential employers. Whether an organization benefits from improving or declining economic conditions, it is important it monitors
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changes occurring in the economy in which the organization’s target markets are located. In particular, marketers should watch for changing patterns in customer spending which may indicate that a longer term change in the economy is occurring. Changes that extend over a long term (six months or longer) may be part of the business cycle of an economy. A business cycle is presented as a series of up (economic expansions) and down (economic contractions) measures. During expansion an economy grows and this generally leads to more jobs, higher income and increased customer spending. However, an economy growing too quickly can present problems of inflation where product prices grow too fast. In this situation, even though customers have higher incomes, they may not be purchasing more since product prices have increased. Such situations are a main reason an economy will contract or see customer spending decrease. If severe this can lead to marketers seeing a major reduction in sales which may indicate the presence of an economic recession (i.e., economic decline). Governmental Environment Marketing decisions must be made with an understanding of how they are impacted by international, national, regional and local laws and regulations. For marketers, laws (i.e., acts past by governmental ruling bodies) and regulations (i.e., requirements put in place by governmental agencies) identify rules and procedures that guide certain marketing activities. Failure to conform to requirements established by the governments and their agencies may result in fines, sanctions or other legal action. The governmental environment is a difficult external force to monitor for two key reasons. First, the number and variety of laws and regulations can be overwhelming even for the most seasoned marketer. For instance, in the U.S. alone there are potentially hundreds of laws and regulations that are either directly or indirectly targeted to marketing decisions. The table below provides a sampling of the issues covered by U.S. laws and regulations and the primary marketing decision areas these affect:
Affected Decision Area Coverage
General Target Market Product Promotion Distribution Pricing
unfair competition, restraint of trade, environmental discrimination, online registration, privacy product safety, labeling, intellectual property, warranties deceptive and misleading claims, advertising to children, telemarketing, email spam tying contracts, exclusive dealerships, transportation safety price discrimination, predatory pricing, consumer credit purchasing
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The second reason the governmental environment proves difficult is due to the complexity inherent in understanding laws and regulations which often makes it impossible for marketers to handle these issues on their own. Seeking legal assistance is necessary (and often costly) for most marketers no matter their size. Dealing with the Government In addition to seeking legal assistance, marketing organizations may find value by engaging in either direct discussion between company employees and governmental personnel or indirect discussion through firms hired to serve as a representative for the marketing company (e.g., consultants, lobbyist). Representatives are particularly important when selling internationally where existing relationships between government personnel and a hired representative can effectively reduce bureaucratic red tape. In situations where proposed legislation is likely to impact an entire industry, communication with the government may occur through a marketer’s participation in an industry trade group. These groups perform many tasks on behalf of their members including maintaining relations with governmental groups to ensure the industry’s voice is heard with regard to pending legislation that affects the industry. Finally, marketers should not view the governmental environment as always erecting obstacles. In many cases laws and regulations present marketing opportunities. For example, the U.S. Federal government recently instituted airline travel regulations limiting the size of liquid, gel and aerosol products that may be carried on a plane. Several companies that produce personal care products (e.g., shaving cream, hair care, toothpaste, etc.) have viewed the new regulations as an opportunity to market their products in new packaging that they promote as being approved for airline travel. Influential Stakeholders Besides dealing with various governmental groups, marketers must also pay close attention to other groups that can affect marketing activity. The most important of these groups are those that have an interest or stake in the company. While such groups are not backed directly by the power of a government they can still command a great deal of power especially in terms of swaying public opinion, which sometimes leads to governmental action. Influential stakeholders can be divided into two categories: • Connected Stakeholders – These stakeholders consist of groups that regularly interact with the marketing 356
organization and often hold important roles in helping the marketer succeed. Examples include: supply and distribution partners (e.g., distributors, material suppliers), industry standards groups, and support companies (e.g., advertising agencies). To address concerns raised by these groups often requires direct communication by management with the stakeholders. • Peripheral Stakeholders – These stakeholders consist of groups that may not routinely impact the marketer unless a specific issue arises that draws their attention. Examples include: religious organizations, community activists, and cause supporters. To address concerns raised by these groups marketers often use public relations professionals as their first line of communication. Cultural and Societal Change Society is made up of many different cultural groups. As we noted in Part 3: Consumer Buying Behavior, members of a cultural group share similar values and beliefs which are learned and reinforced by others within the same cultural group. These shared values and beliefs, lead members of a cultural group to behave in similar ways (e.g., customs, traditions, likes/dislikes, attitudes, perceptions, etc.). Cultural groups can be viewed on several levels. At a broad level, a cultural group consists of a very large number who share basic values (e.g., ethnicity, religious affiliation). While looking at the broad level can offer some insight into how a general cultural group behaves, marketers are much more concerned with examining cultural groups at narrower levels where individuals share more specific interests. Narrow level analysis of cultural groups leads to the study of sub-cultures, which consists of individuals sharing values and beliefs that revolve around special interests. For instance, a large cultural group may exist in a certain region of a country. While they share basic cultural values with others in their country (e.g., sense of patriotism), they may also share values (e.g., work ethic, taste in food, etc.) with those in their region that are not shared consistently throughout the country. Examining these sub-cultures even more closely will reveal thousands of smaller sub-cultures (e.g., sports interests, type of shopper, music preference, online gaming enthusiast, etc.). It should be evident that a single consumer may belong to many different sub-cultures. It should also be evident that members of a sub-culture sharing similar values are also likely to have similar needs and, as we discussed in 357
Part 5: Targeting Markets, this suggests that sub-cultures are natural for market segmentation. Evolution of Cultural Change Cultural values and beliefs are not stagnant; these do evolve and change. However the pace of change will differ depending on the level examined. At the broad cultural level changes often evolves slowly. For instance, consider how people in the United States and Japan view the importance of saving money. People in the United States are more inclined to spend their earned income than they are to save resulting in a low personal savings rate for Americans. Those living in Japan are more concerned with saving and thus show a high personal savings rate. The difference in values toward savings has been consistent for many years and no one expects consumers from either country to alter their values in the near future. While broad cultures tend to shift values and beliefs slowly, changes within sub-cultures can occur relatively quickly. For instance, the music industry often experiences rapid shifts as a sub-culture of music enthusiasts discovers new artists. The key for marketers targeting sub-cultures is to maintain close contact with these groups through regular marketing research. In this way marketers can see how different sub-cultures behave and also spot trends, which the marketer can capitalize on through new marketing tactics (e.g., new products, new sales channels, added value, etc.). Innovation Arguably the external force possessing the greatest potential for changing how marketers and industries compete are those associated with innovation? When most people think of innovation they immediately assume it has to do with computers and other high-tech equipment. While the majority of innovative new products rely in some way on computer technology, it is not a requirement for something to be considered innovative. Instead, an innovation is viewed as anything new that solves needs by offering a significant advantage (e.g., more features, more convenient, easier to use, lower cost, etc.) over existing ways (e.g., products, services). For example, a designer of automobiles may develop a new layout for a car’s dashboard using existing products (no new technologies). This new design reduces the amount of time a driver must take his eyes off the road in order to select a new music station. If this new layout is viewed positively by customers, governmental groups and the media it may gain
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widespread acceptance by other vehicle manufacturers who will make similar designs available in their products. As noted in the above example, for an innovation to be truly important it must be widely adopted within a targeted group (e.g., within an industry, by a target market). Once adopted an innovation becomes important if it leads to behavioral changes including changing how consumers and business satisfy their needs. These changes present both opportunities and threats to marketers. For instance, over the last few years several small companies have created productivity software products (e.g., word processing, spreadsheet) that operate over the Internet. These products do not require the software be downloaded to a user’s computer. While these innovative products are not new in terms of the features they offer, they are new in terms of convenience in accessing documents from anywhere and the ability to share with others. It remains to be seen whether these products will alter behavior, though it appears that one leading maker of traditional productivity software, Microsoft, has recognized this as a threat and is expected to respond with its own version of web-based software. Because of the potential innovation has in affecting products and industries it is no surprise that many marketing organizations direct a significant amount of funds to researching this external force. In fact, in many industries, such as pharmaceuticals and computers, spending on technological research and development represents a significant portion of a company’s overall budget. Innovation in Marketing Marketers in many industries know that innovation through new product development is vital to remain competitive. But product decisions are not the only areas affected by new developments. As we’ve discussed throughout the Principles of Marketing tutorial, innovation can affect almost all marketing areas. Below is a sampling of how innovation has affected different marketing areas:
Marketing Area Effect of Innovation
Marketing Research Targeting Markets Product
Promotion
Creates new ways to conduct research including more sophisticated methods for monitoring and tracking customer behavior and analyzing data. Allows for extreme target marketing where marketing-to-person is replacing mass marketing. For customer service, technology makes it easier to manage relationships and allows for rapid response to customer’s needs. Creates new digital products/services. Incorporation of innovation into existing product/service enhances value by offering improved quality, features & reliability at a lower price. New techniques allow better matching of promotion to customer activity and individualized promotion. Makes it easier for sellers to offer product suggestions and promotional tieins.
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Distribution
Pricing
Creates new channels for distribution and transaction (e.g., electronic commerce) that include making it easier for buyers to place orders. Allows more control over inventory management and closer monitoring of product shipment Enables the use of dynamic pricing methods.
Many of the benefits shown above are driven by the evolution of the Internet. The Internet is transforming how all functional areas of an organization perform work. However, it can be argued that no functional area has been more affected than marketing. Throughout the Principles of Marketing, how the Internet has impacted marketing. Over the next decade it is expected that the Internet’s effect on marketing will continue to grow and marketers are well served to embrace this. Competitors For many marketers the final external force is the one most relevant to immediate day-to-day decision making. While the other external forces we’ve discussed tend to be examined periodically (or in some cases rarely), monitoring competitor activity is often a daily undertaking. Monitoring competitors can serve several goals: • Competitors as Threats – The most obvious reason to monitor the competition is to see how they are responding in the same markets in which the marketer operates. Many larger companies recognize the importance of keeping tabs on their competition and create specific positions or even departments that focus on gathering and analyzing competitor data. These competitive intelligence programs mainly employ high-tech methods, and principally the Internet, to locate information about competitors such as news reports, government filings (e.g., patents, stock reports) and changes to competitors’ websites. Even small sized marketers can more easily track competitor actions. For instance, there are several news and information services that will alert a marketer (usually via email) when a competitor is mentioned in the news. • Competitors as Partners – While many may consider competitors as representing the enemy, there are situations where competitors can present opportunities. This happens often to large companies that offer a broad product line serving many target markets. In some markets a company may compete aggressively with another firm but in other markets both firms may be lagging and it may make more sense for both to work together. This can be seen in the computer industry where Apple Inc., which for many years viewed computers, built with Intel processors as 360
competitors since these run Microsoft operating systems, has now accepted Intel processors and is building computers powered by this chip. • Competitors of Tomorrow – In many industries and, in particular, those in technology-focused industries where there is heavy emphasis on research and development, the most dangerous competitors are the ones that have yet to emerge. Because technologydependent industries, such as computers, consumer electronic and pharmaceuticals, rely heavily on innovative new products, serious competitors can emerge quickly from what seems to be out of nowhere. For instance, the evolution of online video and its impact on the news and entertainment industry grew very rapidly with the introduction of online video services (e.g., You Tube) which was previously an unknown project developed in a garage. However, in less than 18 months it came to dominate the online video industry. Marketing Planning and Strategy For marketers planning is an essential task that must be continually undertaken. As we will see, shifting market conditions, including changing customer needs and competitive threats, almost always insure that what worked in the past will not work in the future, thus requiring revisions in how a product is marketed. Marketing planning is also important since it is often a prerequisite for obtaining funding whether one is a marketer in a large corporation seeking additional money for his or her department or is part of a small startup company looking for initial funding. To aid in our understanding of planning we introduce a key concept in marketing: the Product Life Cycle. We will see the Product Life Cycle offers valuable insight and guidance for marketing decisions. In this tutorial we also discuss different types of marketing strategy that can be followed to meet marketing objectives. Additionally, we look at how innovative products are adopted within a market and how this impacts marketing planning. Importance of Marketing Planning As we have seen throughout the Principles of Marketing tutorial, marketers consider many factors when making decisions. Of course the main factors are those directly associated with how customers (including distribution partners) respond to an organization’s marketing efforts, such as how they may react to changes in a product, new advertisements, special pricing promotions, etc. 361
But when making decisions marketers face other concerns that are not directly customer related. For instance, we have discussed how marketing decisions (e.g., lowering price) may place pressure on other areas of the organization (e.g., production, shipping). Other examples include: • What is marketing? Decisions must be made with an understanding of the value these provide not only to customers but to the marketing organization. Consequently, marketers must be well aware of how their decisions fit with the overall objectives of the company. For example, a company whose goal is to be the low-price leader may have concerns if the company’s marketing department wants to market a very high-end product, since this would go against the reputation and core strengths of the company. • In Part 21: Managing External Forces, we showed that marketers’ decisions may affect peripheral stakeholders who are not directly connected to the marketing organization but have the potential to impact the organization if issues arise that draw their attention. • Marketing decisions also directly affect an organization’s financial condition. Marketers’ efforts generate the funds (i.e., sales) needed for the company to survive, but do so while using company resources, in particular, expenditure of funds. Controls must be put in place to insure the results of what the organization spends through marketing (i.e., return on investment) meet expectations. Because marketing decisions have both internal and external impact, marketers are wise to make their decisions only after engaging in a careful, disciplined planning process. Marketers who make hasty, off-the-cuff decisions without regard to the implications are taking risks that may lead to problems. Instead, marketing decisions should be made with consideration of how these affect others and the resources (e.g., funds) required to carry out the plan. The Marketing Plan The plan serves several functions including: • Forcing marketing personnel to look internally in order to fully understand the results of past marketing decisions. • Forcing marketing personnel to look externally in order to fully understand the market in which they operate.
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Setting future goals and providing direction for future marketing efforts that everyone within the organization should understand and support. • Serving as a key component in obtaining funding to pursue new initiatives. The scope of the Marketing Plan depends on the company and industry. A small technology startup company may, for instance, have a less elaborate plan that is highly flexible (e.g., does not identify exactly where advertising money is spent) to meet the needs of a rapidly changing market. A more established marketing organization, such a large consumer products firm, may create a very structured plan that clearly identifies all activities that take place over a 12-month period. Whether the marketer is creating a short plan intended to cover a narrow timeframe or a full-blown document laying out plans for a year or more, any plan requires undertaking significant market research to better understand the market. With knowledge of the market, the marketer can then begin to build the plan which will include the following key concepts: • Organizational Mission – Represents the guiding force of an organization by identifying the long-run vision for what the organization hopes to achieve. The mission comes from the top leaders of the organization and often remains unchanged for many years. • Objectives – Reflects what the organization expects to achieve with its marketing efforts. As with the mission, objectives also flow from the top of the organization down to the marketing department. Objectives can be in the form of financial goals (i.e., profits) or marketing goals (e.g., achieve certain level of market share). • Marketing Strategy - Achieving objectives requires the marketer engage in marketing decision-making which indicates where resources (e.g., marketing funds) will be directed. However, before spending begins on individual marketing decisions (e.g., where to advertise) the marketer needs to establish a general plan of action that summarizes what will be done to reach the stated objectives. • Tactical Programs – Marketing strategy sets the stage for specific actions that will take place. Marketing tactics are the day-to-day actions that marketers undertake and involve the major marketing decision areas. As would be expected, this is the key area of
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the Marketing Plan since it explains exactly what will be done to reach the organization’s objectives. • Marketing Budget – Carrying out marketing tactics almost always means that money must be spent. The marketing budget lays out the spending requirements needed to carry out marketing tactics. While the marketing department may request a certain level of funding they feel is required, in the end it is uppermanagement that will have final say on how much financial support will be offered. Types of Marketing Strategy One of the most important concepts of the marketing planning process is the need to develop a cohesive marketing strategy that guides tactical programs for the marketing decision areas. In marketing there are two levels to strategy formulation: General Marketing Strategies and Decision Area Strategies. General Marketing Strategies: These set the direction for all marketing efforts by describing, in general terms, how marketing will achieve its objectives. There are many different General Marketing Strategies, though most can be viewed as falling into one of the following categories: • Market Expansion – This strategy looks to grow overall sales in one of two ways: • Grow Sales with Existing Products – With this approach the marketer seeks to actively increase the overall sales of products the company currently markets. This can be accomplished by: 1) getting existing customers to buy more; 2) getting potential customers to buy (i.e., those who have yet to buy); or 3) selling current products in new markets. • Grow Sales with New Products – With this approach the marketer seeks to achieve objectives through the introduction of new products. This can be accomplished by: 1) introducing updated versions or refinements to existing products; 2) introducing products that are extensions of current products; or 3) introducing new products not previously marketed. • Market Share Growth – This strategy looks to increase the marketer’s overall percentage or share of market. In many cases this can only be accomplished by taking sales away from competitors. Consequently, this strategy often relies on aggressive marketing tactics. • Niche Market – This strategy looks to obtain a commanding position within a certain segment of the
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overall market. Usually the niche market is much smaller in terms of total customers and sales volume than the overall market. Ideally this strategy looks to have the product viewed as being different from companies targeting the larger market. • Status Quo – This strategy looks to maintain the marketer’s current position in the market, such as maintaining the same level of market share. • Market Exit – This strategy looks to remove the product from the organization’s product mix. This can be accomplished by: 1) selling the product to another organization, or 2) eliminating the product. Decision Area Strategies These are used to achieve the General Marketing Strategies by guiding the decisions within important marketing areas (product, pricing, distribution, promotion, target marketing). For example, a General Marketing Strategy that centers on entering a new market with new products may be supported by Decision Area Strategies that include: • Target Market Strategy – employ segmenting techniques • Product Strategy – develop new product line • Pricing Strategy – create price programs that offer lower pricing versus competitors • Distribution Strategy – use methods to gain access to important distribution partners that service the target market • Promotion Strategy – create a plan that can quickly build awareness of the product Achieving the Decision Area Strategies is accomplished through the development of detailed Tactical Programs for each area. For instance, to meet the Pricing Strategy that lowers cost versus competitors’ products, the marketer may employ such tactics as: quantity discounts, trade-in allowances or sales volume incentives to distributors. Planning with the Product Life Cycle There are many components, both internal and external, that must be considered within the marketing planning process. In fact, for many marketers creating the Marketing Plan represents one of the most challenging and burdensome tasks they face. Fortunately, over the years marketing academics and professionals have put forth theories, models and other tools that aid planning. Possibly the most widely used planning tool within marketing is the Product Life Cycle (PLC) concept. The basic premise of the PLC is that products go through several stages of “life” with each stage presenting the marketer with different challenges
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that must be met with different marketing approaches. By understanding a product’s position in the PLC, the marketer may be able to develop more effective plans. There have been several attempts over the years to define the stages that make up the PLC. Unfortunately, the PLC may be different for different products, different markets and different market conditions (e.g., economic forces). Consequently, there is not a one-model-fits-all PLC. Yet there is enough evidence to suggest that most products experience patterns of activity that divide the evolution of the product into five distinct stages. These stages are: • Development – Occurs before the product is released to the market and is principally a time for honing the product offering and preparing the market for product introduction. • Introduction – Product is released to the market and sales begin though often gradually as the market becomes aware of the product. • Growth – If the product is accepted it may reach a stage of rapid growth in sales and in profits. • Maturity –At some point sales of a product may stabilize. For some products the maturity phase can be the longest stage as the product is repeatedly purchased by loyal customers. However, while overall sales may grow year-over-year, percentage sales increases may be small. • Decline – All products eventually see demand decline as customers no longer see value in purchasing the product.
