Briefly describe a situation where you felt like your work or school leadership failed you.
Was it fault in the leader? (Leader Behaviors, Traits, Skills) (Chapter 13) or was it an inability to adapt to a change? (Models of Change, Stresses, something else) (Chapter 16).
What would have helped? If you say training be specific.
Ch
ap
t
e
r
13
In This Chapter, W
e
Will Address the
Following Question
s
1. How do we define and classif
y
services, and how do they differ
from goods?
2. What are the new services
realities?
3. How can we achieve excellence
in services marketing?
4. How can we improve service
quality?
5. How can goods marketers
improve customer-support
services?
The unconventional Cirque du Soleil
organization creates memorable
experiences for its audiences through its
creative redefinition of the circus concept.
354 PART 5 SHAPING THE MARKET OFFERINGS
As product companies find it harder and harder to differentiate their physic
al
products, they turn to service differentiation. Many in fact find significant profitability in delivering
superior service, whether that means on-time delivery, better and faster answering of inquiries, or
quicker resolution of complaints. Top service providers know these advantages well and also how to
create memorable customer experiences.1
In its 25-year history, Cirque du Soleil (French for “circus of the sun”) has continually bro-
ken loose from circus convention. It takes traditional ingredients such as trapeze artists,
clowns, muscle men, and contortionists and places them in a nontraditional setting with
lavish costumes, new age music, and spectacular stage designs. And it eliminates other
commonly observed circus elements—there are no animals. Each production is loosely
tied together with a theme such as “a tribute to the nomadic soul” (Varekai) or “a phantasmagoria of
urban life” (Saltimbanco). The group has grown from its Quebec street-performance roots to become
a half-billion-dollar global enterprise, with 3,000 employees on four continents entertaining audienc
es
of millions annually.
Part of its success comes from a company culture that encourages artistic creativity and innovation
and carefully safeguards the brand. One new production is created each year—always in-house—
and is unique: There are no duplicate touring companies. In addition to Cirque’s mix of media and local
promotion, an extensive interactive e-mail program to its million-plus-member Cirque Club creates an
online community of fans—20 percent to 30 percent of all ticket sales
come from club members. Generating $800 million in revenue annually,
the Cirque du Soleil brand has expanded to encompass a record label, a
retail operation, and resident productions in Las Vegas (five in all),
Orlando, Tokyo, and other cities.2
Designing and
Managing Services
35
5
Because it is critical to understand the special nature of
services and what that means to marketers, in this chapter we
systematically analyze services and how to market them most
effectively.
The Nature of Services
The Bureau of Labor Statistics reports that the service-producing sector will continue to be the
dominant employment generator in the economy, adding about 14.6 million jobs through 2018, or
96 percent of the expected increase in total employment. By 2018, the goods-producing sector
is
expected to account for 12.9 percent of total jobs, down from 17.3 percent in 1998 and 14.2 percent
in 2008. Manufacturing lost 4.1 million jobs from 1998 through 2008 and is expected to lose an-
other 1.2 million jobs between 2008 and 2018.3 These numbers and others have led to a growing in-
terest in the special problems of marketing services.4
356 PART 5 SHAPING THE MARKET OFFERINGS
Service Industries Are Everywhere
The government sector, with its courts, employment services, hospitals, loan agencies, military
services, police and fire departments, postal service, regulatory agencies, and schools, is in the
service business. The private nonprofit sector—museums, charities, churches, colleges, foundations,
and hospitals—is in the service business. A good part of the business sector, with its airlines, banks,
hotels, insurance companies, law firms, management consulting firms, medical practices, motion
picture companies, plumbing repair companies, and real estate firms, is in the service business.
Many workers in the manufacturing sector, such as computer operators, accountants, and legal staff,
are really service providers. In fact, they make up a “service factory” providing services to the
“goods factory.” And those in the retail sector, such as cashiers, clerks, salespeople, and customer
service representatives, are also providing a service.
A service is any act or performance one party can offer to another that is essentially intangible
and does not result in the ownership of anything. Its production may or may not be tied to a phys-
ical product. Increasingly, manufacturers, distributors, and retailers are providing value-added
services, or simply excellent customer service, to differentiate themselves. Many pure service firms
are now using the Internet to reach customers; some are purely online. Monster.com’s Webby-
award-winning site offers online career advice and employment recruiting. Done right, improve-
ments or innovations in customer service can have a big payoff, as Zipcar found.
Zipcar Car sharing started in Europe as a means to extend public transportation. In
the United States the appeal of Zipcar, the market leader and pioneer, is both environmental
and economic. With a $50 membership fee and rates that total less than $100 a day—which
includes gas, insurance, and parking—a typical family could save $3,000 to $4,000 a year
by substituting Zipcar use for car ownership. Zipcar’s fleet includes all types of popular
models—BMWs, Volvos, pickup trucks, and even MINI Coopers and the Toyota Prius hybrid—and the
firm estimates that every car it adds keeps up to 20 private cars off the road. Consumers—and an
increasing number of universities and businesses—book online and use a sophisticated reservation sys-
tem to reserve a specific car in their neighborhood. There are a
number of rules for car care (such as no smoking) and logistics
(such as calling to extend a reservation if running late). As CEO
Scott Griffith states, “Our business model depends on the kind-
ness of others.” To help increase awareness, Zipcar slaps its
logo on the side of all but the high-end luxury models. Unusual
marketing stunts such as a contest to guess how many
Swedish meatballs had been stuffed into a MINI Cooper parked
in an IKEA parking lot also help to spread the word. Targeting
major cities and college towns, the company is growing about
30 percent a year.5
Categories of Service Mix
The service component can be a minor or a major part of
the total offering. We distinguish five categories of offerings:
1. Pure tangible good—a tangible good such as soap,
toothpaste, or salt with no accompanying services.
2. Tangible good with accompanying services—a tangible
good, like a car, computer, or cell phone, accompanied
by one or more services. Typically, the more technologi-
cally advanced the product, the greater the need for
high-quality supporting services.
3. Hybrid—an offering, like a restaurant meal, of equal
parts goods and services. People patronize restaurants
for both the food and its preparation.
Zipcar offers its fast-growing cus-
tomer base a practical, environ-
mentally friendly alternative to car
ownership.
DESIGNING AND MANAGING SERVICES | CHAPTER 13 357
4. Major service with accompanying minor goods and services—a major service, like air travel,
with additional services or supporting goods such as snacks and drinks. This offering requires
a capital-intensive good—an airplane—for its realization, but the primary item is a service.
5. Pure service—primarily an intangible service, such as babysitting, psychotherapy, or massage.
The range of service offerings makes it difficult to generalize without a few further distinctions.
• Services vary as to whether they are equipment based (automated car washes, vending ma-
chines) or people based (window washing, accounting services). People-based services vary by
whether unskilled, skilled, or professional workers provide them.
• Service companies can choose among different processes to deliver their service. Restaurants
offer cafeteria-style, fast-food, buffet, and candlelight service formats.
• Some services need the client’s presence. Brain surgery requires the client’s presence, a car
repair does not. If the client must be present, the service provider must be considerate of his or
her needs. Thus beauty salon operators will invest in décor, play background music, and
engage in light conversation with the client.
• Services may meet a personal need (personal services) or a business need (business services).
Service providers typically develop different marketing programs for these markets.
• Service providers differ in their objectives (profit or nonprofit) and ownership (private or
public). These two characteristics, when crossed, produce four quite different types of organi-
zations. The marketing programs of a private investor hospital will differ from those of a
private charity hospital or a Veterans Administration hospital.
6
Customers typically cannot judge the technical quality of some services even after they have
received them. Figure 13.1 shows various products and services according to difficulty of
evaluation.7 At the left are goods high in search qualities—that is, characteristics the buyer can
evaluate before purchase. In the middle are goods and services high in experience qualities—
characteristics the buyer can evaluate after purchase. At the right are goods and services high
in credence qualities—characteristics the buyer normally finds hard to evaluate even after
consumption.8
Because services are generally high in experience and credence qualities, there is more risk in
their purchase, with several consequences. First, service consumers generally rely on word of
mouth rather than advertising. Second, they rely heavily on price, provider, and physical cues to
judge quality. Third, they are highly loyal to service providers who satisfy them. Fourth, because
switching costs are high, consumer inertia can make it challenging to entice business away from
a competitor.
Cl
ot
hi
ng
Easy to
Evaluate
Most goods
High in Search
Qualities
Difficult
to Evaluate
Je
w
el
ry
Fu
rn
itu
re
Ho
us
es
Au
to
m
ob
il
e
s
Re
st
au
ra
nt
m
ea
ls
Va
ca
tio
n
Ha
irc
ut
s
Ch
ild
c
ar
e
Te
le
vi
si
on
re
pa
ir
Le
ga
l s
er
vi
ce
s
Ro
ot
c
an
al
Au
to
re
pa
ir
M
ed
ic
al
d
ia
gn
os
is
High in Credence
Qualities
High in Experience
Qualities
Most
services
|Fig. 13.1|
Continuum of
Evaluation for
Different Types of
Products
Source: Valarie A. Zeithaml, “How Consumer
Evaluation Processes Differ between Goods and
Services,” James H. Donnelly and William R. George,
eds., Marketing of Services (Chicago: American
Marketing Association, 1981). Reprinted with permis-
sion of the American Marketing Association.