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Levels of Analysis of the PLC The Product Life Cycle is commonly referenced in many business publications as a way of describing the current conditions facing a market or product. The fact it is used to describe either markets or individual products points out the need to understand the different levels of analysis for which the PLC can be used. These levels include: Product Category – This level considers the macro market view for the general category of products that meet a general need. For instance, automobiles would be a general category that meets the need for personal motorized transportation (obviously there are others, such as motorcycles, scooters and trucks but we will focus only on automobiles) and includes hundreds of products. Since the PLC for a product category includes sales for all products, the timeframe for the automotive PLC is quite long with the Introduction stage beginning around 1900. Product Form – This level looks at product groupings that fall within a product category. The product form contains many different groupings that, taken together, make up the product category. These groupings include products that not only satisfy the general need of the product category, but do so by also offering additional benefits. In our example, hybrid cars would be a product form, since it satisfies the general need for personal motorized transportation and offers additional benefits in the form of fuel efficiency and environmental friendliness. Other product forms in the product category include sports cars, minivans, luxury sedans, etc. Clearly there can be a unique PLC for each form of a product. Marketers are very concerned with analysis at this level since it provides evidence for what is occurring in specific markets and for this reason is considered the most important level of analysis. Individual Brand – This level concerns the life cycle of a specific brand within a product form. In our example this would include the Toyota Prius. While it may seem marketers would be most concerned with this level, they actually gain more value from analyzing what is happening in the overall market (i.e., product form). For instance, a marketer may make a serious mistake if she assumes the entire market has entered the Decline stage just because her company’s brand has seen a sales drop. Doing so may mean a total misread of what is happening in the market and lead to the marketer missing out on additional opportunities if the market for the product form is still growing. We should note that in most cases the PLC considers what is happening for the total market (i.e., worldwide sales).
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However, more information could be obtained by applying the concepts of the PLC to individual market segments, such as geographic regions or customer characteristics (e.g., by age, education level, etc.). Adoption of New Products The PLC is tied closely to the concept of Diffusion of Innovation, which explains how information and acceptance of new products spread through a market. As we discussed in Part 21: Managing External Forces, innovation is anything new that solves needs by offering a significant advantage over existing methods (e.g., other products) customers use. Innovation can encompass both highly advanced technology products, such as new computer chips, and non-technological products, such as a new soft drink. In fact, the seminal work of the Diffusion of Innovation concept occurred in the 1950s when researchers in the agricultural industry observed how new corn seeds were adopted by farmers in Midwest U.S. states. For marketers a key concept to emerge from research on new product diffusion is the identification of adopter categories into which members of a market are likely to fall. These categories include: • Innovators – Represent a small percentage of the market that is at the forefront of adopting new products. These people are often viewed as enthusiasts and are eager to try new things, often without regard to price. While a good test ground for new products, marketers find that Innovators often do not remain loyal as they continually seek new products. • Early Adopters – This group contains more members than the Innovator category. They share Innovators’ enthusiasm for new products though they tend to be more practical about their decisions. They also are eager to communicate their experiences with the Early Majority (next group) and because of their influence they are important to the future success of the product (i.e., act as opinion leaders). • Early Majority – This represents the beginning of entry into the mass market. The Early Majority account for up to one-third of the overall market. Adoption by the Early Majority is key if a new product is to be profitable. On the other hand, many new products die quickly because they are not accepted beyond early trials by Innovators and Early Adopters and never reach mass market status. • Late Majority – Possibly as large as the Early Majority, this group takes a wait-and-see approach 368
before trying something new. Marketers are likely to see their highest profits once this group starts to purchase. • Laggards – This is the last group to adopt something new and, in fact, may only do so if they have no other choice. Depending on the market this group can be large though because of their reluctance to accept new products marketers are not inclined to direct much attention to them Adopter Categories and the PLC The adopters categories help explain the shape of the life cycle for many products. For instance, consider how a new household cleaning product may become successful. First, Innovators may experience the product during the developmental stage and then become the key targeted customers at the beginning of the Introduction stage. Early Adopters will also be targeted during the Introduction stage and their adoption will determine whether the product makes it to the Growth stage. If the product survives the Innovator and Early Adopters it moves to the Growth stage where acceptance by the Early Majority means the product is entering the mass market. The product can continue to be successful as it is adapted by the Late Majority and, to a much lesser extent, by Laggards. Eventually product sales decline as Innovators and Early Adopter move to something new and the cycle starts over. It should be noted that an assumption of a person’s placement in a certain adopter category for one product does not imply that person will also occupy the same category for other products. For example, someone who is an Innovator for one product may be a Laggard for another. However, with research, marketers may find that an individual’s adopter classification for one product applies across a similar set of products. For instance, those classified as Innovators for computer hardware may have a high probability of being categorized the same for computer software. This assumption may be necessary as a software company develops its target marketing strategies in advance of the launch a new product. Finally, it should be noted that each adopter category may consist of multiple smaller market segments. For example, the Early Majority is made up of smaller markets that can be segmented on variables such as geography, age, income, etc. The PLC and Marketing Planning With a basic understanding of the PLC, we now turn to how this is used in marketing planning. As we will see, the PLC 369
helps the marketer understand that marketing decisions must change as a product moves from one stage to another. For example, marketers will find that what works when appealing to Innovators in the Introduction stage is different than marketing methods used to attract Early Majority during the Growth stage. For much of the rest of this tutorial we offer a detailed discussion of how the PLC can aid marketing planning. The discussion is presented using the following assumptions and techniques: • The chief scope of analysis is at the product form level (i.e., what is happening in a specific industry) where we show how certain characteristics of the market change over time. We break down each stage and discuss the market characteristics in terms of • Level of Competition • Nuances of the Target Market • Available Product Options • Average Price Level • Promotional Focus • Distribution Strategy • Total Industry Profits • While market characteristics are evaluated for the product form, we offer strategy guidance for individual brands that compete within these specific industries. • While at the general level the PLC is divided into five main stages, we view most stages as consisting of sub-stages that result from noticeable changes in market characteristics. Development Stage The Product Life Cycle begins long before a product is brought to market. While technically sales do not start until the next stage, marketers must address many of the same issues they will face once the product is launched. Much of what happens in the Development stage follows our discussion of New Product Development in Part 7: Managing Products, where market research is the key element in planning. Most of what occurs in this stage is experienced only by companies who are on the forefront of innovation of a new product form. In our discussion, the Development stage is divided into two distinct sub-stages: early and late. Early Development Stage Characteristics:
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Competition: No real competition exists since the product is in early development much of which is inhouse and not readily viewable to competitors. However, from a research perspective competitors are now being identified. • Target Market: The target market exists only in market research terms. Possibly a small number of target customers are used to assist with research. • Product: The product exists only in the form of ideas and prototypes. Inventory is not yet available. • Prices: Non-existent unless the company charges research customers a fee to be part of early product testing. • Promotion: Promotion has yet to occur as companies continue to refine the product form and build their marketing plan. • Distribution: Mostly limited to internal analysis of possible distribution alternatives, though there may be some communication with a limited number of distribution partners in order to gauge interest. • Profits: At this stage there are costs only. Brand Strategy: For firms developing a new product form this stage is primarily concerned with market research. This stage matches the Concept Development and Testing step for New Product Development. Customers and distribution partners are only involved to aid in information gathering often through focus group research. Because the product form is still in early development the marketer has yet to determine whether the company will move forward with a full product launch. Late Development Stage Characteristics: • Competition: While a marketer may not face competition in terms of sales, they may face competitive pressure from companies developing similar products, such as competition to acquire materials or technologies for product development, competition to line up product evaluators, and competition to get early word out about the product to the news media. Additionally, competition may exist in the form of other types of products that potential customers currently use to satisfy needs targeted by the new product form. If these competitors are aware that a new product form is being developed, they may increase efforts to sell
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their product with the intention of reducing the market’s need for the new product. • Target Market: Companies may test market the product among a small group of customers or within a selected geographic market. • Product: Companies researching the product form begins to produce small quantities of the product, primarily for testing or to build initial awareness (e.g., for display at trade shows). • Prices: Initial market price is discussed and if there are active test markets the company may be testing different price levels. • Promotion: Promotion often begins prior to product launch as marketers prime the market. Emphasis may be on public relations in an attempt to encourage the media to discuss the product prior to launch. If a real test market is used the companies may be using several promotional options including advertising and sales promotion. • Distribution: For product sold through distributors, the ground work is being laid to build the distribution network. In some cases distributor education and training will start prior to product launch. • Profits: A small amount of revenue may be generated if real test markets are used, but overall marketers continue to experience substantial costs. Brand Strategy: Products that have moved to the late stage of development have done so because market research suggests there is strong potential for success. By this point a marketer has a real product (not just ideas) and is in the position to test it in the market. Consequently, this stage matches the Market Testing step for New Product Development. Firms electing to test their product in real “test markets” will do so using all their marketing tools. Introduction Stage This stage represents the launch of the new product form by one or more companies. It is done only after the marketer has created a detailed Marketing Plan. In many cases tactical marketing decisions (i.e., product, price, promotion, distribution, and target market) have been adjusted as the product has gone through the Development stage. The Introduction stage is divided into two distinct sub-stages: early and late. Early Introduction Stage
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Characteristics: Competition: In many cases, when two or more companies are working to be first to market with a new product form, one company will be out ahead and for a period of time have the market to itself. However, this does not mean there is no competition. The company that launched the product still faces competition from existing products that customers previously purchased in order to satisfy their needs. Target Market: To establish interest in the market for a new product form marketers will initially target Innovators and to a larger extent Early Adopters. Product: From the target market’s perspective, product options are limited since only one or a very small number of companies are selling products. Because of the uncertainty in whether the product will be accepted by a larger market and because of the expense involved in producing products in small volume (primarily due to low demand) there are very few product options available. Prices: In most cases marketers follow a pricing strategy called price skimming in which price is set at a level that is much higher than can be sustained once competitors enter. Price skimming allows the company to recover development and initial marketing costs before the onslaught of competitors eventually lowers price. Promotion: For products considered to be a leap ahead of existing products, early marketers may have some difficulty explaining how the product satisfies customer’s needs. This is particularly an issue with high-tech products. In this situation the marketer must engage in a promotional campaign that is designed to educate the market on the product form and not necessarily push a specific brand. Additional sales promotion may be used to encourage product trial. Also, the sales force may begin a strong push to acquire distributors. Distribution: Upon product launch marketers continue efforts to build their distributor network. As we saw in the Development stage, the focus of marketers is to find distributors committed to handling the product. Profits: Marketers often experience low profits and most likely a loss as the cost of acquiring customers (i.e., promotion) is high and marketers also need to pay back development expense. Brand Strategy: For the early entrants in the market the most important goal is to create awareness for the product form. If customers can see that the product form holds similar characteristics to existing products then the marketer's
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task is easier since their job becomes one of convincing customer that this new product form is better than what they are currently using. However, if the product form is significantly different than existing products then the marketers’ job may be far more difficult. Under these conditions the marketer must not only make customers aware of the new product but they must also educate customers as to what the product is, how it works and what benefits are derived from its use. For some products, such as technology products, conveying this message can prove difficult as customers may not fully understand how the product works and, consequently, not see a need for the product. Whether customers understand the product or not, this stage requires promotional spending directed to addressing the need for customer education and building awareness. Also, education and awareness alone is not enough; customer must often be enticed to try a product through special promotional efforts (e.g., free trials). Characteristics: Competition: By this stage any company that was alone in launching the new product form is alone no longer, as it is highly likely at least one competitor has entered the market. Target Market: Marketers are now engaged heavily in getting a high percentage of Early Adopters to accept the product. Product: With competitors entering the choices available to customers expand, though the difference between competitors’ offerings is often not that significant. Prices: Product pricing remains high, though any new competitor entering at this stage may attempt to compete with the early entrants by offering a lower relative price. Promotion: The promotional message is still one designed to educate the market on the benefits of this new product form but with more competition there is a noticeable increase in the use of advertising that highlights a company’s brand. Also, personal selling and sales promotion have increased especially targeting the channel of distribution as entrants attempt to secure distributors. Distribution: The number of distributors continues to increase with many now offering products from several market entrants (which at this point may still be only a few). Profits: Losses continue to mount due to high marketing cost and the need to recover development expense. Losses may be even higher than anticipated if the market adopts slower than forecast or if more companies enter than expected.
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Brand Strategy: Early entrants continue to create awareness and educate customers, but their promotional orientation may shift to a "buy-our-brand" approach if more companies enter the market. Thus, at this stage, marketers begin to position their products with the intention of separating themselves from the competition. Growth Stage The Growth stage is characterized by product sales increasing often at a very rapid rate. This is seen by large percentage sales increases over previous periods (e.g., 50% increases in sales from one quarter to the next). This is an indication the product has advanced beyond Early Adopters and is now being purchased by the mass market (i.e., Early Majority). It is also the stage when early entrants begin to realize profits, though the fact the market is now profitable invariably leads to increased competition. It is also the time in which competitors try to actively position their brand in a way that will separate it from the onslaught of new entrants. For many products the Growth stage is represented by three distinct sub-stages: early, middle and late. Early Growth Stage Characteristics: • Competition: Only a few competitors may be in the market as others wait to see whether the mass market will adopt the product. However, competitors selling products customers previously purchased to satisfy needs now addressed by the new product form may be getting very aggressive in their marketing tactics as they sense the new product form to be a threat. • Target Market: Continued focus is on Early Adopters but marketers begin to identify new market segments that contain the Early Majority. • Product: A basic product sold to the Early Adopters remains, but plans are underway to introduce products with different configurations, such more options (e.g., advanced models) and fewer options (i.e., stripped down model). An expanded product line may be necessary to satisfy many different distributors that target the mass market. • Distribution: Marketers look for new distribution channels that enable the product to begin to reach the mass market. For instance, consumer products may look to gain distribution in large discount retailers.
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Profits: The early market entrants may begin to experience profits as early development costs have been covered and overall demand is gaining steam. Potential segments of the mass market. • Prices: The average selling price may remain high especially in cases where market demand is strong and only a few competitors have entered. • Promotion: Promotions are broadened with more emphasis on mass promotions and sales promotions that encourage product trial. Also, personal selling and sales promotions to distributors continue as marketers attempt to make inroads into Brand Strategy: In the early part of the Growth stage marketers are looking to expand the market beyond the Early Adopters and into the mass market using Market Expansion strategies such as: 1) Grow Sales with Existing Products primarily by getting new market segments to buy, and 2) Grow Sales with New Products by introducing new models containing different sets of features. The latter strategy is used not only to appeal to new customers but also to encourage repeat purchasing by existing customers. Additionally, greater emphasis is placed on using promotion to continue building awareness and driving interest in the product form. This is due to: 1) the need to reach a broader market, and 2) to maintain an effective “share of voice” (i.e., percentage of all promotions in the market) so the marketer’s message is not lost among competitors’ increased promotional spending. Middle Growth Stage Characteristics: • Competition: More competitors are attracted to the market as they see the market potential to provide high profits. Competitors selling products customers previously purchased to satisfy needs now addressed by the new product form may be extremely aggressive (may be entering the Maturity stage of their industry’s PLC) resulting in major price reductions. This may delay the adoption of the new product form by some Early Majority. • Target Market: The Early Majority sector of the mass market begins to purchase in higher volume and depending on the product, existing customers (i.e., Early Adopters) may be purchasing again. The Late Majority are beginning to become customers.
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Product: Companies increase the number of product offerings in order to differentiate themselves from competitors. In most cases new product offerings do improve on the performance or benefits offered by earlier products. However, the target market may begin to feel burdened by too many choices. • Prices: As more competitors enter with more product options prices may begin to fall, though the effect may not be felt as strongly if demand remains strong. Pricing may be somewhat more competitive if large companies with strong financial backing are now entering, or in smaller segments where multiple companies are trying to establish a niche. • Promotion: Emphasis has shifted to heavy advertising and promotions that promote individual brands and not just awareness and education of the product form. Heavy selling and sales promotion continues with distributors. • Distribution: Distribution reaches saturated levels as all possible channels are now handling the product. • Profits: Marketers who were early entrants to the market may begin to see very high profits as demand is increasing while the pricing levels remain fairly strong. Depending on the product, unit cost of production may be dropping as manufacturing levels increase. Brand Strategy: In the middle part of Growth stage the objective is to continue a Market Expansion strategy, including seeking out new market segments that have not been targeted. This stage is also a time to focus on product positioning. The idea is to use marketing decisions to affect customer’s perceptions of a brand by trying to either: 1) separate a brand from other products (i.e., differentiate), or 2) bring a brand closer to competitor’s offerings (i.e., equivalency). For the differentiation approach marketers use promotional methods that show why their brand is different while the equivalency approach may suggest that a brand is equal to other brands but offers an advantage, generally on price. Late-to-market competitors may use a penetration pricing approach to establish a position in the market. Penetration pricing intentionally sets a price that is below long-term pricing in order to capture large share of market. The firm will raise price once the product is established.
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Some marketers also determine that it is time to focus on specific segments of the market via a Niche strategy approach. Late Growth Stage Characteristics: • Competition: As the market begins to see slower growth, companies find themselves in a highly competitive market with fierce battles occurring on some fronts, such as within certain segments, where demand is falling faster than in other segments. • Target Market: The overall market is still growing in terms of sales volume, especially as the product spreads to the Late Majority. But there is some evidence that while sales is increasing it is occurring at a decreasing rate. • Product: With so many competitors offering numerous product options customers feel overwhelmed and confused by the choices available. In cases where customers do not fully understand the product (e.g., technology product) they may feel more comfortable purchasing from top brands or products sold at major distributors. • Prices: The average price is falling rapidly as market growth begins to slow and competitors struggle to maintain their market share. Price wars may break out. • Promotion: Heavy spending on advertising and especially on sales promotions designed to offer incentives to customers to purchase and to repurchase. • Distribution: With demand beginning to slow, some distributors cut back on the number of products they stock and persuade leading product marketers to offer more incentives to remain with the distributor. • Profits: Marketers begin to see a leveling off of profits as overall revenue flattens due to slowing demand and falling prices. However, marketing costs still remain high. Brand Strategy: Many marketers find this to be the most difficult part of the PLC. The late growth stage is a turbulent time with firms fighting just to survive. The turbulence is brought on by the slowing of growth. This is not to say that overall sales are declining but that the percentage of growth from one period to the next is declining. For instance, sales over a three-year period may show an
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overall increase but it is occurring at a decreasing rate compared to the previous years (e.g., 20%, 15%, and 10%). The key objective for a marketer is to remain competitive by maintaining a power position (e.g., leading brand name) or by achieving an insulated position within a niche. Brands may use promotional tactics that keep existing customers happy (e.g., coupons, improved customer service) and entice new customers to try the product (e.g., rebates, extended payment, try-before-you-buy). Distribution partners are encouraged to remain loyal through such actions as special pricing, promotional assistance and special packaging. Maturity Stage At some point in time sales of the product form slows. Instead of double-digit growth from one period to the next, the industry limps along with low single digit sales increases or worse. There are two key reasons why this occurs. First, the market has become saturated with a large majority of potential customers having already purchased the product. In the case of products that have a long buycycle (i.e., time between repeat purchases) the infrequency of repurchase results in slow sales for some time. Second, customers have moved on to purchase other products that are seen as replacements for this product form. In this situation, the growth of the product form may have been interrupted with the introduction of a new product form (e.g., cassette tape players replaced by CD players). Under these conditions marketers can no longer count on the growth in the overall market as the trigger for increased company sales. This can be best explained with an example. Period 1 – Market Size 100,000 units Market Share 10% Total Company Sales 10,000 units Period 2 – Market Size 200,000 units Market Share 10% Total Company Sales 20,000 units Period 3 – Market Size 200,000 units Market Share 10% Total Company Sales 20,000 units As shown, during the growth stage (Year 1 to Year 2) a marketer may see product sales increase without the need for an increase in market share (i.e., maintain status quo). In fact, if their market share dropped to 6% in Year 2 they would still realize an overall sales increase (200,000 x 6% = 120,000 units). But once sales have leveled off (Period 3) competitors now find that the only way to increase sales is to either: 1) increase market share, or 2) increase the market size. This, of course, will make things very competitive.