358 PART 5 SHAPING THE MARKET OFFERINGS
Distinctive Characteristics of Services
Four distinctive service characteristics greatly affect the design of marketing programs:
intangibility, inseparability, variability, and perishability.9
INTANGIBILITY Unlike physical products, services cannot be seen, tasted, felt, heard, or
smelled before they are bought. A person getting cosmetic surgery cannot see the results before the
purchase, and the patient in the psychiatrist’s office cannot know the exact outcome of treatment.
To reduce uncertainty, buyers will look for evidence of quality by drawing inferences from the
place, people, equipment, communication material, symbols, and price. Therefore, the service
provider’s task is to “manage the evidence,” to “tangibilize the intangible.”10
Service companies can try to demonstrate their service quality through physical evidence and
presentation.11 Suppose a bank wants to position itself as the “fast” bank. It could make this posi-
tioning strategy tangible through any number of marketing tools:
1. Place—The exterior and interior should have clean lines. The layout of the desks and the traf-
fic flow should be planned carefully. Waiting lines should not get overly long.
2. People—Employees should be busy, but there should be a sufficient number to manage the
workload.
3. Equipment—Computers, copy machines, desks, and ATMs should look like, and be, state of
the art.
4. Communication material—Printed materials—text and photos—should suggest efficiency
and speed.
5. Symbols—The bank’s name and symbol could suggest fast service.
6. Price—The bank could advertise that it will deposit $5 in the account of any customer who
waits in line more than five minutes.
Service marketers must be able to transform intangible services into concrete benefits and a
well-defined experience.12 Disney is a master at “tangibilizing the intangible” and creating magical
fantasies in its theme parks; so are companies such as Jamba Juice and Barnes & Noble in their
respective retail stores.13 Table 13.1 measures brand experiences in general along sensory,
affective, behavioral, and intellectual dimensions. Applications to services are clear.
TABLE 13.1 Dimensions of Brand Experience
Sensory
• This brand makes a strong impression on my visual sense or other senses.
• I find this brand interesting in a sensory way.
• This brand does not appeal to my senses.
Affective
• This brand induces feelings and sentiments.
• I do not have strong emotions for this brand.
• This brand is an emotional brand.
Behavioral
• I engage in physical actions and behaviors when I use this brand.
• This brand results in bodily experiences.
• This brand is not action-oriented.
Intellectual
• I engage in a lot of thinking when I encounter this brand.
• This brand does not make me think.
• This brand stimulates my curiosity and problem solving.
Source: Jos̆ko Brakus, Bernd H. Schmitt, and Lia Zarantonello, “Brand Experience: What Is It? How Is It Measured? Does It Affect Loyalty?” Journal
of Marketing 73 (May 2009), pp. 52–68. Reprinted with permission from Journal of Marketing, published by the American Marketing Association.
DESIGNING AND MANAGING SERVICES | CHAPTER 13 359
Because there is no physical product, the service provider’s facilities—its primary and secondary
signage, environmental design and reception area, employee apparel, collateral material, and so
on—are especially important. All aspects of the service delivery process can be branded, which is
why Allied Van Lines is concerned about the appearance of its drivers and laborers, why UPS has
developed such strong equity with its brown trucks, and why Hilton’s Doubletree Hotels offers
fresh-baked chocolate chip cookies to symbolize care and friendliness.
14
Service providers often choose brand elements—logos, symbols, characters, and slogans—to
make the service and its key benefits more tangible—for example, the “friendly skies” of United, the
“good hands” of Allstate, and the “bullish” nature of Merrill Lynch.
INSEPARABILITY Whereas physical goods are manufactured, then inventoried, then distributed,
and later consumed, services are typically produced and consumed simultaneously.15 A haircut can’t
be stored—or produced without the barber. The provider is part of the service. Because the client is
also often present, provider–client interaction is a special feature of services marketing. Buyers of
entertainment and professional services are very interested in the specific provider. It’s not the same
concert if Taylor Swift is indisposed and replaced by Beyoncé, or if a corporate legal defense is
supplied by an intern because antitrust expert David Boies is unavailable. When clients have strong
provider preferences, the provider can raise its price to ration its limited time.
Several strategies exist for getting around the limitations of inseparability. The service provider
can work with larger groups. Some psychotherapists have moved from one-on-one therapy to
small-group therapy to groups of over 300 people in a large hotel ballroom. The service provider
can work faster—the psychotherapist can spend 30 more efficient minutes with each patient in-
stead of 50 less-structured minutes and thus see more patients. The service organization can train
more service providers and build up client confidence, as H&R Block has done with its national
network of trained tax consultants.
VARIABILITY Because the quality of services depends on who provides them, when and where,
and to whom, services are highly variable. Some doctors have an excellent bedside manner; others
are less empathic.
A different entertainer creates a different concert experience—a Beyoncé concert is not the same
as a Taylor Swift concert.
360 PART 5 SHAPING THE MARKET OFFERINGS
Service buyers are aware of this variability and often talk to others before selecting a service
provider. To reassure customers, some firms offer service guarantees that may reduce consumer per-
ceptions of risk.16 Here are three steps service firms can take to increase quality control.
1. Invest in good hiring and training procedures. Recruiting the right employees and providing
them with excellent training is crucial, regardless of whether employees are highly skilled profes-
sionals or low-skilled workers. Better-trained personnel exhibit six characteristics: Competence,
courtesy, credibility, reliability, responsiveness, and communication.17 Given the diverse nature
of its customer base in California, banking and mortgage giant Wells Fargo actively seeks and
trains a diverse workforce. The average Wells Fargo customer uses 5.2 different bank products,
roughly twice the industry average, thanks in part to the teamwork of its highly motivated staff.18
2. Standardize the service-performance process throughout the organization. A service blue-
print can map out the service process, the points of customer contact, and the evidence of
service from the customer’s point of view.19 Figure 13.2 shows a service blueprint for a
guest spending a night at a hotel.20 Behind the scenes, the hotel must skillfully help the guest
move from one step to the next. Service blueprints can be helpful in developing new service,
supporting a zero-defects culture, and devising service recovery strategies.
3. Monitor customer satisfaction. Employ suggestion and complaint systems, customer surveys,
and comparison shopping. Customer needs may vary in different areas, allowing firms to de-
velop region-specific customer satisfaction programs.21 Firms can also develop customer in-
formation databases and systems for more personalized service, especially online.22
Because services are a subjective experience, service firms can also design marketing communi-
cation and information programs so consumers learn more about the brand than what they get
from service encounters alone.
Arrive at
Hotel
Give Bags
to Bellperson
Check In
Greet and
Take Bags
Process
Registration
Go to Room Sleep
Shower
Deliver
Bags
Call Room
Service
Receive
Food
Take Bags
to Room
Take
Food Order
Registration
System
Prepare
Food
Registration
System
Eat Check Out
and Leave
Deliver
Food
Process
Check Out
Hotel Exterior
Parking
Cart for
Bags
Desk
Registration
Papers
Lobby
Key
Elevators
Hallways
Room
Care for
Bags
Room
Amenities
Bath Menu
Delivery
Tray
Food
Appearance Food
Bill
Desk
Lobby
Hotel Exterior
Parking
Receive
Bags
Line of Interaction
Line of Visibility
Line of Internal Interaction
|Fig. 13.2|
Blueprint for Overnight Hotel Stay
Source: Valarie Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating Customer Focus across the Firm, 4th ed. (New York: McGraw-Hill, 2006).
DESIGNING AND MANAGING SERVICES | CHAPTER 13 361
PERISHABILITY Services cannot be stored, so their perishability can be a problem
when demand fluctuates. Public transportation companies must own much more
equipment because of rush-hour demand than if demand were even throughout the
day. Some doctors charge patients for missed appointments because the service value
(the doctor’s availability) exists only at the time of the appointment.
Demand or yield management is critical—the right services must be available to
the right customers at the right places at the right times and right prices to maximize
profitability. Several strategies can produce a better match between service demand
and supply.23 On the demand side:
• Differential pricing will shift some demand from peak to off-peak periods.
Examples include low matinee movie prices and weekend discounts for car
rentals.24
• Nonpeak demand can be cultivated. McDonald’s pushes breakfast service, and
hotels promote minivacation weekends.
• Complementary services can provide alternatives to waiting customers, such as
cocktail lounges in restaurants and automated teller machines in banks.
• Reservation systems are a way to manage the demand level. Airlines, hotels,
and physicians employ them extensively.
On the supply side:
• Part-time employees can serve peak demand. Colleges add part-time teachers when enroll-
ment goes up; stores hire extra clerks during holiday periods.
• Peak-time efficiency routines can allow employees to perform only essential tasks during
peak periods. Paramedics assist physicians during busy periods.
• Increased consumer participation frees service providers’ time. Consumers fill out their own
medical records or bag their own groceries.
• Shared services can improve offerings. Several hospitals can share medical-equipment purchases.
• Facilities for future expansion can be a good investment. An amusement park buys sur-
rounding land for later development.
Many airlines, hotels, and resorts e-mail short-term discounts and special promotions to self-selected
customers. After 40 years of making people stand in line at its theme parks, Disney instituted FASTPASS,
which allows visitors to reserve a spot in line and eliminate the wait. Polls revealed 95 percent like the
change. Disney’s vice president, Dale Stafford, told a reporter, “We have been teaching people how to
stand in line since 1955, and now we are telling them they don’t have to. Of all the things we can do and
all the marvels we can create with the attractions, this is something that will have a profound effect on
the entire industry.”25
The New Services Realities
Service firms once lagged behind manufacturers in their use of marketing because they were small,
or they were professional businesses that did not use marketing, or they faced large demand or lit-
tle competition. This has certainly changed. Some of the most skilled marketers now are service
firms. One that wins praise for its marketing success is Singapore Airlines.