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The slowing of market growth is a signal that the product form may have reached the Maturity stage of the PLC. In our discussion the Maturity stage is divided into two distinct sub-stages: early and late. Early Maturity Stage Characteristics: • Competition: By far the fiercest competition takes place as marketers move to grab customers from often weakened competitors. At this stage many competitors fail or merge with others. • Target Market: Little or no growth is occurring as the market is saturated or the target market looks to other product to satisfy their needs. Laggards may start buying but only if they can no longer purchase products they previously purchased to satisfy their needs. • Product: Many products still exist though some level of product standardization has occurred. Any new models introduced do not lead to major improvements in product performance or benefits offered, but instead offer minor incremental improvements. • Prices: The average price continues to fall possibly below cost as competitors attempt to remain in market. Price wars occur in many segments. • Promotion: Heavy competitive advertising and extensive promotions take place with the objective of getting existing customers to switch (for their repeat purchases) and encouraging distributors not to drop from their inventory. • Distribution: Distributors continue to reduce their inventory and promotional focus for the product form and become very selective on the products they will carry. • Profits: Industry profits fall rapidly and many firms lose money as they increase spending in hopes of remaining in the market. Brand Strategy: In the early part of the maturity stage, the key objective is to enact strategies that enable a product to survive in the face of strong competition driven by lessening of demand. In fact, marketers may be happy following a Status Quo strategy that is intended to just maintain their market position. Unfortunately, this may prove difficult as this stage, often called the “shakeout stage”, leads to many products failing or being absorbed by competitors (i.e., companies merge, products are sold).
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In order to survive, marketers may need to resort to tactics designed to "steal customers" from others which often involves significant price promotions (e.g., heavy discounting) or strong promotions intended to improve image or solidify a niche. Marketers who have avoided competing on price may be in a better position to weather the storm if they have convinced the market they offer special features that few others offer. This can be the case if they have successfully established a strong position in a niche market. Extending the PLC A more likely scenario for companies at this stage is to investigate new ways to grow the market in an effort to extend the growth stage of the PLC. The use of resurgence tactics include such measures as: Changing how customers use the product such as: encourage more frequent use or more consumption per usage (e.g., consume 2 units instead of 1 unit); suggest new benefits that can be obtained from using the product (e.g., has added health benefits not previously promoted); or suggest new uses for the product. Finding new markets not previously targeted. Developing new product options (i.e., product line extensions) that offer more or better features (e.g., easier to use, safer, more attractive) that may get existing customers to re-purchase more quickly then they would normally. • Heightening interest by changing image through heavy promotion and package redesign. Competing with lower priced brands by offering own low price product through private label branding arrangement with distribution partners. Late Maturity Stage Characteristics: Competition: The competitive landscape has stabilized with only the survivors remaining often made up of a few market giants and several small niche firms. Target Market: The market has become saturated for first time buyers and focus is now on getting existing customers to remain loyal. Product: The introduction of new models is reduced to just a few product performance enhancements, though there may be more stylistic improvements. Prices: Overall prices stabilize and may rise due to limited competition. 381
Promotion: Large competitors begin to cut back on expensive promotions designed to attract new customers and focus on reminder promotions to loyal customers. Distribution: Has stabilized with few new distributors agreeing to handle product. For products sold at retail stores there is a noticeable reduction in shelf space devoted to the product. Profits: Companies see profits recover as demand stabilizes, pricing rises and overall marketing costs drop. Brand Strategy: If companies have failed to extend the PLC in the early part of the maturity stage, it is very likely the product form may never again experience growth. Instead the companies will continue to market the product, albeit, with little effort other than making it available to customers who have been purchasing it for some time. By the late part of the maturity stage the companies that are still selling may no longer consider the product an important product for the future of the company, but this does not mean the product is not important. In fact, it may be very important for the profit it generates (a.k.a. cash cow) which is used to fund new products. Consequently, some attention is still paid to the product but only to insure that it is still available to those who want to purchase. Decline Stage A product form has reached this stage when it becomes clear the market is no longer able to sustain itself. Like the Maturity stage, the Decline stage may last a long time especially for products that have been adopted by a large percentage of the market who are not inclined to change how they satisfy their needs (i.e., Laggards). Since the end of the product form is seen as inevitable, there are no substages here. Characteristics: Competition: As time goes on firms drop out until no one is producing the product. Target Market: Mostly consists of Laggards who have been loyal to this type of product for a long time and have not moved on to newer products. Product: No new improvements are introduced and some models are discontinued. Prices: May be rising as competitors drop out and companies still in the market have little incentive to engage in price competition. Also, there may be a large loyal market they may not be sensitive to price increases. However, some companies looking to get out of market, but have existing
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inventory, may drastically markdown product to encourage rapid sales. Promotion: Companies limit promotions to occasional reminders to loyal customers though overall little is spent. Distribution: With declining demand distributors are removing products. The marketer may even make the decision to remove the product from unprofitable distributors. Sales may shift to online distribution or via non-traditional channels. Profits: For companies remaining, profits may be stable and possibly big if this stage takes a long time to play out. Brand Strategy: Marketers are faced with Market Exit strategies when they reach the Decline stage. There are two ways marketers can address this. First, companies may consider a "milking" strategy that involves getting the most out of the product in terms of sales without spending any additional funds to support the product. This strategy works best if a sizable market remains that is loyal to the product and not very price sensitive. A customer base with these characteristics allows a marketer to ride through the decline stage for some time while earning sizeable profits. Second, companies may look to sell off or "divest" the product. In some situations this can be done by first investing in the product in order to make the product more attractive to potential buyers. However, discontinuing a product does not mean a company no longer earns revenue from the product form. Many discontinued products, especially those used in business and industrial settings, will continue to earn money through support services such as selling supplies and service/repair contracts. Criticisms of the PLC The PLC has the ability to offer marketers guidance on strategies and tactics as they manage products through changing market conditions. Unfortunately, the PLC does not offer a perfect model of markets as it contains drawbacks that prevent it from being applicable to all products. Among the problems cited are: • Shape of Curve – Some product forms do not follow the traditional PLC curve. For instance, clothing may go through regular up and down cycles as styles are in fashion then out then in again. Fad products, such as certain toys, may be popular for a period of time only 383
to see sales drop dramatically until a future generation renews interest in the toy. • Length of Stages – The PLC offers little help in determining how long each stage will last. For example, some products can exist in the Maturity stage for decades while others may be there for only a few months. Consequently, it may be difficult to determine when adjustments to the Marketing Plan are needed to meet the needs of different PLC stages. • Competitor Reaction not Predictable – As we saw, the PLC suggests that competitor response occurs in a somewhat consistent pattern. For example, the PLC says competitors will not engage in strong brand-to-brand competition until a product form has gained a foothold on the market. The logic is that until the market is established it is in the best interest of all competitors to focus on building interest in the product form itself and not on claiming one brand is better than another. However, competitors do not always conform to theoretical models. Some will always compete on brand first and leave it to others to build market interest for the product form. Arguments can also be made that competitors will respond differently than what the PLC suggests on such issues as pricing, number of product options, spending on declining products, to name a few. • Impact of External Forces – The PLC assumes customers’ decisions are primarily impacted by the marketing activities of the companies selling in the market. In fact, as we discussed in Part 21: Managing External Forces, there are many other factors that can affect a market which are not controlled by marketers. Such factors (e.g., social changes, technological innovation) can lead to changes in market demand at rates that are much more rapid than would occur if only marketing decisions were being changed (i.e., if everything was held constant except for company’s marketing decisions). • Use for Forecasting – The impact of external forces makes it difficult to use the PLC as a forecasting tool. For instance, market factors not directly associated with the marketing activities of market competitors, such as economic conditions, may have a greater impact on reducing demand than customers’ interest in the product. Consequently, what may be forecasted as a decline in the market signaling a move
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to the Maturity stage may in fact be the result of declining economic conditions and not a decline in customers’ interest in the product? In fact, it is likely demand for the product will recover to growth levels once economic conditions improve. If a marketer follows the strict guidance of the PLC they would conclude that strategies should shift to those of the Maturity stage. Doing so may be an over-reaction that could hurt market position and profitability. • Stages Not Seamlessly Connected – Some high-tech marketers question whether one stage of the PLC naturally will follow another stage. In particular, technology consultant Geoffrey Moore suggests that for high-tech products targeted to business customers a noticeable space or “chasm” occurs between the Introduction and Growth stages that can only be overcome by significantly altering marketing strategy beyond what is suggested by the PLC. While not perfect, the PLC is a marketing tool that should be well understood by marketers since its underlying message, that markets are dynamic, supports the need for frequent marketing planning. Also, for many markets the principles presented by the PLC will in fact prove to be very much representative of the conditions they will face in the market. Finally, the PLC is just one of many models that can assist marketers as they are engaged in the planning process. Most are beyond the scope of this Principles of Marketing tutorial. For those interested in learning more about these models you are encouraged to consult one or more of the many excellent Marketing Strategy textbooks or trade books. Brand Marketing Search engine rankings, usability, Flash web design and Web site stickiness have each had their time in the limelight as the most important element of web marketing. One last important piece of the web marketing pie is brand marketing. Brand marketing is the art/science of making the right impression on prospects. It’s the active process of discovering, developing and bringing the right image or identity of your company to the marketplace. Too often, clients are focused on the later stages of the brand identity development process, such as the presentation on a Web site or advertisement in a magazine. Effective Brand Marketing is a complete process of researching the market and developing an image for your corporate identity, and then engineering its presentation at optimal times and places. Since search engine users are 385
looking for a specific product or service, having your well-constructed brand presented in search engine listings, is perhaps one of the best brand impressions you can make. What are the elements of brand marketing? • Target market research: collecting information on prospect needs and preferences • Features and benefits: identifying target prospects are interested in and which will move them to purchase • Brand presentation: designing a web page that maximizes the impact and impression of your business. • Brand experience: creating a Web site or other advertisement that makes the users meeting with your product or service memorable, fun or useful. Brand Marketing Research National Analysts' comprehensive brand marketing research process enables brand managers to: 1) develops a thorough understanding of their brand's assets; 2) identify opportunities for building and leveraging its equity; and 3) pinpoint specific areas where brand-building investment will achieve significant returns. Since no two brands are alike, there is no rigid formula for brand marketing research; rather, there are rules of logic and good judgment. Important components of the process include: • Identifying brand essence. • Performing a detailed brand image and performance assessment. • Implementing systematic brand equity measurements, exploring the brand's value and resilience in existing markets as well as its leverage potential for extensions into new markets. • Monitoring ongoing performance through a systematic brand health tracking program. • National Analysts has substantial experience performing brand marketing research in a wide range of product categories in both consumer and business-tobusiness markets. Point of sale display Marketers design special advertising vehicles, called point-of-sale displays, which are found near, on or next to a checkout counter. This is meant to entice the customer into buying more products, or products that are on a special offer. Such displays are colourful, to distract the customer while waiting in line, and to look at the product. They are meant to stand out from other items. They can also
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be related to a special event, either one going on in a shop, or a holiday-time sale. Common items that may be there year-round are batteries, video tapes or writable CDs and DVDs, drinks, tobacco, ice cream, candy, chewing gum and magazines/comics. These displays are also useful in places with limited floor space, as there tends to be a lot of wasted room around counters. The displays are normally covered with branding for the product they are trying to sell, and are made out of cardboard, and/or covering over a plastic stand. This means they are easily replaceable and disposable. This also means the designer can make full use of colour and printing to make the box appealing to the eye. Some displays are fixed or non-disposable. These may contain lighting to make the display more visible. It may also contain a cooler, such as for drinks or ice cream. Some are like a metal basket, and have no design on the outside, and simply show a price. These types of displays are easier to refill. The Biggest Obstacle to Your Success The biggest obstacle to your success is invisibility. The best, the most experienced, or the most talented cannot enjoy prosperity until they are visible to their potential market. This is a profound truth for any venture, person, or business. Becoming visible at a party can lead to romance. Becoming visible in the workplace can bring a long overdue promotion. Becoming visible to your prospects can bring corporate success. There are several ways to become visible: • Spend excessive amounts of money to reach your prospective customers (advertising). • Scream and shout your truth until someone listens (public relations). • Get a lucky break (don't hold your breath). The Secret of Visibility Becoming visible is only the first highway to travel on your route to true success. The route you choose can determine the duration of your triumph. A lucky break can bring success – but it is usually very short-lived. A massive spending spree in advertising or promotions will certainly pull customers – until you stop spending. You can use negative or positive public relations, demanding people notice you. The secret to stable and long-term success is ImageMarketing. There are eighty-eight Image-Marketing concepts and eight important Persona Factors contained in the 387
trademarked science. This is the only specific step-by-step process that contains all the known factors and variables in image-building. It is the scientific and certain way to build the equity value of your image. The concept is a simple one: your very first priority should be to invest in your image. Don't spend or shout your way to the top. Spending is only a way of reaching your audience. There are inexpensive and expensive ways of achieving notoriety. Steadily investing in your image is the inexpensive way. In time, your image will become an icon. Using all of the techniques, tips, instructions, and formulas of the Principle can make you the Xerox of your industry. The Second Obstacle The second roadblock on your journey to success is credibility. This is a major factor, Building a strong image on no substance will bring only short-term success. Just as investing in risky stocks is usually wasteful, investing in an image-only venture is doomed to fail. Build your image only on credible truths. It is important that you identify and promote only your strengths and your truths. Everyone, and every venture, can be best at something. Once you've discovered your strengths - through a research process A Controversial Foundation Image is power. Be perceived as the best and you will become the best. Your reputation is more important than your bank account. There is more value in appearing successful than in being successful. These are all controversial statements in the 1990s. Marketers are doing all they can to avoid the appearance of hype. The image is more valuable than resources or skills to any aspiring entrepreneur, salesperson, manager, or corporate officer. This will be a relief to the under funded, no-capital, start-up entrepreneur, but it is a notion that will be hotly contested by pundits who believe that we are moving away from the excessive hype of the late twentieth century. A New Millennium We are approaching a new millennium – an age many claim will be an era of substance over hype. Marketing gurus forecast a society that will resist hype and demand responsibility and truth. The image-over-substance controversy is a zero issue. Truth is almost as important. If your truth is never visible to your potential clients, you will fail. For every success story, there are dozens of
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failures. Most failures are not due to lack of talent, substance, or value. Persona Profile: The Lasting Image it is not enough to be visible. To last is to succeed. And to last. The top five advertisers have been leaders for decades: #1 Brand: AT&T telephone #2 Brand: Ford cars, trucks, and vans #3 Brand: Kellogg's cereals #4 Brand: Sears stores #5 Brand: McDonald's restaurants Not surprisingly, these brands lead in spending. But they started from modest beginnings. Although McDonald's spent $208,992,400 in 1994, this figure is only a small percentage of its extraordinary revenue. In fact, as a percentage of revenue, McDonald's spending is below average. Spending may seem the main rule of success for these big brands, but of more importance is image. Even an exorbitant level of spending would not have built McDonald's into the number one fast-food chain without a clear and consistent. Without image – corporate culture, advertising character, restaurant decor, all of which must appeal to the specific target audience – no amount of spending would bring McDonald's to the top. McDonald's controlled every ad and expenditure in marketing to maintain a consistent image. The McDonald's persona is the true secret to its success. Ronald McDonald and the Ham burglar have been so consistently promoted that they are a part of the North American culture. The credibility message "billions served" has been a cornerstone of McDonald's. All brand leaders have something in common: they all value long-term images. But how did they become these giants that practically every citizen of the United States and Canada knows by name? They invented or refined their product to be different from any similar product They made credible claims They never compromised, treating their as an inviolable culture. They allowed their persona to become a distinct, almost living, entity, complete with unique characters; names, logos, and styles It is difficult for the average start-up entrepreneur to relate to these giants. Yet these were once small ventures. McDonald's began humbly as a single restaurant and then a handful of unknown restaurants. Finally, McDonald's was bought by a shrewd entrepreneur who developed the
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McDonald's culture. This culture became an empire. If you use the codes, your Image-Equity will grow your venture could become a McDonald's or a Kellogg's with steady, precise, uncompromising application. Image and Brand Trends Why is image so important in a world that is apparently moving away from core brands and wastefulness? Isn't it good enough just to be the best and wait for your prospects to come to you? Many students ask these questions. Strategy becomes crucially important in our changing world. These trends will strongly affect the businesses of the future. They are important because of Persona Code 24, Code of Collective Conscious. Fighting trends will result in disastrous defeat. You must learn, appreciate, and use the trends of the next millennium. Our new century will be defined by its trends. We can expect it to be characterized by the Five Ages. Brand Consider these three hypothetical business communications challenges involving a company's identity. Unless carefully addressed, they clearly will send the chief communications executive right around the bend. 1. As the company's vice president of corporate communications, you receive a frantic weekend call from your CEO. A merger of your outfit and another of similar size in is the works. "Do we combine the two companies' names or think up something new?" By Monday, he wants a plan on his desk that addresses the name question, the new company's positioning and a host of related communications issues. 2. Your new CEO has just returned from a whirlwind worldwide tour of all company plants and offices. He is outraged because he's just seen a disorganized presentation of the corporation's identity. Signs are inconsistent, marketing materials are a mess and each of the seven division heads' business cards are completely different. He wants you to get right on the job—and please let him know how quickly you can pull it all together! 3. You are the director of marketing for a major airline that, over the past two years, has lost significant market share to several aggressive competitors. Current research suggests your carrier is being ignored by the business traveler. You also observed that the plane's orange and brown markings are a little dated, check-in counters seem run-down, aircraft interiors look shabby and morale is plummeting. Your CEO wants a new program put into effect
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ASAP —refurbished planes and check-in counters in three months and definitive results by the end of the year. As these hypothetical, but not unrealistic, challenges suggest, managing an identity program is very different from running a business day to day, even though it affects all of the organization. Why is managing a company's identity program so challenging? Identity is the key stone for all communications; depending on the size of the program, there can be thousands of details involved. Corporate identity is an interrelated and comprehensive network of customer perceptions and corporate management of visibility and invisible elements. Savvy managers understand that identity is a significant corporate asset. Identity includes: The image and reputation of a corporation or brand in the public mind; how a company maintains its mission and position to produce a unified, positive perception now and in the future; and how a company differentiates itself from competitors, including logos, packaging, letterheads and business cards. A logical planning process will allow a company or a brand to clearly differentiate itself clearly from the competition by projecting the appropriate attributes and providing a framework for accurately monitoring the status of the identity over a period of time. The most effective process creates a system in which future acquisitions, new products and services, promotions, advertising and facilities can be effectively integrated under one cohesive identity. A successful program increases employee pride and internal focus by emphasizing the company's personality and culture. Media guidelines allow for consistent, positive presentation. The proper management of standards can create economies of time and money by simplifying the decisionmaking process. The results should be a sizable impact on advertising and promotion budgets, with greater bang for the buck. IBM, for instance—a company that produces more than 15,000 different pieces of sales promotional literature annually—addressed this issue by putting all their design standards, system templates and an interactive user's guide for its entire identity system on a CD-ROM and distributed it globally. Continental before and after making change What should a company consider before changing its identity? Obviously, there must be sound business reasons
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for considering any modifications to the existing identity. The following procedures may help avoid monumental mistakes. 1. Compare the present identity and company name with the company's actual line of business. Do they adequately convey the range of products and services offered? Are they unique; do they indicate a specific focus or a diffuse, vague one? Determine the needs and expectations of the multiple audiences to which the business appeals. McGrawHill revamped its identity program a few years ago because it was not effectively communicating its position as a leading, technologically sophisticated information enterprise serving global markets. The financial community, a critical audience, looked upon the company as a domestic, print publisher, with weak investment appeal. 2. Interview representatives of each major audience and speak with the people the organization deals with, including customers, stockholders, bankers, employees. How does each group view the business? Conduct surveys to secure an understanding of the firm's general public image. How do customers, employees and financial analysts perceive the organization? What about the financial analysts? What impressions or reactions does the present name or identity evoke? 3. Investigate the business's operating goals and the image attributes the company wants to express in its name and identity. This can be a difficult task because there are as many divergent views on the subject as there are people involved in the project. When Primerica acquired the Travelers Corp. in 1993, it decided to reposition itself using both the Travelers name and the Travelers symbol—the widely recognized umbrella. Primerica renamed itself the Travelers Group, deciding that, going forward, the attributes associated with the Travelers name and recognition of their corporate icon would benefit the parent company and its other businesses. Before changing a name and identity, it is essential for companies to gain an overview of their future. Is the company expanding? Is it planning to sell off a subsidiary? Is it aiming for a more targeted or expansive audience? Analyze the business mix and management style. Is the company highly centralized, or do subsidiaries run their own shows? Is it a one product or a multiproduct business? Is it selling products or services, or both? Study the relationships of the parts of the company and how they communicate to different audiences. What qualities, what desired character, does the company want to project? What is the business becoming and in what direction is it headed?