Singapore Airlines (SIA) Singapore Airlines is consistently recog-
nized as the world’s “best” airline—it wins so many awards, it has to update its Web site
monthly to keep up to date—in large part due to its stellar holistic marketing. Famous for
pampering passengers, SIA continually strives to create a “wow effect” and surpass cus-
tomers’ expectations. It was the first to launch individual video screens at airplane seats.
Thanks to the first-of-its-kind $1 million simulator SIA built to mimic the air pressure and humidity inside
a plane, the carrier found that taste buds change in the air and that, among other things, it needed to cut
back on spices in its food. SIA places a high value on training; its “Transforming Customer Service (TCS)”
program includes staff in five key operational areas: cabin crew, engineering, ground services, flight oper-
ations, and sales support. The TCS culture is also embedded in all management training, company-wide. It
Disney’s innovative FASTPASS
system helps to match supply and
demand for its Disney World
theme park rides.
362 PART 5 SHAPING THE MARKET OFFERINGS
applies a 40-30-30 rule in its holistic approach to people, processes, and
products: 40 percent of resources go to training and invigorating staff,
30 percent to reviewing process and procedures, and 30 percent to creating
new product and service ideas. With its innovatively designed Boeing
777-300 ERS and Airbus A380 planes, SIA set new standards of comforts
in all classes of service, from eight private minirooms in first class to
wider seats, AC power supplies, and USB ports in coach.26
A Shifting Customer Relationship
Not all companies, however, have invested in providing superior
service, at least not to all customers. In many service industries,
such as airlines, banks, stores, and hotels, customer satisfaction in
the United States has not significantly improved—or in some cases
actually dropped—in recent years.27 Customers complain about
inaccurate information; unresponsive, rude, or poorly trained workers; and long wait times.
Even worse, many find their complaints never actually reach a live human being because of slow
or faulty phone or online reporting systems.
It doesn’t have to be that way. Fifty-five operators handle 100,000 calls a year on Butterball
Turkeys’ 800 number—10,000 on Thanksgiving Day alone—about how to prepare, cook, and serve
turkeys. Trained at Butterball University, the operators have all cooked turkeys dozens of different
ways and can handle the myriad queries that come their way, including why customers shouldn’t
stash turkeys in snow banks or thaw them in bathtubs.28
Savvy services marketers are recognizing the new services realities, such as the importance of the
newly empowered customer, customer coproduction, and the need to engage employees as well as
customers.
CUSTOMER EMPOWERMENT Customers are becoming more sophisticated about
buying product-support services and are pressing for “ unbundled services.” They may desire
separate prices for each service element and the right to select the elements they want.
Customers also increasingly dislike having to deal with a multitude of service providers
handling different types of equipment. Some third-party service organizations now service a
greater range of equipment.
Most importantly, the Internet has empowered customers by letting them vent
their rage about bad service—or reward good service—and send their comments
around the world with a mouse click. Although a person who has a good customer ex-
perience is more likely to talk about it, someone who has a bad experience will talk to
more people.29 Ninety percent of angry customers reported sharing their story with a
friend. Now, they can share their stories with strangers too. At PlanetFeedback.com,
shoppers can send a complaint, compliment, suggestion, or question directly to a
company, with the option to post comments publicly on the site as well.
United Breaks Guitars When Canadian singer Dave
Carroll faced $1,200 in damages to his $3,000 Gibson guitar after a United
flight, he put his creative energy to good use. He created a humorous video,
United Breaks Guitars, and launched it on YouTube with this catchy refrain:
“United, you broke my Taylor guitar. United, some big help you are. You broke it, you
should fix it. You’re liable, just admit it. I should have flown with someone else or
gone by car ’cuz United breaks guitars.”
Viewed over 5 million times, his follow-up video focused on his frustrating efforts to get United
to pay for the damage. United got the message. It donated a check for $1,200 to a charity
Carroll designated and now uses the incident in training baggage handlers and customer-
service representatives.30
Singapore Airlines goes to extra-
ordinary lengths to ensure that
every aspect of the passenger
experience exceeds expectations.
Customer service dissatisfaction
increasingly goes viral—Canadian
singer Dave Carroll’s musical frus-
tration with United Airlines was
downloaded by millions.
DESIGNING AND MANAGING SERVICES | CHAPTER 13 363
Most companies respond quickly. Comcast allows contact 24/7 by phone and e-chat but also
reaches out to customers and monitors blogs, Web sites, and social media. If employees see a cus-
tomer report a problem on a blog, they get in touch and offer help. E-mail responses to customers
must be implemented properly to be effective. One expert believes companies should (1) send an
automated reply to tell customers when a more complete answer will arrive (ideally within
24 hours), (2) ensure the subject line always contains the company name, (3) make the message
easy to scan for relevant information, and (4) give customers an easy way to respond with follow-
up questions.31
More important than simply responding to a disgruntled customer, however, is preventing
dissatisfaction from occurring in the future. That may mean simply taking the time to nurture
customer relationships and give customers attention from a real person. Columbia Records spent
$10 million to improve its call center, and customers who phone the company can now opt out to
reach an operator at any point in their call. JetBlue took a service disaster and used it to improve its
customer service approach.
JetBlue CEO David Neeleman set the bar high for responding to enraged customers
after the company’s drastic Valentine’s Day failure of 2007. During storms in New York City,
JetBlue left hundreds of passengers stranded aboard grounded aircraft—some for longer than
9 hours without amenities—and cancelled more than 1,000 flights. JetBlue had built its reputa-
tion on being a more responsive, humane airline in an era of minimal services and maximal delays.
Neeleman knew he had to act fast to stem another kind of storm: a whirlwind of customer defections. Within
24 hours, he had placed full-page ads in newspapers nationwide in which he personally responded to JetBlue’s
debacle. “We are sorry and embarrassed,” the ads declared, “But
most of all we are deeply sorry.” JetBlue gave concrete repara-
tions to passengers. Neeleman announced a new “customer bill
of rights” that promised passengers travel credits for excessive
waits. For instance, passengers who are unable to disembark
from an arriving flight for 3 hours or more would receive vouchers
worth the full value of their round-trip ticket. JetBlue will also hand
out vouchers for the full amount of passengers’ round trips if a
flight is cancelled within 12 hours of a scheduled departure. The
apology, backed by concrete benefits for the angry and inconve-
nienced passengers, netted kudos for the company from both the
business press and JetBlue’s own true blue customers. Neeleman
eventually stepped down as new management was brought in to
address some of the growth challenges the airline faced.32
CUSTOMER COPRODUCTION The reality is that
customers do not merely purchase and use a service; they
play an active role in its delivery.33 Their words and actions
affect the quality of their service experiences and those of
others, and the productivity of frontline employees.
Customers often feel they derive more value, and feel a
stronger connection to the service provider, if they are ac-
tively involved in the service process. This coproduction
can put stress on employees, however, and reduce their
satisfaction, especially if they differ culturally or in other
ways from customers.34 Moreover, one study estimated
that one-third of all service problems are caused by the
customer.35 The growing shift to self-service technologies
will likely increase this percentage.
Preventing service failures is crucial, since recovery
is always challenging. One of the biggest problems is
attribution—customers often feel the firm is at fault or,
even if not, that it is still responsible for righting any
JetBlue weathered a customer
service disaster and continues to
receive kudos from its passengers.
364 PART 5 SHAPING THE MARKET OFFERINGS
wrongs. Unfortunately, although many firms have well-designed and executed procedures to deal
with their own failures, they find managing customer failures—when a service problem arises from
a customer’s lack of understanding or ineptitude—much more difficult. Figure 13.3 displays
the four broad causes of customer failures. Solutions come in all forms, as these examples show:36
1. Redesign processes and redefine customer roles to simplify service encounters. One of the
keys to Netflix’s success is that it charges a flat fee and allows customers to return DVDs by
mail at their leisure, giving customers greater control and flexibility.
2. Incorporate the right technology to aid employees and customers. Comcast, the largest cable
operator by subscribers in the United States, introduced software to identify network glitches
before they affected service and to better inform call-center operators about customer
problems. Repeat service calls dropped 30 percent as a result.
3. Create high-performance customers by enhancing their role clarity, motivation, and
ability. USAA reminds enlisted policyholders to suspend their car insurance when they are
stationed overseas.
4. Encourage “customer citizenship” so customers help customers. At golf courses, players
can not only follow the rules by playing and behaving appropriately, they can encourage
others to do so.