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4. Compare external views of the company with the interview findings from internal sources. A sharp disparity between the two bodies of evidence signals trouble. If management has high regard for a particular business segment, but customer attitudes are negative, the firm's communications strategy should be explored. A similar problem arises when a strong external image—among customers, for instance— conflicts with a weak internal image, the company's recognition of inherent weaknesses or surfacing problems. A few years back, Continental Airlines redesigned its identity to present an image of a world-class airline. It did so, however, only after research confirmed those employees, customers and travel agents all believed that Continental was changing for the better, but was not yet world-class. Comparing external vs. internal perception about an organization not only can highlight what vulnerabilities or opportunities exist for it, but also lay the groundwork for a communications strategy that clearly parallels business strategy. 5. Examine the relationship between management or the owners of the business and employees. Is morale sagging even though management believes that employees are proud to be a part of the organization? Is high productivity masking an undercurrent of dissatisfaction with upper-level policymaking? Employees may benefit from a name that they are valuable contributors to the whole rather than mere ciphers. In some cases, employee identification with a corporate symbol can support the overall projection of the company's identity. For example, Humana, one of the nation's largest providers of managed healthcare plans, repositioned itself and adopted a new symbol with an expressive winged figure, conveying a "human-ness" with which employees and customers can readily identify. How do you decide if it's time to change a corporate, brand or retail identity? Mergers, acquisitions, a change in business focus, aggressive competition, growth, or poor maintenance of the current identity, are all reasons. Generally, there are a number of checkpoints to measure the effectiveness of your current identity. A good example from the retail sector is the Red Lobster chain of restaurants, which originally featured a rather plain generic presentation. At age 25, Red Lobster needed to revitalize its role as a "seafood specialist," and adopted a thematic approach to dining as the center of its new positioning. So successful was the undertaking that customer entering a newly designed Red Lobster soon felt as if they were dining
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pier side, even though the nearest coastline was a thousand miles away. Red Lobster before and after. There are other issues to be considered: Does the current personality accurately and favorably represent the true nature and scope of the corporation, brand or retail entity —now and for the immediate future? Is it distinctive enough to make an impact on audiences? Is the identity memorable? Are the visual characteristics clearly separate and unique from competition in a positive way? Are they modern and memorable or are they a bit dated or poorly maintained? Does the identity fit well with division or brand names so that all elements support one another? If the current effect is haphazard and fragmented, then you're not getting the maximum benefit from your identity. Conduct the simple exercise: Collect a cross-section of business cards from every department, division and subsidiary. If the overall presentation is fragmented, it is usually a tell-tale sign that serious communication problems exist. If the business cards don't represent a clear message, then it's a safe bet that all other forms of communication lack cohesiveness. Companies embark on a major identity program roughly once every 20 years or so. When analyzed strategically, the long-tern benefit of projecting an accurate identity far outweighs short-term costs. That said, costs for identity firms are determined by several factors: The complexity of the task. The identity for a small regional bank will be easier to determine that of a global financial institution. The number of people needed to participate in the assignment. The amount of time to solve the problem and implement the solution. A small regional bank program may involve three or four people over four to six months. But a project for a multinational company with a broad mix of products and services may involve five to seven people over at least 12 months. Depending on the complexity, budgets can range from as little as $75,000 to $1 million and more. Conoco before and after. Who's in charge? Most CEOs today understand the importance of corporate identity as a valuable business asset. Since it is central to any company's communications, identity management is the responsibility of the chief communications officer. For larger companies, specialists (managers of corporate or
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brand identity) help insure a successful effort. Their responsibility is to establish identity policy, maintain standards, set priorities, look for opportunities for enhancement, coordinate the details and act as champions for the program. Those with the responsibility of managing a company's identity must be very likable, great communicators and at ease with the officers of the company and the workforce. They must also be excellent sales people, discreet, diplomatic and tactful. Most important, they must have the confidence and full backing of the CEO. People who manage corporate identity come from various fields. They must have excellent communication skills and be able to convince marketers, managers, and all levels of employees of the communication and economic benefits of identity. A good communications background combined with a strong understanding of design is mandatory. Training can be formal or informal: a marketing and communications program at the college level or the school of hard knocks—a few years with a major corporation or with a top identity consultant. Identity management is essentially integrating thousands of details so that the end result appears as one perfectly synchronized and memorable expression. If your company embarks on an identity program, how do you evaluate identity firms so that you can select the most appropriate expert help? Look for firms that have a strong portfolio of case histories with demonstrated results. How did the consultant contribute to the betterment of its clients' business? Are communications improved? Have clients gained customers? Is Wall Street following them more closely? If their projects are retail- and brand-related, are more products and services being sold? Is the public perception of the company consistent with the image the identity consultant wanted to project? Again, we can look to Continental Airlines as a good example. Several months after Continental re-energized its identity, service improved markedly throughout the airline's entire organization. It improved so much that J.D. Powers rated Continental one of the top companies in customer responsiveness and on-time arrival two years' running. That kind of documented result is a good indication of good advice and great execution. When evaluating an identity firm, look to its people. The project managers and designers should have solid experience, with demonstrable problem-solving skills and design capabilities. Are they responsive? Did they get out meeting with you quickly and supplying a proposal in a timely fashion? Are they quick studies? Do they grasp your problems? Do past clients give
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them high marks for their availability, promptness and creativity? Do they anticipate your needs? Many firms fail at one or more of these points. Consider a firm's international capability. An identity project may need an integrated approach. If the assignment is complex, the challenge may require research, customer franchise management, or growth initiatives worldwide. Moreover, if the project is an international assignment, it may require a global network to facilitate the management and service aspects. The case of Samsung illustrates this. This huge Korean company underwent radical change to position itself as a global player. At the time of its transformation, its presentation was that of a parochial Korean firm. As part of its new identity, the Samsung name was presented in English, while descriptions of particular product lines, businesses or services appeared in appropriate local languages. Only a consultant with international capabilities could help Samsung accomplish this transformation to become a major global brand. Today, a majority of the work for identity consultants demands that they maintain a global presence. Consultants with multifaceted international capabilities are able to market themselves to a much broader spectrum of clients. So, managing identity programs is not for the faint of heart. The details are monumental, and the risks and rewards can be great. But managers who do their homework and choose an effective consulting firm to provide consistent support throughout the lifecycle of an identity management program will find their work a lot easier and a lot more rewarding. And when they get that weekend call from the CEO about the impending merger, they'll know exactly what to do.
SALES
Sales is the act of meeting buyers and providing them with a service for a negotiated compensation. It forms an integral part of commercial activity. Selling is a practical implementation of marketing; it often forms a separate grouping in a corporate structure, employing separate specialist operatives known as salespersons (singular: salesperson. Sales is considered by many to be a sort of persuading "art". Contrary to popular belief, the methodological approach of selling refers to a systematic 396
process of repetitive and measurable milestones, by which a salesperson relates his offering of a product of service in return enabling the buyer to achieve his goal in an economic way. Agents Agents in the sales process can be defined as representing either side of the sales process for example: • Sales broker or Seller agency or seller agent
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This is a traditional sales person role where the sales person represents a person or company on the selling end of the deal. Buyers broker or Buyer brokerage This is where the sales person represents the consumer making the purchase. Imagine if you will having someone who oversees the purchase of a pair of pants or a car for you to ensure honesty and integrity in the deal. This is most often applied in large transactions. Disclosed dual agent This is where the sales person represents both parties in the sale and acts as a mediator for the transaction. The role of the sales person here is to over see that both parties receive an honest and fair deal, and is responsible to both. Transaction broker This is where the sales person doesn't represent either party, but handles the transaction only. This is where the seller owes no responsibility to either party getting a fair or honest deal, just that all of the papers are handled properly. Sales Managers It is the goal of a qualified and talented sales manager to implement various sales strategies and management techniques in order to facilitate improved profits and increased sales volume. They are also responsible for coordinating the sales and marketing department as well as over site concerning the fair and honest execution of the sales process by his agents. Salespersons The primary function of professional sales is to generate and close leads, educate prospects, fill needs and satisfy wants of consumers appropriately, and therefore turn prospective customers into actual ones. The successful questioning to understand a customer's goal, the further creation of a valuable solution by communicating the necessary information that encourages a buyer to achieve his goal at an economic cost is the responsibility of the sales person or the sales engine (e.g. internet, vending machine etc).
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The sale can be made through: • Direct Sales, involving person to person contact • Pro forma sales • Agency-based • sales agents (real estate, manufacturing) • Transaction sales • Consultative sales • Complex sales • consignment • telemarketing or telesales • retail or consumer • door-to-door or traveling salesman • Request for Proposal is an invitation for suppliers, through a bidding process, to submit a proposal on a specific product or service. An RFP is usually part of a complex sales process, also known as enterprise sales. • Business-to-business — Business-to-business sales are much more relationship based owing to the lack of emotional attachment to the products in question. Industrial/Professional Sales is selling from one business to another • Electronic • Web — Business-to-business and business-to-consumer • Electronic Data Interchange (EDI) is a set of standards for structuring information to be electronically exchanged between and within businesses • Indirect, human-mediated but with indirect contact • Mail-order
Relationship with marketing
The marketing department's goal is to bring people to the sales team using promotional techniques such as advertising, sales promotion, publicity, and public relations. In most large corporations, the marketing department is structured in a similar fashion to the sales department and the managers of these teams must coordinate efforts in order to drive profits and business success. Driving more customers "through the door" gives the sales department a better chance by ratio of selling their product to the consumer.
Selling models Single purchases
Organizations seldom profit from single purchases made by first-time customers. Normally they rely on repeat business to generate the profit that they need. However, there are some industries which have a business model based on one time only sales relationship. These tend to be the sale of very expensive, unusual household products such as houses
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and new and used cars.The economic reason for this behavior is that these items are usually unique. Consumers buy people not products. Consumers will often pay more and accept less quality if they like and trust the sales person. A customer is buying a product because of that product's features and benefits along with their emotional attachment and feelings about the sales person and company credibility.
Repeat purchases
If your product appeals to the customer the first time they are likely to buy it again. So build a sales strategey that works and appeals to the customer to make the largest profit possible.
Criticisms Deceitful selling practices
In capitalist apologetics, the purpose of selling is to help a customer realize his or her goals in an economic fashion. This assumption neglects the fact that buyer and seller may not have the same interests. Even if the selling organization recognizes that its sustainability depends on the maintenance of a healthy relationship with repeat customers, the salesperson does not necessarily share that goal. Many sales professionals are characterized by their short-term goals, a desire quick returns on effort, and not the long-term building of relationships that the most successful sales people undertake. This dysfunctional behavior is encouraged by: • incentives of salespeople to increase their total number of sales, especially where retailers keep track of sales or offer commission-based salaries • incentives from the manufactures of products or the companies of service providers to salespeople to sell their products where other similar products offered by competitors are offered • the incentive to sell a customer a product that is in need of being cleared out, despite the fact that a customer may be better to wait for the new product. Salespersons recognize that having been deceived a customer is unlikely to buy a similar product for a long time, and so the salesperson has no incentive to offer any extra quality of service to encourage a long-term relationship. This behavior is generally true only of business-to-consumer sales.
Persuasion
Persuasion is a form of influence. It is the process of guiding people toward the adoption of an idea, attitude, or action by rational and symbolic (though not only logical) means. It is a problem-solving strategy and relies on "appeals" rather than force. Dissuasion is the process of convincing someone not to believe or act on something. Persuasion is often confused with manipulation, which is the act of guiding another towards something that is not in
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their best interest by subverting their thought processes. Persuasion is meant to benefit one or more parties in the end. Aristotle said that "Rhetoric is the art of discovering, in a particular case, the available means of persuasion." • Methods of persuasion • By appeal to reason: • Logical argument In logic, an argument is a set of statements, consisting of a number of premises, a number of inferences, and a conclusion, which is said to have the following property: if the premises are true, then the conclusion must be true, or highly likely to be true. An argument is thus an attempt to demonstrate that the truth of the conclusion follows from the truth of the premises, and the role of the inferences is to illustrate why this connection exists. An argument proceeds from premises to inferences to conclusion by employing a particular form of reasoning. If the reasoning is deductive, then the argument attempts to show that the conclusion follows necessarily from the premises. If the reasoning is inductive, the argument may show only that the conclusion is highly likely to be true if the premises are true. Other forms of reasoning are also used, with corresponding variations in the precise sense in which the conclusion follows from the premise. Logical arguments are extremely important in philosophy, science and other disciplines concerned with knowledge and truth.
Validity, soundness and effectiveness
A valid argument is one for which it is the case that if the premises are true then the conclusion must be true, or highly likely to be true. Even if an argument is valid, however, its conclusion may not be true, because a valid argument need not have true premises. A sound argument is a valid argument that does have true premises, and is thus an argument with a conclusion that is true or highly likely to be true. Clearly it is very desirable to ensure that the arguments we employ in science and other disciplines are sound. It is, however, very often a matter of debate whether or not particular arguments are actually sound, often because their validity is in dispute. Arguments can be invalid for a variety of reasons. There are well-established patterns of reasoning that arguments may follow which render them invalid; these patterns are known as logical fallacies. Even if an argument is sound (and hence also valid), an argument may still fail in its primary task of persuading us of the truth of its conclusion. Such an argument is then sound, but ineffective. An argument may fail to be effective because it is not scrutinizable, in the sense
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that it is not open to public examination. This may be because the argument is too long or too complex, because the terms occurring in it are obscure, or because the reasoning it employs is not well understood. The validity and soundness of an argument are logical properties of it, known as semantic properties. Effectiveness, on the other hand, is not a logical notion but a practical concern.
Formal arguments and mathematical arguments
In mathematics, an argument can often be formalized by writing each of its statements in a formal language such as first-order Peano Arithmetic. A formalized argument should have the following properties: • its premises are clearly identified as such • each of the inferences is justified by appeal to a specific rule of reasoning of the formal language in which the argument is written • the conclusion of the argument appears as the final inference Checking the validity of a formal argument is thus a straightforward matter, since the presence of these three properties is easily verified. Most arguments used in mathematics are not formal in quite so strict a sense. Strictly formal proofs of all but the most trivial assertions are extremely tedious to construct and often so long as to be hard to follow without assistance from a computer. Automated theorem proving is sometimes used to overcome these problems. In general mathematical practice arguments are formal insofar as they are formalizable in theory; this is sometimes expressed by saying that mathematical arguments are rigorous. Mathematicians are happy to make a single inference that would, if formalized, amount to a long chain of inferences, because they are confident that the formal chain could be constructed if required. Nevertheless, one advantage of formalizing arguments is the possibility of constructing a theory of valid mathematical arguments such as proof theory. Proof theory investigates the class of valid arguments in mathematics as a whole, and hence elucidates what kinds of statements can occur as conclusions to sound mathematical arguments. Gödel's incompleteness theorems are proof-theoretic results which show the surprising fact that not all true mathematical statements can occur as the conclusion of formalized, sound mathematical arguments. In effect, not all true statements of mathematics are provable.
Logical arguments in science
In ordinary, philosophical and scientific argumentation abductive arguments and arguments by analogy are also commonly used. Arguments can be valid or invalid, although how arguments are determined to be in either of these two categories can often itself be an object of much discussion. Informally one should expect that a valid
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argument should be compelling in the sense that it is capable of convincing someone about the truth of the conclusion. However, such a criterion for validity is inadequate or even misleading since it depends more on the skill of the person constructing the argument to manipulate the person who is being convinced and less on the objective truth or undeniability of the argument itself. Less subjective criteria for validity of arguments are often clearly desirable, and in some cases we should even expect an argument to be rigorous, that is, to adhere to precise rules of validity. This is the case for arguments used in mathematical proofs. Note that a rigorous proof does not have to be a formal proof. In ordinary language, people refer to the logic of an argument or use terminology that suggests that an argument is based on inference rules of formal logic. Though arguments do use inferences that are indisputably purely logical (such as syllogisms), other kinds of inferences are almost always used in practical arguments. For example, arguments commonly deal with causality, probability and statistics or even specialized areas such as economics. In these cases, rather than to the well-defined principles of pure logic as explicitly set out and agreed upon in an academic, professional or other strictly understood context, logic in everyday usage almost always refers to something the reader or audience of the argument believe they perceive in the argument, and which drives them inexorably towards some conclusion, something perhaps illdefined in their own minds (as opposed to putting the emphasis on examining by what criteria they actually accept this apparently compelling force as correct, which is how the formal rules of pure logic are constructed). And yet this feeling of inexorable conviction is also the foundation of those begrudgingly somewhat unsatisfying definitions we give of "logic"; in that we who are driven to construct these most conscientious, circumspect and clear definitions were initially drawn to do so by a similar belief that we recognized some intrinsic logic or compelling rational force in the world- even in the most everyday arguments, although such a view may have been naive, and is in any case incapable of being tested in any objective and/or universally satisfying fashion.
Theories of arguments
Theories of arguments are closely related to theories of informal logic. Ideally, a theory of argument should provide some mechanism for explaining validity of arguments. One natural approach would follow the mathematical paradigm and attempt to define validity in terms of semantics of the assertions in the argument. Though such an approach is appealing in its simplicity, the obstacles to proceeding this way are very difficult for anything other than purely
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logical arguments. Among other problems, we need to interpret not only entire sentences, but also components of sentences, for example noun phrases such as The present value of government revenue for the next twelve years. One major difficulty of pursuing this approach is that determining an appropriate semantic domain is not an easy task, raising numerous thorny ontological issues. It also raises the discouraging prospect of having to work out acceptable semantic theories before being able to say anything useful about understanding and evaluating arguments. For this reason the purely semantic approach is usually replaced with other approaches that are more easily applicable to practical discourse. For arguments regarding topics such as probability, economics or physics, some of the semantic problems can be conveniently shoved under the rug if we can avail ourselves of a model of the phenomenon under discussion. In this case, we can establish a limited semantic interpretation using the terms of the model and the validity of the argument is reduced to that of the abstract model. This kind of reduction is used in the natural sciences generally, and would be particularly helpful in arguing about social issues if the parties can agree on a model. Unfortunately, this prior reduction seldom occurs, with the result that arguments about social policy rarely have a satisfactory resolution. Another approach is to develop a theory of argument pragmatics, at least in certain cases where argument and social interaction are closely related. This is most useful when the goal of logical argument is to establish a mutually satisfactory resolution of a difference of opinion between individuals.