SATISFYING EMPLOYEES AS WELL AS CUSTOMERS Excellent service companies know
that positive employee attitudes will promote stronger customer loyalty.37 Instilling a strong customer
orientation in employees can also increase their job satisfaction and commitment, especially if they
have high customer contact. Employees thrive in customer-contact positions when they have an
internal drive to (1) pamper customers, (2) accurately read customer needs, (3) develop a personal
relationship with customers, and (4) deliver quality service to solve customers’ problems.38
Consistent with this reasoning, Sears found a high correlation between customer satisfaction,
employee satisfaction, and store profitability. In companies such as Hallmark, John Deere, and Four
Seasons Hotels, employees exhibit real company pride. The downside of not treating employees
right is significant. A survey of 10,000 employees from the largest 1,000 companies found that
40 percent of workers cited “lack of recognition” as a key reason for leaving a job.39
Given the importance of positive employee attitudes to customer satisfaction, service compa-
nies must attract the best employees they can find. They need to market a career rather than just
a job. They must design a sound training program and provide support and rewards for good
performance. They can use the intranet, internal newsletters, daily reminders, and employee
roundtables to reinforce customer-centered attitudes. Finally, they must audit employee job
satisfaction regularly.
People
Processes
Te
ch
no
log
y
Se
rvi
ce
sc
ap
e
Communication
Fit
Skill
Attitude and Effort
Role Clarity
Training
Identified Customer Failure
Communication
Fit
Skill
Attitude and Effort
Role Clarity
Training
Employees
Customers
Complexity
Ease of Use
Support
Availability of Support
Functionality
Accessibility
Reliability
Ease of Use
Signs, Symbols and Other Objects
Spatial Layout
Ambient Conditions
|Fig. 13.3|
Root Causes of
Customer Failure
Source: Stephen Tax, Mark Colgate, and David
Bowen, MIT Sloan Management Review (Spring
2006): pp. 30–38. ©2006 by Massachusetts
Institute of Technology. All rights reserved. Distributed
by Tribune Media Services.
DESIGNING AND MANAGING SERVICES | CHAPTER 13 365
The Panda Express restaurant chain has management turnover that’s half the industry average,
due in part to a combination of ample bonuses and health benefits with a strong emphasis on
worker self-improvement through meditation, education, and hobbies. Special wellness seminars
and get-to-know-you events outside work help to create a caring, nurturing atmosphere.40
Achieving Excellence
in Services Marketing
The increased importance of the service industry has sharpened the focus on what it takes to excel
in the marketing of services.41 Here are some guidelines.
Marketing Excellence
Marketing excellence with services requires excellence in three broad areas: external, internal, and
interactive marketing (see Figure 13.4).42
• External marketing describes the normal work of preparing, pricing, distributing, and promot-
ing the service to customers.
• Internal marketing describes training and motivating employees to serve customers well. The
most important contribution the marketing department can make is arguably to be “exceptionally
clever in getting everyone else in the organization to practice marketing.”43
• Interactive marketing describes the employees’ skill in serving the client. Clients judge service
not only by its technical quality (Was the surgery successful?), but also by its functional quality
(Did the surgeon show concern and inspire confidence?).44
A good example of a service company achieving marketing excellence is Charles Schwab.
Charles Schwab Charles Schwab, one of the nation’s largest discount broker-
age houses, uses the telephone, Internet, and wireless devices to create an innovative combina-
tion of high-tech and high-touch services. One of the first major brokerage houses to provide
online trading, Schwab today services more than 8 million individual and institutional accounts. It
offers account information and proprietary research from retail brokers, real-time quotes, an after-
hours trading program, the Schwab learning center, live events, online chats with customer service representa-
tives, a global investing service, and market updates delivered by e-mail. Besides the discount brokerage, the
firm offers mutual funds, annuities, bond trading, and now mortgages through its Charles Schwab Bank.
Schwab’s success has been driven by its efforts to lead in three areas: superior service (online, via phone, and
in local branch offices), innovative products, and low prices. Daily customer feedback reports are reviewed and
acted on the next day. If customers have trouble filling out a form or experience an unexpected delay, a Schwab
representative calls to ask about the source of the problem and how it can be solved.45
Company
External
Marketing
Internal
Marketing
CustomersEmployees Interactive
Marketing
Cleaning/
maintenance
services
Restaurant
industry
Financial/
banking
services
$
|Fig. 13.4|
Three Types of
Marketing in Service
Industries
C
h
a
rl
e
s
S
c
h
w
a
b
366 PART 5 SHAPING THE MARKET OFFERINGS
In interactive marketing, teamwork is often key, and delegating authority to frontline employees
can allow for greater service flexibility and adaptability through better problem solving, closer em-
ployee cooperation, and more efficient knowledge transfer.46
Technology also has great power to make service workers more productive. When US Airways
deployed handheld scanners to better track baggage in 2008, mishandled baggage decreased almost
50 percent from the year before. The new technology paid for itself in the first year and helped con-
tribute to a 35 percent drop in complaints.47
Sometimes new technology has unanticipated benefits. When BMW introduced Wi-Fi to its
dealerships to help customers pass the time more productively while their cars were being ser-
viced, more customers chose to stay rather than use loaner cars, an expensive item for dealers to
maintain.48
Companies must avoid pushing productivity so hard, however, that they reduce perceived qual-
ity. Some methods lead to too much standardization. Service providers must deliver “high touch” as
well as “high tech.” Amazon.com has some of the most amazing technological innovations in online
retailing, but it also keeps customers extremely satisfied when a problem arises even if they don’t
actually talk to an Amazon.com employee.49
The Internet lets firms improve their service offerings and strengthen their relationships
with customers by allowing for true interactivity, customer-specific and situational personal-
ization, and real-time adjustments of the firm’s offerings.50 But as companies collect, store,
and use more information about customers, they have also raised concerns about security and
privacy.51 Companies must incorporate the proper safeguards and reassure customers about
their efforts.