Argumentative dialogue
Arguments as discussed in the preceding paragraphs are static, such as one might find in a textbook or research article. They serve as a published record of justification for an assertion. Arguments can also be interactive, in which the proposer and the interlocutor have a more symmetrical relationship. The premises are discussed, as well the validity of the intermediate inferences. For example, consider the following exchange, illustrated by the No true Scotsman fallacy: • Argument: "No Scotsman puts sugar on his porridge." • Reply: "But my friend Angus likes sugar with his porridge." • Rebuttal: "Ah yes, but no true Scotsman puts sugar on his porridge." In this dialogue, the proposer first offers a premise, the premise is challenged by the interlocutor, and finally the proposer offers a modification of the premise. This exchange could be part of a larger discussion, for example a murder trial, in which the defendant is a Scotsman, and it had been
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established earlier that the murderer was eating sugared porridge when he or she committed the murder. In argumentative dialogue, the rules of interaction may be negotiated by the parties to the dialogue, although in many cases the rules are already determined by social mores. In the most symmetrical case, argumentative dialogue can be regarded as a process of discovery more than one of justification of a conclusion. Ideally, the goal of argumentative dialogue is for participants to arrive jointly at a conclusion by mutually accepted inferences. In some cases however, the validity of the conclusion is secondary. For example; emotional outlet, scoring points with an audience, wearing down an opponent or lowering the sale price of an item may instead be the actual goals of the dialogue. Walton distinguishes several types of argumentative dialogue which illustrate these various goals: • Personal quarrel. • Forensic debate. • Persuasion dialogue. • Bargaining dialogue. • Action seeking dialogue. • Educational dialogue. Van Eemeren and Grootendorst identify various stages of argumentative dialogue. These stages can be regarded as an argument protocol. In a somewhat loose interpretation, the stages are as follows: • Confrontation: Presentation of the problem, such as a debate question or a political disagreement • Opening: Agreement on rules, such as for example, how evidence is to be presented, which sources of facts are to be used, how to handle divergent interpretations, determination of closing conditions. • Argumentation: Application of logical principles according to the agreed-upon rules • Closing: This occurs when the termination conditions are met. Among these could be for example, a time limitation or the determination of an arbiter. Van Eemeren and Grootendorst provide a detailed list of rules that must be applied at each stage of the protocol. Moreover, in the account of argumentation given by these authors, there are specified roles of protagonist and antagonist in the protocol which are determined by the conditions which set up the need for argument. Many cases of argument are highly unsymmetrical, although in some sense they are dialogues. A particularly important case of this is political argument. Much of the recent work on argument theory has considered argumentation as an integral part of language and perhaps the most important function of language (Grice, Searle, Austin, Popper). This tendency has removed argumentation theory away from the realm of pure formal logic.
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One of the original contributors to this trend is the philosopher Chaim Perelman, who together with Lucie Olbrechts-Tyteca, introduced the French term La nouvelle rhetorique in 1958 to describe an approach to argument which is not reduced to application of formal rules of inference. Perelman's view of argumentation is much closer to a juridical one, in which rules for presenting evidence and rebuttals play an important role. Though this would apparently invalidate semantic concepts of truth, this approach seems useful in situations in which the possibility of reasoning within some commonly accepted model does not exist or this possibility has broken down because of ideological conflict. Retaining the notion enunciated in the introduction to this article that logic usually refers to the structure of argument, we can regard the logic of rhetoric as a set of protocols for argumentation.
Other theories
In recent decades one of the more influential discussions of philosophical arguments is that by Nicholas Rescher in his book The Strife of Systems. Rescher models philosophical problems on what he calls aporia or an aporetic cluster: a set of statements, each of which has initial plausibility but which are jointly inconsistent. The only way to solve the problem, then, is to reject one of the statements. If this is correct, it constrains how philosophical arguments are formulated. Logic, from Classical Greek λόγος logos (meaning word, account, reason or principle), is the study of the principles and criteria of valid inference and demonstration. As a formal science, logic investigates and classifies the structure of statements and arguments, both through the study of formal systems of inference and through the study of arguments in natural language. The scope of logic is therefore large, ranging from core topics such as the study of fallacies and paradoxes, to specialized analyses of reasoning using probability and to arguments involving causality. Logic is also commonly used today in argumentation theory. Traditionally, logic is studied as a branch of philosophy, one part of the classical trivium, which consisted of grammar, logic, and rhetoric. Since the mid-nineteenth century formal logic has been studied as the foundation of mathematics. In 1903 Bertrand Russell and Alfred North Whitehead established logic as the cornerstone of mathematics with the publication of Principia Mathematica. The development of formal logic and its implementation in computing machinery is the foundation of computer science.
Logic
Nature of logic
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The crucial concept of form is central to discussions of the nature of logic, and it complicates exposition that 'formal' in "formal logic" is commonly used in an ambiguous manner. Symbolic language is actually a species of formal logic, and is distinguished from another class of formal logic, traditional Aristotelian syllogistic logic, which deals solely with categorical propositions. Informal logic is the study of natural language arguments. The study of fallacies is an especially important branch of informal logic. The dialogues of Plato are a major example of informal logic. Formal logic is the study of inference with purely formal content, where that content is made explicit. (An inference possesses a purely formal content if it can be expressed as a particular application of a wholly abstract rule, that is, a rule that is not about any particular thing or property. The first rules of formal logic that have come down to us were written by Aristotle.We will see later that in many definitions of logic, logical inference and inference with purely formal content are the same thing. This does not render the notion of informal logic vacuous, since one may wish to investigate logic without committing to a particular formal analysis.) Symbolic logic is the study of symbolic abstractions that capture the formal features of logical inference. "Formal logic" is very often used with the alternate meaning of symbolic logic whereas informal logic is any logical investigation that does not involve symbolic abstraction; it is this sense of 'formal' that is parallel to the received usages coming from "formal languages" or "formal theory" While formal logic is old, dating back more than two millennia, most of symbolic logic is comparatively new, and arises with the application of insights from mathematics to problems in logic. Generally, a symbolic logic is captured by a formal system, comprising a formal language including rules for creating expressions in the language. The expressions will usually have an intended interpretation representing claims that we may be interested in. In addition to a system for creating expressions, a formal system will also have a set of rules stating what counts as a valid proof. A typical proof consists of axioms, rules of inference, and theorems. An axiom is a sentence that may be asserted in a proof at any time. A theorem is any sentence that can be proved in the system. A rule of inference allows a theorem to be proved from one or more previously established theorems and/or axioms. Most formal systems have either a rich set of rules of inference but few or no axioms; or a rich set of axioms but few rules of inference.
Formal Logic
Consistency, soundness, and completeness 406
Among the valuable properties that formal systems can have are: • Consistency, which means that none of the theorems of the system contradict one another. • Soundness, which means that the system's rules of proof will never allow a false inference from a true premise. If a system is sound and its axioms are true then its theorems are also guaranteed to be true. • Completeness, which means that there are no true sentences in the system that cannot, at least in principle, be proved in the system. Not all systems achieve all three virtues. The work of Kurt Gödel has shown that no useful system of arithmetic can be both consistent and complete: see Gödel's incompleteness theorems.
Important families of formal systems
Formal logic encompasses a wide variety of logical systems. Various systems of logic discussed below include term logic, predicate logic, propositional logic, and modal logic, and formal systems are indispensable in all branches of mathematical logic. The table of logic symbols describes various widely used notations in symbolic logic. Logic arose from a concern with correctness of argumentation. The conception of logic as the study of argument is historically fundamental, and was how the founders of distinct traditions of logic, namely Plato and Aristotle, conceived of logic. Modern logicians usually wish to ensure that logic studies just those arguments that arise from appropriately general forms of inference; so for example the Stanford Encyclopedia of Philosophy says of logic that it "does not, however, cover good reasoning as a whole. That is the job of the theory of rationality. Rather it deals with inferences whose validity can be traced back to the formal features of the representations that are involved in that inference, be they linguistic, mental, or other representations" (Hofweber 2004). By contrast Immanuel Kant introduced an alternative idea as to what logic is. He argued that logic should be conceived as the science of judgement, an idea taken up in Gottlob Frege's logical and philosophical work, where thought (German: Gedanke) is substituted for judgement (German: Urteil). On this conception, the valid inferences of logic follow from the structural features of judgements or thoughts. A third view of logic arises from the idea that logic is more fundamental than reason, and so that logic is the science of states of affairs (German: Sachverhalt) in general. Barry Smith locates Franz Brentano as the source for this idea, an idea he claims reaches its fullest development in the work of Adolf Reinach (Smith 1989). This view of logic appears radically distinct from the first: on this conception logic has no essential connection with
Rival conceptions of logic
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argument, and the study of fallacies and paradoxes no longer appears essential to the discipline. Occasionally one encounters a fourth view as to what logic is about: it is a purely formal manipulation of symbols according to some prescribed rules. This conception can be criticized on the grounds that the manipulation of just any formal system is usually not regarded as logic. Such accounts normally omit an explanation of what it is about certain formal systems that makes them systems of logic.
Deductive and inductive reasoning
Deductive reasoning concerns what follows necessarily from given premises. However, inductive reasoning—the process of deriving a reliable generalization from observations—has sometimes been included in the study of logic. Correspondingly, we must distinguish between deductive validity and inductive validity. An inference is deductively valid if and only if there is no possible situation in which all the premises are true and the conclusion false. The notion of deductive validity can be rigorously stated for systems of formal logic in terms of the well-understood notions of semantics. Inductive validity on the other hand requires us to define a reliable generalization of some set of observations. The task of providing this definition may be approached in various ways, some less formal than others; some of these definitions may use mathematical models of probability. For the most part this discussion of logic deals only with deductive logic. deductive argument follows the pattern of a general premise to a particular one,there is a very strong relationship between the premise and the conclusion of the argument. While many cultures have employed intricate systems of reasoning and math, logic as an explicit analysis of the methods of reasoning received sustained development originally only in three places: India in the 6th century BC, China in the 5th century BC, and Greece between the 4th century BC and the 1st century BC. The formally sophisticated treatment of modern logic descends from the Greek tradition, the latter mainly being informed from the transmission of Aristotelian logic. The traditions outside Europe did not survive into the modern era: in China, the tradition of scholarly investigation into logic was repressed by the Qin dynasty following the legalist philosophy of Han Feizi; in the Islamic world the rise of the Asharite school suppressed original work on logic. However in India, innovations in the scholastic school, called Nyaya, continued into the early 18th century. It did not survive long into the colonial period. In the 20th century, western philosophers like Stanislaw Schayer and
History of logic
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Klaus Glashoff have tried to explore certain aspects of the Indian tradition of logic. According to Hermann Weyl (1929): During the medieval period, after it was shown that Aristotle's ideas were largely compatible with faith, a greater emphasis was placed upon Aristotle's logic. During the later period of the medieval ages, logic became a main focus of philosophers, who would engage in critical logical analyses of philosophical arguments.
Topics in logic
Throughout history, there has been interest in distinguishing good from bad arguments, and so logic has been studied in some more or less familiar form. Aristotelian logic has principally been concerned with teaching good argument, and is still taught with that end today, while in mathematical logic and analytical philosophy much greater emphasis is placed on logic as an object of study in its own right, and so logic is studied at a more abstract level. Consideration of the different types of logic explains that logic is not studied in a vacuum. While logic often seems to provide its own motivations, the subject develops most healthily when the reason for our interest is made clear.
Syllogistic logic
The Organon was Aristotle's body of work on logic, with the Prior Analytics constituting the first explicit work in formal logic, introducing the syllogistic. The parts of syllogistic, also known by the name term logic, were the analysis of the judgements into propositions consisting of two terms that are related by one of a fixed number of relations, and the expression of inferences by means of syllogisms that consisted of two propositions sharing a common term as premise, and a conclusion which was a proposition involving the two unrelated terms from the premises. Aristotle's work was regarded in classical times and from medieval times in Europe and the Middle East as the very picture of a fully worked out system. It was not alone: the Stoics proposed a system of propositional logic that was studied by medieval logicians; nor was the perfection of Aristotle's system undisputed; for example the problem of multiple generality was recognised in medieval times. Nonetheless, problems with syllogistic logic were not seen as being in need of revolutionary solutions. Today, some academics claim that Aristotle's system is generally seen as having little more than historical value (though there is some current interest in extending term logics), regarded as made obsolete by the advent of sentential logic and the predicate calculus. Others use Aristotle in argumentation theory to help develop and critically question argumentation schemes that are used in artificial intelligence and legal arguments.
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Predicate logic
Logic as it is studied today is a very different subject to that studied before, and the principal difference is the innovation of predicate logic. Whereas Aristotelian syllogistic logic specified the forms that the relevant part of the involved judgements took, predicate logic allows sentences to be analysed into subject and argument in several different ways, thus allowing predicate logic to solve the problem of multiple generality that had perplexed medieval logicians. With predicate logic, for the first time, logicians were able to give an account of quantifiers general enough to express all arguments occurring in natural language. The development of predicate logic is usually attributed to Gottlob Frege, who is also credited as one of the founders of analytical philosophy, but the formulation of predicate logic most often used today is the first-order logic presented in Principles of Theoretical Logic by David Hilbert and Wilhelm Ackermann in 1928. The analytical generality of the predicate logic allowed the formalisation of mathematics, and drove the investigation of set theory, allowed the development of Alfred Tarski's approach to model theory; it is no exaggeration to say that it is the foundation of modern mathematical logic. Frege's original system of predicate logic was not first-, but second-order. Second-order logic is most prominently defended (against the criticism of Willard Van Orman Quine and others) by George Boolos and Stewart Shapiro. In languages, modality deals with the phenomenon that subparts of a sentence may have their semantics modified by special verbs or modal particles. For example, "We go to the games" can be modified to give "We should go to the games", and "We can go to the games"" and perhaps "We will go to the games". More abstractly, we might say that modality affects the circumstances in which we take an assertion to be satisfied. The logical study of modality dates back to Aristotle, who was concerned with the alethic modalities of necessity and possibility, which he observed to be dual in the sense of De Morgan duality. While the study of necessity and possibility remained important to philosophers, little logical innovation happened until the landmark investigations of Clarence Irving Lewis in 1918, who formulated a family of rival axiomatisations of the alethic modalities. His work unleashed a torrent of new work on the topic, expanding the kinds of modality treated to include deontic logic and epistemic logic. The seminal work of Arthur Prior applied the same formal language to treat temporal logic and paved the way for the marriage of the two subjects. Saul Kripke discovered (contemporaneously
Modal logic
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with rivals) his theory of frame semantics which revolutionised the formal technology available to modal logicians and gave a new graph-theoretic way of looking at modality that has driven many applications in computational linguistics and computer science, such as dynamic logic.
Deduction and reasoning
The motivation for the study of logic in ancient times was clear, as we have described: it is so that we may learn to distinguish good from bad arguments, and so become more effective in argument and oratory, and perhaps also, to become a better person. This motivation is still alive, although it no longer takes centre stage in the picture of logic; typically dialectical logic will form the heart of a course in critical thinking, a compulsory course at many universities, especially those that follow the American model. Mathematical logic really refers to two distinct areas of research: the first is the application of the techniques of formal logic to mathematics and mathematical reasoning, and the second, in the other direction, the application of mathematical techniques to the representation and analysis of formal logic. The earliest use of mathematics and geometry in relation to logic and philosophy goes back to the ancient Greeks such as Euclid, Plato, and Aristotle. Many other ancient and medieval philosophers applied mathematical ideas and methods to their philosophical claims. The boldest attempt to apply logic to mathematics was undoubtedly the logicism pioneered by philosopher-logicians such as Gottlob Frege and Bertrand Russell: the idea was that mathematical theories were logical tautologies, and the programme was to show this by means to a reduction of mathematics to logic. The various attempts to carry this out met with a series of failures, from the crippling of Frege's project in his Grundgesetze by Russell's paradox, to the defeat of Hilbert's Program by Gödel's incompleteness theorems. Both the statement of Hilbert's Program and its refutation by Gödel depended upon their work establishing the second area of mathematical logic, the application of mathematics to logic in the form of proof theory. Despite the negative nature of the incompleteness theorems, Gödel's completeness theorem, a result in model theory and another application of mathematics to logic, can be understood as showing how close logicism came to being true: every rigorously defined mathematical theory can be exactly captured by a firstorder logical theory; Frege's proof calculus is enough to describe the whole of mathematics, though not equivalent to it. Thus we see how complementary the two areas of mathematical logic have been.
Mathematical logic
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If proof theory and model theory have been the foundation of mathematical logic, they have been but two of the four pillars of the subject. Set theory originated in the study of the infinite by Georg Cantor, and it has been the source of many of the most challenging and important issues in mathematical logic, from Cantor's theorem, through the status of the Axiom of Choice and the question of the independence of the continuum hypothesis, to the modern debate on large cardinal axioms. Recursion theory captures the idea of computation in logical and arithmetic terms; its most classical achievements are the undecidability of the Entscheidungsproblem by Alan Turing, and his presentation of the Church-Turing thesis. Today recursion theory is mostly concerned with the more refined problem of complexity classes -- when is a problem efficiently solvable? -- and the classification of degrees of unsolvability.
Philosophical logic
Philosophical logic deals with formal descriptions of natural language. Most philosophers assume that the bulk of "normal" proper reasoning can be captured by logic, if one can find the right method for translating ordinary language into that logic. Philosophical logic is essentially a continuation of the traditional discipline that was called "Logic" before it was supplanted by the invention of mathematical logic. Philosophical logic has a much greater concern with the connection between natural language and logic. As a result, philosophical logicians have contributed a great deal to the development of non-standard logics (e.g., free logics, tense logics) as well as various extensions of classical logic (e.g., modal logics), and non-standard semantics for such logics (e.g., Kripke's technique of supervaluations in the semantics of logic). Logic and the philosophy of language are closely related. Philosophy of language has to do with the study of how our language engages and interacts with our thinking. Logic has an immediate impact on other areas of study. Studying logic and the relationship between logic and ordinary speech can help a person better structure their own arguments and critique the arguments of others. Many popular arguments are filled with errors because so many people are untrained in logic and unaware of how to correctly formulate an argument. Logic cut to the heart of computer science as it emerged as a discipline: Alan Turing's work on the Entscheidungsproblem followed from Kurt Gödel's work on the incompleteness theorems, and the notion of general purpose computers that came from this work was of fundamental importance to the designers of the computer machinery in the 1940s.
Logic and computation
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In the 1950s and 1960s, researchers predicted that when human knowledge could be expressed using logic with mathematical notation, it would be possible to create a machine that reasons, or artificial intelligence. This turned out to be more difficult than expected because of the complexity of human reasoning. In logic programming, a program consists of a set of axioms and rules. Logic programming systems such as Prolog compute the consequences of the axioms and rules in order to answer a query. Today, logic is extensively applied in the fields of artificial intelligence, and computer science, and these fields provide a rich source of problems in formal and informal logic. Argumentation theory is one good example of how logic is being applied to artificial intelligence. The ACM Computing Classification System in particular regards: • Section F.3 on Logics and meanings of programs and F. 4 on Mathematical logic and formal languages as part of the theory of computer science: this work covers formal semantics of programming languages, as well as work of formal methods such as Hoare logic • Boolean logic as fundamental to computer hardware: particularly, the system's section B.2 on Arithmetic and logic structures; • Many fundamental logical formalisms are essential to section I.2 on artificial intelligence, for example modal logic and default logic in Knowledge representation formalisms and methods, Horn clauses in logic programming, and description logic. Furthermore, computers can be used as tools for logicians. For example, in symbolic logic and mathematical logic, proofs by humans can be computer-assisted. Using automated theorem proving the machines can find and check proofs, as well as work with proofs too lengthy to be written out by hand.
Argumentation Theory
Argumentation theory is the study and research of informal logic, fallacies, and critical questions as they relate to every day and practical situations. Specific types of dialogue can be analyzed and questioned to reveal premises, conclusions, and fallacies. Argumentation theory is now applied in artificial intelligence and law. Just as we have seen there is disagreement over what logic is about, so there is disagreement about what logical truths there are. The logics discussed above are all "bivalent" or "twovalued"; that is, they are most naturally understood as dividing propositions into the true and the false
Controversies in logic
Bivalence and the law of the excluded middle
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propositions. Systems which reject bivalence are known as non-classical logics. In 1910 Nicolai A. Vasiliev rejected the law of excluded middle and the law of contradiction and proposed the law of excluded fourth and logic tolerant to contradiction. In the early 20th century Jan Łukasiewicz investigated the extension of the traditional true/false values to include a third value, "possible", so inventing ternary logic, the first multi-valued logic. Intuitionistic logic was proposed by L.E.J. Brouwer as the correct logic for reasoning about mathematics, based upon his rejection of the law of the excluded middle as part of his intuitionism. Brouwer rejected formalisation in mathematics, but his student Arend Heyting studied intuitionistic logic formally, as did Gerhard Gentzen. Intuitionistic logic has come to be of great interest to computer scientists, as it is a constructive logic, and is hence a logic of what computers can do. Modal logic is not truth conditional, and so it has often been proposed as a non-classical logic. However, modal logic is normally formalised with the principle of the excluded middle, and its relational semantics is bivalent, so this inclusion is disputable. On the other hand, modal logic can be used to encode non-classical logics, such as intuitionistic logic. Logics such as fuzzy logic have since been devised with an infinite number of "degrees of truth", represented by a real number between 0 and 1. Bayesian probability can be interpreted as a system of logic where probability is the subjective truth value.
Implication: strict or material?
It is obvious that the notion of implication formalised in classical logic does not comfortably translate into natural language by means of "if... then...", due to a number of problems called the paradoxes of material implication. The first class of paradoxes involves counterfactuals, such as "If the moon is made of green cheese, then 2+2=5", which are puzzling because natural language does not support the principle of explosion. Eliminating this class of paradoxes was the reason for C. I. Lewis's formulation of strict implication, which eventually led to more radically revisionist logics such as relevance logic. The second class of paradoxes involves redundant premises, falsely suggesting that we know the succedent because of the antecedent: thus "if that man gets elected, granny will die" is materially true if granny happens to be in the last stages of a terminal illness, regardless of the man's election prospects. Such sentences violate the Gricean maxim of relevance, and can be modelled by logics that reject the principle of monotonicity of entailment, such as relevance logic.
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Tolerating the impossible
Closely related to questions arising from the paradoxes of implication comes the radical suggestion that logic ought to tolerate inconsistency. Relevance logic and paraconsistent logic are the most important approaches here, though the concerns are different: a key consequence of classical logic and some of its rivals, such as intuitionistic logic, is that they respect the principle of explosion, which means that the logic collapses if it is capable of deriving a contradiction. Graham Priest, the main proponent of dialetheism, has argued for paraconsistency on the striking grounds that there are in fact, true contradictions.
Is logic empirical?
What is the epistemological status of the laws of logic? What sort of argument is appropriate for criticising purported principles of logic? In an influential paper entitled "Is logic empirical?"[8] Hilary Putnam, building on a suggestion of W.V. Quine, argued that in general the facts of propositional logic have a similar epistemological status as facts about the physical universe, for example as the laws of mechanics or of general relativity, and in particular that what physicists have learned about quantum mechanics provides a compelling case for abandoning certain familiar principles of classical logic: if we want to be realists about the physical phenomena described by quantum theory, then we should abandon the principle of distributivity, substituting for classical logic the quantum logic proposed by Garrett Birkhoff and John von Neumann. Another paper by the same name by Sir Michael Dummett argues that Putnam's desire for realism mandates the law of distributivity.[10] Distributivity of logic is essential for the realist's understanding of how propositions are true of the world in just the same way as he has argued the principle of bivalence is. In this way, the question, "Is logic empirical?" can be seen to lead naturally into the fundamental controversy in metaphysics on realism versus anti-realism.
Rhetoric
Rhetoric (from Greek ῥήτωρ, rhêtôr, orator, teacher) is generally understood to be the art or technique of persuasion through the use of spoken and written language; however, this definition of rhetoric has expanded greatly since rhetoric emerged as a field of study in universities. In this sense, there is a divide between classical rhetoric (with the aforementioned definition) and contemporary practices of rhetoric. Historically, Classical Rhetoric has its inception in a school of Pre-Socratic philosophers known as Sophists. It is later taught as one of the three original liberal arts
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or trivium (the other members are dialectic and grammar) in Western culture. In ancient and medieval times, grammar concerned itself with correct, accurate, pleasing, and effective language use through the study and criticism of literary models, dialectic concerned itself with the testing and invention of new knowledge through a process of question and answer, and rhetoric concerned itself with persuasion in public and political settings such as assemblies and courts of law. As such, rhetoric is said to flourish in open and democratic societies with rights of free speech, free assembly, and political enfranchisement for some portion of the population. Contemporary Studies of Rhetoric have a more diverse range of practices and meanings than was the case in ancient times. The concept of rhetoric has thus shifted widely during its 2500-year history. Rhetoricians have recently argued that the classical understanding of rhetoric is limited because persuasion depends on communication, which in turn depends on meaning. Thus the scope of rhetoric is understood to include much more than simply public--legal and political--discourse. This emphasis on meaning and how it is constructed and conveyed draws on a large body of critical and social theory (see literary theory and Critical Theory), philosophy (see Post-structuralism and Hermeneutics), and problems in social science methodology (see Reflexivity). So while rhetoric has traditionally been thought of being involved in such arenas as politics, law, public relations, lobbying, marketing and advertising, the study of rhetoric has recently entered into diverse fields such as science, religion, journalism, history, literature and even cartography and architecture. Every aspect of human life and thought that depends on the articulation and communication of meaning can be said to involve elements of the rhetorical.
Negative Connotation
The terms "rhetoric" and "sophistry" are also used today in a pejorative or dismissive sense, when someone wants to refer to demagogic politicians, distinguish between "empty" words and action, or between true or accurate information and misinformation, propaganda, or "spin." Another current use of the word rhetoric is to denigrate specific forms of verbal reasoning as irrelevant, fallacious, inflammatory, or spurious. Nonetheless, rhetoric, as the art of persuasion, continues to play an important function in contemporary public life.
History of Classical Rhetoric Introduction
The scholarly literature on the 2500-year history and theory of rhetoric in Western culture is far too voluminous to be listed at the end of this entry. Useful reference
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works include George Kennedy's Classical Rhetoric and its Christian and Secular Tradition from Ancient to Modern Times, Thomas O. Sloane, ed., Encyclopedia of Rhetoric (Oxford University Press, 2001); Heinrich Lausberg, Handbook of Literary Rhetoric: A Foundation for Literary Study (1960; 2nd ed. 1973; English trans, Brill, 1998); Richard A. Lanham, A Handlist of Rhetorical Terms (University of California Press, 1968; 2nd ed. 1991). For overview surveys of the scholarly literature, see Winifred Bryan Horner, ed., The Present State of Scholarship in Historical and Contemporary Rhetoric (University of Missouri Press, 1983; rev. ed. 1990); and Theresa Enos and Stuart C. Brown, eds., Defining the New Rhetorics (Sage, 1993).
Ancient Greece
The earliest mention of oratorical skill occurs in Homer's Illiad, where heroes like Achilles, Nestor, and Odysseus were honored for their ability to advise and exhort their peers and followers (the laos or army) in wise and appropriate action. With the rise of the democratic polis, speaking skill was adapted to the needs of the public and political life of cities in Ancient Greece, much of which revolved around the use of oratory as the medium through which political and judicial decisions were made, and through which philosophical ideas were developed and disseminated. For modern students today, it can be difficult to remember that the wide use and availability of written texts is a phenomenon that was just coming into vogue in Classical Greece. In Classical times, many of the great thinkers and political leaders performed their works before an audience, usually in the context of a competition or contest for fame, political influence, and cultural capital; in fact, many of them are known only through the texts that their students, followers, or detractors wrote down. As has already been noted, rhetor was the Greek term for orator: A rhetor was a citizen who regularly addressed juries and political assemblies and who was thus understood to have gained some knowledge about public speaking in the process, though in general facility with language was often referred to as logôn techne, "skill with arguments" or "verbal artistry." See, Mogens Herman Hansen The Athenian Democracy in the Age of Demosthenes (Blackwell, 1991); Josiah Ober Mass and Elite in Democratic Athens (Princeton UP, 1989); Jeffrey Walker, Rhetoric and Poetics in Antiquity (Oxford UP, 2000). Rhetoric thus evolved as an important art, one that provided the orator with the forms, means, and strategies for persuading an audience of the correctness of the orator's arguments. Today the term rhetoric can be used at times to refer only to the form of argumentation, often with the pejorative connotation that rhetoric is a means of
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obscuring the truth. Classical philosophers believed quite the contrary: the skilled use of rhetoric was essential to the discovery of truths, because it provided the means of ordering and clarifying arguments.
The Sophists
Organized thought about public speaking began in ancient Greece. Possibly, the first study about the power of language may be attributed to the philosopher Empedocles (d. ca. 444 BC), whose theories on human knowledge would provide a basis for many future rhetoricians. The first written manual is attributed to Corax and his pupil Tisias. Their work, as well as that of many of the early rhetoricians, grew out of the courts of law; Tisias, for example, is believed to have written judicial speeches that others delivered in the courts. Teaching in oratory was popularized in the 5th century BC by itinerant teachers known as sophists, the best known of whom were Protagoras (c.481-420 BC), Gorgias (c.483-376 BC), and Isocrates (436338 BC). The Sophists were a disparate group who travelled from city to city making public displays to attract students who were then charged a fee for their education. Their central focus was on logos or what we might broadly refer to as discourse, its functions and powers. They defined parts of speech, analyzed poetry, parsed close synonyms, invented argumentation strategies, and debated the nature of reality. They claimed to make their students "better," or, in other words, to teach virtue. They thus claimed that human "excellence" was not an accident of fate or a prerogative of noble birth, but an art or "techne" that could be taught and learned. They were thus among the first humanists. Several sophists also questioned received wisdom about the gods and about the inherent supremacy of Greek culture, taken for granted by Greeks of their time, making them among the first agnostics as well. They argued, for example, that cultural practices were a function of convention or nomos rather than blood or birth or phusis, and further that the morality or immorality of any action could not be judged outside of the cultural context within which it occurred. The well-known phrase, "Man is the measure of all things" arises from this belief. One of their most famous, and infamous, doctrines has to do with probability and counter arguments. They taught that every argument could be countered with an opposing argument, that an argument's effectiveness derived from how "likely" it appeared to the audience (its probability of seeming true), and that any probability argument could be countered with an inverted probability argument. Thus, if it seemed likely that a strong, poor man were guilty of robbing a rich, weak man, the strong poor man could argue, on the contrary, that this very likelihood (that he would be a suspect) makes it unlikely that he committed the crime, since he would mostly
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likely be apprehended for the crime. They also taught and were known for their ability to "make the weaker (or worse) argument the stronger (or better). Aristophanes famously parodies the clever inversions that sophists were known for in his play The Clouds. The word "sophistry" developed strong negative connotations in ancient Greece that continue today, but in ancient Greece sophists were nevertheless popular and well-paid professionals, widely respected for their abilities but also widely criticized for their excesses.
Socrates
Socrates (436-338 BC), like the sophists, taught public speaking as a means of human improvement, but he worked to distinguish himself from the Sophists, whom he saw as claiming far more than they could deliver. He suggested that while an art of virtue or excellence did exist, it was only one piece, and the least, in a process of selfimprovement that relied much more heavily on native talent and desire, constant practice, and the imitation of good models. Isocrates believed that practice in speaking publicly about noble themes and important questions would function to improve the character of both speaker and audience while also offering the best service to a state. He thus wrote his speeches as "models" for his students to imitate in the same way that poets might imitate Homer or Hesiod. His was the first permanent school in Athens and it is likely that Plato's Academy and Aristotle's Lyceum were founded in part as a response to Isocrates. Though he left no handbooks, his speeches ("Antidosis" and "Against the Sophists" are most relevant to students of rhetoric) became models of oratory (he was one of the canonical "Ten Attic Orators") and he had a marked influence on Cicero and Quintilian, and through them, on the entire educational system of the west.
Plato
Plato (427-347 BC) has famously outlined the differences between true and false rhetoric in a number of dialogues, but especially the Gorgias and the Phaedrus. Both dialogues are complex and difficult, but in both Plato disputes the Sophistic notion that an art of persuasion, the art of the Sophists which he calls "rhetoric" (after the public speaker or rhêtôr) can exist independent of the art of dialectic. Plato claims that since Sophists appeal only to what seems likely or probable, rather than to what is true, they are not at all making their students and audiences "better," but simply flattering them with what they want to hear. While Plato's condemnation of rhetoric is clear in the Gorgias, in the Phaedrus he seems to suggest the possibility of a true art of rhetoric based upon the knowledge produced by dialectic, and he relies on such a
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dialectically informed rhetoric to appeal to the main character, Phaedrus, to take up philosophy. It is possible that in developing his own theory of knowledge, Plato coined the term "rhetoric" both to denounce what he saw as the false wisdom of the sophists, and to advance his own views on knowledge and method. Plato's animosity against the Sophists derives not only from their inflated claims to teach virtue and their reliance on appearances, but from the fact that his teacher, Socrates, was accused of being a sophist and ultimately sentenced to death for his teaching. In his dialogues, Plato attempts to distinguish the rhetoric common to Socratic questioning from Sophistry.
Aristotle
Plato's student Aristotle (384-322 BC) famously set forth an extended treatise on rhetoric that still repays careful study today. In the first sentence of The Art of Rhetoric, Aristotle says that "rhetoric is the counterpart [literally, the antistrophe] of dialectic." As the "antistrophe" of a Greek ode responds to and is patterned after the structure of the "strophe" (they form two sections of the whole and are sung by two parts of the chorus), so the art of rhetoric follows and is structurally patterned after the art of dialectic because both are arts of discourse production. Thus, while dialectical methods are necessary to find truth in theoretical matters, rhetorical methods are required in practical matters such as adjudicating somebody's guilt or innocence when charged in a court of law, or adjudicating a prudent course of action to be taken in a deliberative assembly. For Plato and Aristotle, dialectic involves persuasion, so when Aristotle says that rhetoric is the antistrophe of dialectic, he means that rhetoric as he uses the term has a domain or scope of application that is parallel to but different from the domain or scope of application of dialectic. In Nietzsche Humanist (1998: 129), Claude Pavur explains that "[t]he Greek prefix 'anti' does not merely designate opposition, but it can also mean 'in place of.'" When Aristotle characterizes rhetoric as the antistrophe of dialectic, he no doubt means that rhetoric is used in place of dialectic when we are discussing civic issues in a court of law or in a legislative assembly. The domain of rhetoric is civic affairs and practical decision making in civic affairs, not theoretical considerations of operational definitions of terms and clarification of thought -- these, for him, are in the domain of dialectic. Aristotle's treatise on rhetoric is an attempt to systematically describe civic rhetoric as a human art or skill (techne). His definition of rhetoric as a mode of discovery seems to limit the art to the inventional process, and Aristotle heavily emphasizes the logical
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aspect of this process. But the treatise in fact also discusses not only elements of style and (briefly) delivery, but also emotional appeals (pathos) and characterological appeals (ethos). He thus identifies three steps or "offices" of rhetoric--invention, arrangement, and style--and three different types of rhetorical proof: ethos: how the character and credibility of a speaker influence an audience to consider him to be believable. This could be any position in which the speaker--from being a college professor of the subject, to being an acquaintance of person who experienced the matter in question--knows about the topic. pathos: the use of emotional appeals to alter the audience's judgment. This can be done through metaphor, amplification, storytelling, or presenting the topic in a way that evokes strong emotions in the audience. logos: the use of reasoning, either inductive or deductive, to construct an argument. Inductive reasoning uses examples (historical, mythical, or hypothetical) to draw conclusions. Deductive or "enthymematic" reasoning uses generally accepted propositions to derive specific conclusions. The term logic evolved from logos. Aristotle emphasized enthymematic reasoning as central to the process of rhetorical invention, though later rhetorical theorists placed much less emphasis on it. Aristotle also identifies three different types or genres of civic rhetoric: forensic (also known as judicial, was concerned with determining truth or falsity of events that took place in the past), deliberative (also known as political, was concerned with determining whether or not particular actions should or should not be taken in the future), and epideictic (also known as ceremonial, was concerned with praise and blame, demonstrating beauty and skill in the present). One of the most fruitful of Aristotelian doctrines was the idea of topics (also referred to as common topics or commonplaces). Though the term had a wide range of application (as a memory technique or compositional exercise, for example) it most often referred to the "seats of argument"--the list of categories of thought or modes of reasoning--that a speaker could use in order to generate arguments or proofs. The topics were thus a heuristic or inventional tool designed to help speakers categorize and thus better retain and apply frequently used types of argument. For example, since we often see effects as "like" their causes, one way to invent an argument (about a future effect) is by discussing the cause (which it will be "like"). This and other rhetorical topics derive from
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Aristotle's belief that there are certain predictable ways in which humans (particularly non-specialists) draw conclusions from premises. Based upon and adapted from his dialectical Topics, the rhetorical topics became a central feature of later rhetorical theorizing, most famously in Cicero's work of that name.
Roman rhetoricians
The Romans, for whom oration also became an important part of public life, saw much value in Greek rhetoric, hiring Greek rhetoricians to teach in their schools and as private tutors, and imitating and adapting Greek rhetorical works in Latin and with Roman examples. Roman rhetoric thus largely extends upon and develops its Greek roots, though it tends to prefer practical advice to the theoretical speculations of Greek rhetoricians. Cicero (106-43 BC) and Quintilian (35-100 AD) were chief among Roman rhetoricians, and their work is an extension of sophistic, Isocratean, Platonic and Aristotelian rhetorical theory. Latin rhetoric was developed out of the Rhodian schools of rhetoric. In the second century BC, Rhodes became an important educational center, particularly of rhetoric, and the sons of noble Roman families studied there. Although not widely read in Roman times, the Rhetorica ad Herennium (sometimes attributed to Cicero, but probably not his work) is a notable early work on Latin rhetoric. Its author was probably a Latin rhetorician in Rhodes, and for the first time we see a systematic treatment of Latin elocutio. The Ad Herennium provides a glimpse into the early development of Latin rhetoric, and in the Middle Ages and Renaissance, it achieved wide publication as one of the basic school texts on rhetoric. Whether or not he wrote the Rhetorica ad Herennium, Cicero, along with Quintilian (the most influential Roman teacher of rhetoric), is considered one of the most important Roman rhetoricians. His works include the early and very influential De Inventione (On Invention, often read alongside the Ad Herennium as the two basic texts of rhetorical theory throughout the Middle Ages and into the Renaissance), De Oratore (a fuller statement of rhetorical principles in dialague form), Topics (a rhetorical treatment of common topics, highly influential through the Renaissance), Brutus (a discussion of famous orators)and Orator (a defense of Cicero's style). Cicero also left a large body of speeches and letters which would establish the outlines of Latin eloquence and style for generations to come. It was the rediscovery of Cicero's speeches (such as the defence of Archias) and letters (to Atticus) by Italians like Petrach that, in part, ignited the cultural innovations that we know as the Rennaisance. Quintilian's career began as a pleader in the courts of law; his reputation grew so great that Vespasian created a
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chair of rhetoric for him in Rome. The culmination of his life's work was the Institutio oratoria (or Institutes of Oratory), a lengthy treatise on the training of the orator in which he discusses the training of the "perfect" orator from birth to old age and, in the process, reviews the doctrines and opinions of many influential rhetoricians who preceeded him. In the Institutes, Quintilian organizes rhetorical study through the stages of education that an aspiring orator would undergo, beginning with the selection of a nurse. Aspects of elementary education (training in reading and writing, grammar, and literary criticism) are followed by preliminary rhetorical exercises in composition (the progymnasmata) that include maxims and fables, narratives and comparisons, and finally full legal or political speeches. The delivery of speeches within the context of education or for entertainment purposes became widespread and popular under the term "declamation." Rhetorical training proper was categorized under five canons that would persist for centuries in academic circles: Inventio (invention) is the process that leads to the development and refinement of an argument. Once arguments are developed, dispositio (disposition, or arrangement) is used to determine how it should be organized for greatest effect, usually beginning with the exordium. Once the speech content is known and the structure is determined, the next steps involve elocutio (style) and pronuntiatio (presentation). Memoria (memory) comes to play as the speaker recalls each of these elements during the speech. Actio (delivery) is the final step as the speech is presented in a gracious and pleasing way to the audience the Grand Style. This work was available only in fragments in medieval times, but the discovery of a complete copy at Abbey of St. Gall in 1416 led to its emergence as one of the most influential works on rhetoric during the Renaissance. Quintilian's work attempts to describe not just the art of rhetoric, but the formation of the perfect orator as a politically active, virtuous, publically minded citizen. His emphasis on the real life application of rhetorical training was in part nostalgia for the days when rhetoric was an important political tool, and in part a reaction against the growing tendency in Roman schools toward standardization of themes and techniques and increasing separation between school exercises and actual legal practice, a tendency equally powerful today in public schools and law schools alike. At the same time that rhetoric was becoming divorced from political decision
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making, rhetoric rose as a culturally vibrant and important mode of entertainment and cultural criticism in a movement known as the "second sophistic," a development which gave rise to the charge (made by Quintilian and others) that teachers were emphasizing ornamentation over substance in rhetoric. Quintilian's masterful work was not enough to curb this movement, but his dismayed response cemented the scholarly opinion that 2nd Century C.E. rhetoric fell into decadence and political irrelevance, despite its wide popularity and cultural importance. Although he is not commonly regarded as a rhetorician, St. Augustine (354-430) was trained in rhetoric and was at one time a teacher of Latin rhetoric. After his conversion to Christianity, he became interested in using these "pagan" arts for spreading his religion. This new use of rhetoric is explored in the Fourth Book of his De Doctrina Christiana, which laid the foundation of what would become homiletics, the rhetoric of the sermon.
Rhetoric from the Renaissance to the Enlightenment
After the Roman Empire, the study of rhetoric continued to be central to the study of the verbal arts; but the study of the verbal arts went into decline for several centuries, followed eventually by a gradual rise in formal education, culminating in the rise of medieval universities. But rhetoric transmuted during this period in the arts of letter writing (ars dictaminis) and writing sermons (ars praedicandi). As part of the trivium, rhetoric was secondary to the study of logic, and its study was highly scholastic: students were given repetitive exercises in the creation of discourses on historical subjects (suasoriae) or on classic legal questions (controversiae). In his 1943 Cambridge University doctoral dissertation in English, Marshall McLuhan (1911-1980) surveys the verbal arts from approximately the time of Cicero down to the time of Thomas Nashe (1567-1600?). His dissertation is still noteworthy for undertaking to study the history of the verbal arts together as the trivium, even though the developments that he surveys have been studied in greater detail since he undertook his study. As noted below, McLuhan became one of the most widely publicized thinkers in the 20th century, so it is important to note his scholarly roots in the study of the history of rhetoric and dialectic. Walter J. Ong's encyclopedia article "Humanism" in the 1967 New Catholic Encyclopedia provides a well-informed survey of Renaissance humanism, which defined itself broadly as disfavoring medieval scholastic logic and dialectic and as favoring instead the study of classical Latin style and grammar and philology and rhetoric. (Reprinted in Ong's Faith and Contexts (Scholars Press, 1999; 4: 69-91.)
Sixteenth century
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One influential figure in the rebirth of interest in classical rhetoric was Erasmus (c.1466-1536). His work, De Duplici Copia Verborum et Rerum (1512), was widely published (it went through more than 150 editions throughout Europe) and became one of the basic school texts on the subject. Its treatment of rhetoric is less comprehensive than the classic works of antiquity, but provides a traditional treatment of res-verba (matter and form): its first book treats the subject of elocutio, showing the student how to use schemes and tropes; the second book covers inventio. Much of the emphasis is on abundance of variation (copia means "plenty" or "abundance", as in copious or cornucopia), so both books focus on ways to introduce the maximum amount of variety into discourse. For instance, in one section of the De Copia, Erasmus presents two hundred variations of the sentence "Semper, dum vivam, tui meminero". Another of his works, the extremely popular The Praise of Folly also had considerable influence on the teaching of rhetoric in the later sixteenth century. Its orations in favour of qualities such as madness spawned a type of exercise popular in Elizabethan grammar schools, later called adoxography, which required pupils to compose passages in praise of useless things. Juan Luis Vives (1492 - 1540) also helped shape the study of rhetoric in England. A Spaniard, he was appointed in 1523 to the Lectureship of Rhetoric at Oxford by Cardinal Wolsey, and was entrusted by Henry VIII to be one of the tutors of Mary. Vives fell into disfavor when Henry VIII divorced Catherine of Aragon and left England in 1528. His best-known work was a book on education, De Disciplinis, published in 1531, and his writings on rhetoric included Rhetoricae, sive De Ratione Dicendi, Libri Tres (1533), De Consultatione (1533), and a rhetoric on letter writing, De Conscribendis Epistolas (1536). It is likely that many well-known English writers would have been exposed to the works of Erasmus and Vives (as well as those of the Classical rhetoricians) in their schooling, which was conducted in Latin (not English) and often included some study of Greek and placed considerable emphasis on rhetoric. See, for example, T.W. Baldwin's William Shakspere's Small Latine and Lesse Greeke, 2 vols. (University of Illinois Press, 1944). The mid-1500s saw the rise of vernacular rhetorics — those written in English rather than in the Classical languages; adoption of works in English was slow, however, due to the strong orientation toward Latin and Greek. A successful early text was Thomas Wilson's The Arte of Rhetorique (1553), which presents a traditional treatment of rhetoric. For instance, Wilson presents the five canons of rhetoric (Invention, Disposition, Elocutio, Memoria, and Utterance or Actio). Other notable works included Angel Day's The
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English Secretorie (1586, 1592), George Puttenham's The Arte of English Poesie (1589), and Richard Rainholde's Foundacion of Rhetorike (1563). During this same period, a movement began that would change the organization of the school curriculum in Protestant and especially Puritan circles and lead to rhetoric losing its central place. A French scholar, Petrus Ramus (1515-1572), dissatisfied with what he saw as the overly broad and redundant organization of the trivium, proposed a new curriculum. In his scheme of things, the five components of rhetoric no longer lived under the common heading of rhetoric. Instead, invention and disposition were determined to fall exclusively under the heading of dialectic, while style, delivery, and memory were all that remained for rhetoric. See Walter J. Ong, Ramus, Method, and the Decay of Dialogue: From the Art of Discourse to the Art of Reason (Harvard University Press, 1958; reissued by the University of Chicago Press, 2004, with a new foreword by Adrian Johns). One of Ramus' followers, Audomarus Talaeus (Omer Talon) published his rhetoric, Institutiones Oratoriae, in 1544. This work provided a simple presentation of rhetoric that emphasized the treatment of style, and became so popular that it was mentioned in John Brinsley's (1612) Ludus literarius; or The Grammar Schoole as being the "most used in the best schooles." Many other Ramist rhetorics followed in the next half-century, and by the 1600s, their approach became the primary method of teaching rhetoric in Protestant and especially Puritan circles. See Walter J. Ong, Ramus and Talon Inventory (Harvard University Press, 1958); Joseph S. Freedman, Philosophy and the Arts in Central Europe, 1500-1700: Teaching and Texts at Schools and Universities (Ashgate, 1999). John Milton (1608-1674) wrote a textbook in logic or dialectic in Latin based on Ramus' work, which has now been translated into English by Walter J. Ong and Charles J. Ermatinger in The Complete Prose Works of John Milton (Yale University Press, 1982; 8: 206-407), with a lengthy introduction by Ong (144-205). The introduction is reprinted in Ong's Faith and Contexts (Scholars Press, 1999; 4: 111-41). But Ramism did not strongly influence the established Catholic schools and universities or the new Catholic schools and universities founded by members of the religious order known as the Society of Jesus, as can be seen in the Jesuit document known as the Ratio Studiorum that Claude Pavur, S.J., has recently translated into English, with the Latin text in the parallel column on each page (St. Louis: Institute of Jesuit Sources, 2005). The influence of Cicero and Quintilian permeates the Ratio Studiorum.
Seventeenth century
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In New England and at Harvard College (founded 1636), Ramus and his followers dominated, as Perry Miller shows in The New England Mind: The Seventeenth Century (Harvard University Press, 1939). However, in England, several writers influenced the course of rhetoric during the seventeenth century, many of them carrying forward the dichotomy that had been set forth by Ramus and his followers during the preceding decades. Of greater importance is that this century saw the development of a modern, vernacular style that looked to English, rather than to Greek, Latin, or French models. Francis Bacon (1561-1626), although not a rhetorician, contributed to the field in his writings. One of the concerns of the age was to find a suitable style for the discussion of scientific topics, which needed above all a clear exposition of facts and arguments, rather than the ornate style favored at the time. Bacon in his The Advancement of Learning criticized those who are preoccupied with style rather than "the weight of matter, worth of subject, soundness of argument, life of invention, or depth of judgment." On matters of style, he proposed that the style conform to the subject matter and to the audience, that simple words be employed whenever possible, and that the style should be agreeable. See Lisa Jardine, Francis Bacon: Discovery and the Art of Discourse (Cambridge University Press, 1975). Thomas Hobbes (1588-1679) also wrote on rhetoric. Along with a shortened translation of Aristotle's Rhetoric, Hobbes also produced a number of other works on the subject. Sharply contrarian on many subjects, Hobbes, like Bacon, also promoted a simpler and more natural style that used figures of speech sparingly. Perhaps the most influential development in English style came out of the work of the Royal Society (founded in 1660), which in 1664 set up a committee to improve the English language. Among the committee's members were John Evelyn (1620-1706), Thomas Sprat (1635-1713), and John Dryden (1631-1700). Sprat regarded "fine speaking" as a disease, and thought that a proper style should "reject all amplifications, digressions, and swellings of style" and instead "return back to a primitive purity and shortness" (History of the Royal Society, 1667). While the work of this committee never went beyond planning, John Dryden is often credited with creating and exemplifying a new and modern English style. His central tenet was that the style should be proper "to the occasion, the subject, and the persons." As such, he advocated the use of English words whenever possible instead of foreign ones, as well as vernacular, rather than Latinate, syntax. His own prose (and his poetry) became exemplars of this new style.
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Modern Rhetoric History of Modern Rhetoric
Walter Jost has examined Rhetorical Thought in John Henry Newman (1989). (John Henry Newman lived from 1801-1890.) The Canadian Jesuit philosopher and theologian Bernard Lonergan (1904-1984), who was deeply influenced by Newman's An Essay in Aid of a Grammar of Assent (1870), worked out what he styles the generalized empirical method in Insight: A Study of Human Understanding (1957) and elsewhere. In a review article originally published in the Quarterly Journal of Speech (1985: 476-88), John Angus Campbell has characterized Lonergan's generalized empirical method as his rhetoric, an astute observation that has not yet been widely noted. Even so, Lonergan's generalized empirical method holds enormous potential for taking the theory of rhetoric to the next level of significance. (Campbell's essay is reprinted in Communication and Lonergan (Sheed & Ward, 1991: 3-22). At the turn of the twentieth century, there was a revival of rhetorical study manifested in the establishment of departments of rhetoric and speech at academic institutions, as well as the formation of national and international professional organizations. Theorists generally agree that a significant reason for the revival of the study of rhetoric was the renewed importance of language and persuasion in the increasingly mediated environment of the twentieth century (see Linguistic turn). The rise of advertising and of mass media such as photography, telegraphy, radio, and film brought rhetoric more prominently into people's lives. For example, when McLuhan was working on his 1943 Cambridge University doctoral dissertation on the verbal arts and Nashe, mentioned above, he was also preparing the materials that were eventually published as the book The Mechanical Bride: The Folklore of Industrial Man (Vanguard Press, 1951). This book is a compilation of exhibits of ads and other materials from popular culture with short essays about them by McLuhan. The essays involve rhetorical analyses of the ways in which the material in an item aims to persuade, and commentary on the persuasive strategies in each item. After studying the persuasive strategies involved in such an array of items in popular culture, McLuhan shifted the focus of his rhetorical analysis and began to consider how communication media themselves have an impact on us as persuasive, in a manner of speaking. In other words, the communication media as such embody and carry a persuasive dimension. McLuhan uses hyperbole to express this insight when he says "the medium is the message." This shift in focus from his 1951 book led to his two most widely known books, The Gutenberg Galaxy: The Making of Typographic Man
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(University of Toronto Press, 1962) and Understanding Media: The Extensions of Man (McGraw-Hill, 1964). These two books led McLuhan to become one of the most publicized thinkers in the 20th century. No other scholar of the history and theory of rhetoric was as widely publicized in the 20th century as McLuhan. McLuhan read Lonergan's Insight, mentioned above, in 1957 (see Letters of Marshall McLuhan, 1987: 251). Lonergan's book is an elaborate guidebook to cultivate one's inwardness and on attending to and reflecting on one's inward consciousness. McLuhan's 1962 and 1964 books represent an inward turn to attending to one's consciousness that is far more pronounced than anything found in his 1951 book or in his 1943 dissertation. By contrast, many other thinkers in the study of rhetoric are more outward oriented toward sociological considerations and symbolic interaction. McLuhan's famous dictum "the medium is the message" can be paraphrased with terminology from Lonergan. At the empirical level of consciousness, the medium is the message, whereas at the intelligent and rational levels of consciousness, the content is the message. McLuhan is thus ordering us to pay attention to the empirical level of consciousness.
Contemporary Study of Rhetoric
Rhetorical theory today is as much influenced by the research results and research methods of the behavioral sciences and by theories of literary criticism as by ancient rhetorical theory. Early rhetorical theorists attempted to turn the study of rhetoric into a social science that allowed predictive analyses of human behavior. Interdisciplinary scholars of symbol systems, such as Ernst Cassirer (1874-1945), Hugh Duncan, and most notably Kenneth Burke (1897-1993), influenced a new generation of rhetorical scholars who drew from various disciplines to more fully comprehend the phenomenon of human communication in all its aspects. While ancient rhetorical scholarship had focused primarily on rhetoric as speech, contemporary rhetorical theorists are interested in the panoply of human symbolic behavior—both the spoken and written word as well as music, film, radio, television, etc. Thus Kenneth Burke, who defined the human being as the "symbol-using animal," defined rhetoric as "the use of symbols to induce cooperation in those who by nature respond to symbols." Current rhetorical theory also draws heavily from cultural studies, performance studies, and design studies. Topics of interest to contemporary scholars include the relationships between rhetoric and gender, studies of non-traditional or alternative rhetorics, and rhetorics of science, technology, and new media.
Rhetoric in the Academy
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Contemporary scholars in rhetoric come from diverse academic backgrounds, and are often housed in departments of English, Communication Studies, Rhetoric, Education, or Speech Communication. Rhetorical scholars meet at conferences such as the Conference on College Composition and Communication, the National Communication Association conference, and the Rhetoric Society of America conference. They publish research in journals including the Quarterly Journal of Speech, College Composition and Communication, the Rhetoric Society Quarterly, Rhetoric Review, Rhetoric and Public Affairs, and Philosophy and Rhetoric.
Discourse Analysis
What is most important to understand about rhetoric, however, is that it is not only a method for training effective communicators (rhetors); as a discipline for advanced study, it is a method for understanding on a theoretical as well as a practical level how humans use language ( "discourse") to alter or shape our understanding of reality. It is this latter use that is often used in describing Discourse Analysis. Discourse Analysis is generally thought of being the a priori to engaging in research or scholarship. Rather than providing a particular method, Discourse Analysis can be characterized as a way of approaching and thinking about a problem. In this sense, Discourse Analysis is neither a qualitative nor a quantitative research method, but a manner of questioning the basic assumptions of quantitative and qualitative research methods. Discourse Analysis does not provide a tangible answer to problems based on scientific research, but it enables access to the ontological and epistemological assumptions behind a project, a statement, a method of research, or - to provide an example from the field of Library and Information Science - a system of classification. In other words, Discourse Analysis will enable to reveal the hidden motivations behind a text or behind the choice of a particular method of research to interpret that text. Expressed in today's more trendy vocabulary, Critical or Discourse Analysis is nothing more than a deconstructive reading and interpretation of a problem or text (while keeping in mind that postmodern theories conceive of every interpretation of reality and, therefore, of reality itself as a text. Every text is conditioned and inscribes itself within a given discourse, thus the term Discourse Analysis). Discourse Analysis will, thus, not provide absolute answers to a specific problem, but enable us to understand the conditions behind a specific "problem" and make us realize that the essence of that "problem", and its resolution, lie in its assumptions; the very assumptions that enable the existence of that "problem". By enabling us to make these assumptions explicit, Discourse Analysis aims at allowing us to view
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the "problem" from a higher stance and to gain a comprehensive view of the "problem" and ourselves in relation to that "problem". Discourse Analysis is meant to provide a higher awareness of the hidden motivations in others and ourselves and, therefore, enable us to solve concrete problems - not by providing unequivocal answers, but by making us ask ontological and epistemological questions.
Scientific method
Scientific method is a body of techniques for investigating phenomena and acquiring new knowledge, as well as for correcting and integrating previous knowledge. It is based on gathering observable, empirical, measurable evidence, subject to specific principles of reasoning. Although procedures vary from one field of inquiry to another, there are identifiable features that distinguish scientific inquiry from other methods of developing knowledge. Scientific researchers propose specific hypotheses as explanations of natural phenomena, and design experimental studies that test these predictions for accuracy. These steps are repeated in order to make increasingly dependable predictions of future results. Theories that encompass wider domains of inquiry serve to bind more specific hypotheses together in a coherent structure. This in turn aids in the formation of new hypotheses, as well as in placing groups of specific hypotheses into a broader context of understanding. Among other facets shared by the various fields of inquiry is the conviction that the process must be objective to reduce a biased interpretation of the results. Another basic expectation is to document, archive and share all data and methodology so it is available for careful scrutiny by other scientists, thereby allowing other researchers the opportunity to verify results by attempting to reproduce them. This also allows statistical measures of the reliability of these data to be established.
Elements of scientific method
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There are multiple ways of outlining the basic method shared by all of the fields of scientific inquiry. The following examples are typical classifications of the most important components of the method on which there is very wide agreement in the scientific community and among philosophers of science, each of which are subject only to marginal disagreements about a few very specific aspects. The scientific method involves the following basic facets: Observation. A constant feature of scientific inquiry. Description. Information must be reliable, i.e., replicable (repeatable) as well as valid (relevant to the inquiry). Prediction. Information must be valid for observations past, present, and future of given phenomena, i.e., purported "one shot" phenomena do not give rise to the
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capability to predict, nor to the ability to repeat an experiment. • Control. Actively and fairly sampling the range of possible occurrences, whenever possible and proper, as opposed to the passive acceptance of opportunistic data, is the best way to control or counterbalance the risk of empirical bias. • Falsifiability, or the elimination of plausible alternatives. This is a gradual process that requires repeated experiments by multiple researchers who must be able to replicate results in order to corroborate them. This requirement, one of the most frequently contended, leads to the following: All hypotheses and theories are in principle subject to disproof. Thus, there is a point at which there might be a consensus about a particular hypothesis or theory, yet it must in principle remain tentative. As a body of knowledge grows and a particular hypothesis or theory repeatedly brings predictable results, confidence in the hypothesis or theory increases. • Causal explanation. Many scientists and theorists on scientific method argue that concepts of causality are not obligatory to science, but are in fact well-defined only under particular, admittedly widespread conditions. Under these conditions the following requirements are generally regarded as important to scientific understanding: • Identification of causes. Identification of the causes of a particular phenomenon to the best achievable extent. • Covariation of events. The hypothesized causes must correlate with observed effects. • Time-order relationship. The hypothesized causes must precede the observed effects in time. The following is a more thorough description of the method. This set of methodological elements and organization of procedures will in general tend to be more characteristic of natural sciences and experimental psychology than of disciplines commonly categorized as social sciences. Among the latter, methods of verification and testing of hypotheses may involve less stringent mathematical and statistical interpretations of these elements within the respective disciplines. Nonetheless the cycle of hypothesis, verification and formulation of new hypotheses will tend to resemble the basic cycle described below. The essential elements of a scientific method are iterations, recursions, interleavings, and orderings of the following: • Characterizations (Quantifications, observations, and measurements) • Hypotheses (theoretical, hypothetical explanations of observations and measurements)
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Predictions (reasoning including logical deduction from hypothesis and theory) Experiments (tests of all of the above) An alternative way to explain scientific method is the "operational": The essential elements of a scientific method are operations, observations, models, and a utility function for evaluating models. • Operation - Some action done to the system being investigated • Observation - What happens when the operation is done to the system • Model - A fact, hypothesis, theory, or the phenomenon itself at a certain moment • Utility Function - A measure of the usefulness of the model to explain, predict, and control, and of the cost of use of it One of the elements of any scientific utility function is the refutability of the model. Another is its simplicity, on the Principle of Parsimony also known as Occam's Razor. The element of observation includes both unconditioned observations (prior to any theory) as well as the observation of the experiment and its results. Experimental design must consider hypothesis development, prediction, and the effects and limits of observation, because all of these elements are typically necessary for a valid experiment. Imre Lakatos and Thomas Kuhn had done extensive work on the "theory laden" character of observation. Kuhn (1961) maintained that the scientist generally has a theory in mind before designing and undertaking experiments so as to make empirical observations, and that the "route from theory to measurement can almost never be traveled backward". This perspective implies that the way in which theory is tested is dictated by the nature of the theory itself which led Kuhn (1961, p. 166) to argue that "once it has been adopted by a profession ... no theory is recognized to be testable by any quantitative tests that it has not already passed". Each element of the scientific method is subject to peer review for possible mistakes. These activities do not describe all that scientists do (see below) but apply mostly to experimental sciences (e.g., physics, chemistry). The elements above are often taught in the educational system. The scientific method is not a recipe: it requires intelligence, imagination, and creativity. Further, it is an ongoing cycle, constantly developing more useful, accurate and comprehensive models and methods. For example, when Einstein developed the Special and General Theories of Relativity, he did not in any way refute or discount Newton's Principia. On the contrary, if one
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reduces out the astronomically large, the vanishingly small, and the extremely fast from Einstein's theories — all phenomena that Newton could not have observed — one is left with Newton's equations. Einstein's theories are expansions and refinements of Newton's theories, and the observations that increase our confidence in them also increase our confidence in Newton's approximations to them. The Keystones of Science project, sponsored by the journal Science, has selected a number of scientific articles from that journal and annotated them, illustrating how different parts of each article embody the scientific method. Here is an annotated example of the scientific method example titled Microbial Genes in the Human Genome: Lateral Transfer or Gene Loss?. A linearized, pragmatic scheme of the four points above is sometimes offered as a guideline for proceeding: 1. Define the question 2. Gather information and resources 3. Form hypothesis 4. Perform experiment and collect data 5. Analyze data 6. Interpret data and draw conclusions that serve as a starting point for new hypotheses 7. Publish results The iterative cycle inherent in this step-by-step methodology goes from point 3 to 6 back to 3 again. While this schema outlines a typical hypothesis/testing method, it should also be noted that a number of philosophers, historians and sociologists of science (perhaps most notably Paul Feyerabend) claim that such descriptions of scientific method have little relation to the ways science is actually practiced.
DNA example
Each element of scientific method is illustrated below by an example from the discovery of the structure of DNA: • DNA/characterizations • DNA/hypotheses • DNA/predictions • DNA/experiments The examples are continued in "Evaluations and iterations" with DNA/iterations. Characterizations The scientific method depends upon increasingly more sophisticated characterizations of subjects of the investigation. (The subjects can also be called unsolved problems or the unknowns). For example, Benjamin Franklin correctly characterized St. Elmo's fire as electrical in nature, but it has taken a long series of experiments and theory to establish this. While seeking the pertinent properties of the subjects, this careful thought may also
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entail some definitions and observations; the observations often demand careful measurements and/or counting. The systematic, careful collection of measurements or counts of relevant quantities is often the critical difference between pseudo-sciences, such as alchemy, and a science, such as chemistry or biology. Scientific measurements taken are usually tabulated, graphed, or mapped, and statistical manipulations, such as correlation and regression, performed on them. The measurements might be made in a controlled setting, such as a laboratory, or made on more or less inaccessible or unmanipulatable objects such as stars or human populations. The measurements often require specialized scientific instruments such as thermometers, spectroscopes, or voltmeters, and the progress of a scientific field is usually intimately tied to their invention and development. Measurements demand the use of operational definitions of relevant quantities. That is, a scientific quantity is described or defined by how it is measured, as opposed to some more vague, inexact or "idealized" definition. For example, electrical current, measured in amperes, may be operationally defined in terms of the mass of silver deposited in a certain time on an electrode in an electrochemical device that is described in some detail. The operational definition of a thing often relies on comparisons with standards: the operational definition of "mass" ultimately relies on the use of an artifact, such as a certain kilogram of platinum-iridium kept in a laboratory in France. The scientific definition of a term sometimes differs substantially from their natural language usage. For example, mass and weight overlap in meaning in common discourse, but have distinct meanings in mechanics. Scientific quantities are often characterized by their units of measure which can later be described in terms of conventional physical units when communicating the work. Measurements in scientific work are also usually accompanied by estimates of their uncertainty. The uncertainty is often estimated by making repeated measurements of the desired quantity. Uncertainties may also be calculated by consideration of the uncertainties of the individual underlying quantities that are used. Counts of things, such as the number of people in a nation at a particular time, may also have an uncertainty due to limitations of the method used. Counts may only represent a sample of desired quantities, with an uncertainty that depends upon the sampling method used and the number of samples taken. New theories sometimes arise upon realizing that certain terms had not previously been sufficiently clearly defined. For example, Albert Einstein's first paper on relativity begins by defining simultaneity and the means for
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determining length. These ideas were skipped over by Isaac Newton with, "I do not define time, space, place and motion, as being well known to all." Einstein's paper then demonstrates that they (viz., absolute time and length independent of motion) were approximations. Francis Crick cautions us that when characterizing a subject, however, it can be premature to define something when it remains illunderstood. In Crick's study of consciousness, he actually found it easier to study awareness in the visual system, rather than to study Free Will, for example. His cautionary example was the gene; the gene was much more poorly understood before Watson and Crick's pioneering discovery of the structure of DNA; it would have been counterproductive to spend much time on the definition of the gene, before them.
DNA/characterizations
The history of the discovery of the structure of DNA is a classic example of the elements of scientific method: in 1950 it was known that genetic inheritance had a mathematical description, starting with the studies of Gregor Mendel. But the mechanism of the gene was unclear. Researchers in Bragg's laboratory at Cambridge University made X-ray diffraction pictures of various molecules, starting with crystals of salt, and proceeding to more complicated substances. Using clues which were painstakingly assembled over the course of decades, beginning with its chemical composition, it was determined that it should be possible to characterize the physical structure of DNA, and the X-ray images would be the vehicle.
Precession of Mercury
Precession of the perihelion (very exaggerated) The characterization element can require extended and extensive study, even centuries. It took thousands of years of measurements, from the Chaldean, Indian, Persian, Greek, Arabic and European astronomers, to record the motion of planet Earth. Newton was able to condense these measurements into consequences of his laws of motion. But the perihelion of the planet Mercury's orbit exhibits a precession which is not fully explained by Newton's laws of motion. The observed difference for Mercury's precession, between Newtonian theory and relativistic theory (approximately 43 arc-seconds per century), was one of the things that occurred to Einstein as a possible early test of his theory of General Relativity. A hypothesis is a suggested explanation of a phenomenon, or alternately a reasoned proposal suggesting a possible correlation between or among a set of phenomena. Normally hypotheses have the form of a mathematical model. Sometimes, but not always, they can also be formulated as
Hypothesis development
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existential statements, stating that some particular instance of the phenomenon being studied has some characteristic and causal explanations, which have the general form of universal statements, stating that every instance of the phenomenon has a particular characteristic. Scientists are free to use whatever resources they have — their own creativity, ideas from other fields, induction, Bayesian inference, and so on — to imagine possible explanations for a phenomenon under study. Charles Sanders Peirce, borrowing a page from Aristotle (Prior Analytics, 2.25) described the incipient stages of inquiry, instigated by the "irritation of doubt" to venture a plausible guess, as abductive reasoning. The history of science is filled with stories of scientists claiming a "flash of inspiration", or a hunch, which then motivated them to look for evidence to support or refute their idea. Michael Polanyi made such creativity the centrepiece of his discussion of methodology. Karl Popper, following others, developing and inverting the views of the Austrian logical positivists, has argued that a hypothesis must be falsifiable, and that a proposition or theory cannot be called scientific if it does not admit the possibility of being shown false. It must at least in principle be possible to make an observation that would show the proposition to be false, even if that observation had not yet been made. William Glen observes that the success of a hypothesis, or its service to science, lies not simply in its perceived "truth", or power to displace, subsume or reduce a predecessor idea, but perhaps more in its ability to stimulate the research that will illuminate … bald suppositions and areas of vagueness. In general scientists tend to look for theories that are "elegant" or "beautiful". In contrast to the usual English use of these terms, they here refer to a theory in accordance with the known facts, which is nevertheless relatively simple and easy to handle. If a model is mathematically too complicated, it is hard to deduce any prediction. Note that 'simplicity' may be perceived differently by different individuals and cultures.
DNA/hypotheses
Linus Pauling proposed that DNA was a triple helix. Francis Crick and James Watson learned of Pauling's hypothesis, understood from existing data that Pauling was wrong and realized that Pauling would soon realize his mistake. So the race was on to figure out the correct structure. Except that Pauling did not realize at the time that he was in a race!
Predictions from the hypothesis
Any useful hypothesis will enable predictions, by reasoning including deductive reasoning. It might predict the outcome
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of an experiment in a laboratory setting or the observation of a phenomenon in nature. The prediction can also be statistical and only talk about probabilities. It is essential that the outcome be currently unknown. Only in this case does the eventuation increase the probability that the hypothesis be true. If the outcome is already known, it's called a consequence and should have already been considered while formulating the hypothesis. If the predictions are not accessible by observation or experience, the hypothesis is not yet useful for the method, and must wait for others who might come afterward, and perhaps rekindle its line of reasoning. For example, a new technology or theory might make the necessary experiments feasible.
DNA/predictions
When Watson and Crick hypothesized that DNA was a double helix, Francis Crick predicted that an X-ray diffraction image of DNA would show an X-shape. Also in their first paper they predicted that the double helix structure that they discovered would prove important in biology, writing "It has not escaped our notice that the specific pairing we have postulated immediately suggests a possible copying mechanism for the genetic material".
General relativity
Einstein's prediction (1907): Light bends in a gravitational field Einstein's theory of General Relativity makes several specific predictions about the observable structure of space-time, such as a prediction that light bends in a gravitational field and that the amount of bending depends in a precise way on the strength of that gravitational field. Arthur Eddington's observations made during a 1919 solar eclipse supported General Relativity rather than Newtonian gravitation.
Experiments
Once predictions are made, they can be tested by experiments. If test results contradict predictions, then the hypotheses are called into question and explanations may be sought. Sometimes experiments are conducted incorrectly and are at fault. If the results confirm the predictions, then the hypotheses are considered likely to be correct but might still be wrong and are subject to further testing. Depending on the predictions, the experiments can have different shapes. It could be a classical experiment in a laboratory setting, a double-blind study or an archaeological excavation. Even taking a plane from New York to Paris is an experiment which tests the aerodynamical hypotheses used for constructing the plane. Scientists assume an attitude of openness and accountability on the part of those conducting an
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experiment. Detailed record keeping is essential, to aid in recording and reporting on the experimental results, and providing evidence of the effectiveness and integrity of the procedure. They will also assist in reproducing the experimental results. This tradition can be seen in the work of Hipparchus (190 BCE - 120 BCE), when determining a value for the precession of the Earth over 2100 years ago, and 1000 years before Al-Batani.
DNA/experiments
Before proposing their model Watson and Crick had previously seen x-ray diffraction images by Rosalind Franklin, Maurice Wilkins, and Raymond Gosling. However, they later reported that Franklin initially rebuffed their suggestion that DNA might be a double helix. Franklin had immediately spotted flaws in the initial hypotheses about the structure of DNA by Watson and Crick. The X-shape in Xray images helped confirm the helical structure of DNA.
Evaluation and iteration Testing and improvement
The scientific process is iterative. At any stage it is possible that some consideration will lead the scientist to repeat an earlier part of the process. Failure to develop an interesting hypothesis may lead a scientist to re-define the subject they are considering. Failure of a hypothesis to produce interesting and testable predictions may lead to reconsideration of the hypothesis or of the definition of the subject. Failure of the experiment to produce interesting results may lead the scientist to reconsidering the experimental method, the hypothesis or the definition of the subject. Other scientists may start their own research and enter the process at any stage. They might adopt the characterization and formulate their own hypothesis, or they might adopt the hypothesis and deduce their own predictions. Often the experiment is not done by the person who made the prediction and the characterization is based on experiments done by someone else. Published results of experiments can also serve as a hypothesis predicting their own reproducibility.
DNA/iterations
After considerable fruitless experimentation, being discouraged by their superior from continuing, and numerous false starts, Watson and Crick were able to infer the essential structure of DNA by concrete modeling of the physical shapes of the nucleotides which comprise it. They were guided by the bond lengths which had been deduced by Linus Pauling and the X-ray diffraction images of Rosalind Franklin.
Confirmation
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Science is a social enterprise, and scientific work tends to be accepted by the community when it has been confirmed. Crucially, experimental and theoretical results must be reproduced by others within the science community. Researchers have given their lives for this vision; Georg Wilhelm Richmann was killed by lightning (1753) when attempting to replicate the 1752 kite-flying experiment of Benjamin Franklin. To protect against bad science and fraudulent data, government research granting agencies like NSF and science journals like Nature and Science have a policy that researchers must archive their data and methods so other researchers can access it, test the data and methods and build on the research that has gone before. Scientific data archiving can be done at a number of national archives in the U.S. or in the World Data Center.
Models of scientific inquiry Classical model
The classical model of scientific inquiry derives from Aristotle, who distinguished the forms of approximate and exact reasoning, set out the threefold scheme of abductive, deductive, and inductive inference, and also treated the compound forms such as reasoning by analogy.
Pragmatic model
Charles Peirce considered scientific inquiry to be a species of the genus inquiry, which he defined as any means of fixing belief, that is, any means of arriving at a settled opinion on a matter in question. He observed that inquiry in general begins with a state of uncertainty and moves toward a state of certainty, sufficient at least to terminate the inquiry for the time being. He graded the prevalent forms of inquiry according to their evident success in achieving their common objective, scoring scientific inquiry at the high end of this scale. At the low end he placed what he called the method of tenacity, a die-hard attempt to deny uncertainty and fixate on a favored belief. Next in line he placed the method of authority, a determined attempt to conform to a chosen source of ready-made beliefs. After that he placed what might be called the method of congruity, also called the a priori, the dilettante, or the what is agreeable to reason method. Peirce observed the fact of human nature that almost everybody uses almost all of these methods at one time or another, and that even scientists, being human, use the method of authority far more than they like to admit. But what recommends the specifically scientific method of inquiry above all others is the fact that it is deliberately designed to arrive at the ultimately most secure beliefs, upon which the most successful actions can be based.
Computational approaches
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Many subspecialties of applied logic and computer science, to name a few, artificial intelligence, machine learning, computational learning theory, inferential statistics, and knowledge representation, are concerned with setting out computational, logical, and statistical frameworks for the various types of inference involved in scientific inquiry, in particular, hypothesis formation, logical deduction, and empirical testing. Some of these applications draw on measures of complexity from algorithmic information theory to guide the making of predictions from prior distributions of experience, for example, see the complexity measure called the speed prior from which a computable strategy for optimal inductive reasoning can be derived.
Philosophy and sociology of science
While the philosophy of science has limited direct impact on day-to-day scientific practice, it plays a vital role in justifying and defending the scientific approach. Philosophy of science looks at the underpinning logic of the scientific method, at what separates science from nonscience,and the ethic that is implicit in science. We find ourselves in a world that is not directly understandable. We find that we sometimes disagree with others as to the facts of the things we see in the world around us, and we find that there are things in the world that are at odds with our present understanding. The scientific method attempts to provide a way in which we can reach agreement and understanding. A "perfect" scientific method might work in such a way that rational application of the method would always result in agreement and understanding; a perfect method would arguably be algorithmic, and so not leave any room for rational agents to disagree. As with all philosophical topics, the search has been neither straightforward nor simple. Logical Positivist, empiricist, falsificationist, and other theories have claimed to give a definitive account of the logic of science, but each has in turn been criticized. Thomas Samuel Kuhn examined the history of science in his The Structure of Scientific Revolutions, and found that the actual method used by scientists differed dramatically from the then-espoused method. Paul Feyerabend similarly examined the history of science, and was led to deny that science is genuinely a methodological process. In his book Against Method he argues that scientific progress is not the result of applying any particular method. In essence, he says that "anything goes", by which he meant that for any specific methodology or norm of science, successful science has been done in violation of it. Criticisms such as his led to the strong programme, a radical approach to the sociology of science.
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In his 1958 book, Personal Knowled