Best Practices of Top Service Companies
In achieving marketing excellence with their customers, well-managed service companies share a
strategic concept, a history of top-management commitment to quality, high standards, profit tiers,
and systems for monitoring service performance and customer complaints.
STRATEGIC CONCEPT Top service companies are “customer obsessed.” They have a
clear sense of their target customers and their needs and have developed a distinctive strategy
for satisfying these needs. At the Four Seasons luxury hotel chain, employees must pass four
interviews before being hired. Each hotel also employs a “guest historian” to track guest
preferences. With more branch offices in the United States than Starbucks has, Edward Jones
brokerage stays close to customers by assigning a single financial advisor and one
administrator to each office. Although costly, maintaining such small teams fosters personal
relationships.52
TOP-MANAGEMENT COMMITMENT Companies such as Marriott, Disney, and USAA
have a thorough commitment to service quality. Their managements look monthly not only at
financial performance, but also at service performance. Ray Kroc of McDonald’s insisted on
continually measuring each McDonald’s outlet on its conformance to QSCV: quality, service,
cleanliness, and value. Some companies insert a reminder along with employees’ paychecks:
“Brought to you by the customer.” Sam Walton of Walmart required the following employee
pledge: “I solemnly swear and declare that every customer that comes within 10 feet of me, I will
smile, look them in the eye, and greet them, so help me Sam.”
HIGH STANDARDS The best service providers set high quality standards. Citibank aims to
answer phone calls within 10 seconds and customer letters within 2 days. The standards must be set
appropriately high. A 98 percent accuracy standard may sound good, but it would result in 64,000
lost FedEx packages a day; 6 misspelled words on each page of a book; 400,000 incorrectly filled
prescriptions daily; 3 million lost USPS mail pieces each day; no phone/Internet/electricity 8 days
per year or 29 minutes per day; 1,000 mislabeled or (mispriced) products at a supermarket; and
6 million people unaccounted for in a U.S. census.
PROFIT TIERS Firms have decided to raise fees and lower services to those customers who barely
pay their way, and to coddle big spenders to retain their patronage as long as possible. Customers in
high-profit tiers get special discounts, promotional offers, and lots of special service; customers in
DESIGNING AND MANAGING SERVICES | CHAPTER 13 367
lower-profit tiers may get more fees, stripped-down service, and voice messages to process their
inquiries.
When the recent recession hit, Zappos decided to stop offering complimentary overnight shipping
to first-time buyers and offer it to repeat buyers only. The money saved was invested in a new VIP
service for the company’s most loyal customers.53 Companies that provide differentiated levels of
service must be careful about claiming superior service, however—customers who receive lesser treat-
ment will bad-mouth the company and injure its reputation. Delivering services that maximize both
customer satisfaction and company profitability can be challenging.
MONITORING SYSTEMS Top firms audit service performance, both their own and
competitors’, on a regular basis. They collect voice of the customer (VOC) measurements to probe
customer satisfiers and dissatisfiers. They use comparison shopping, mystery or ghost shopping,
customer surveys, suggestion and complaint forms, service-audit teams, and customers’ letters to
the president.
We can judge services on customer importance and company performance. Importance-performance
analysis rates the various elements of the service bundle and identifies required actions. Table 13.2
shows how customers rated 14 service elements or attributes of an automobile dealer’s service
department on importance and performance. For example,“Job done right the first time” (attribute 1)
received a mean importance rating of 3.83 and a mean performance rating of 2.63, indicating that
customers felt it was highly important but not performed well. The ratings of the 14 elements are
divided into four sections in Figure 13.5.
• Quadrant A in the figure shows important service elements that are not being performed at
the desired levels; they include elements 1, 2, and 9. The dealer should concentrate on improv-
ing the service department’s performance on these elements.
TABLE 13.2 Customer Importance and Performance Ratings for an
Auto Dealership
Number
Attribute Attribute Description
Mean
Importance
Ratinga
Mean
Performance
Ratingb
1 Job done right the first time 3.83 2.63
2 Fast action on complaints 3.63 2.73
3 Prompt warranty work 3.60 3.15
4 Able to do any job needed 3.56 3.00
5 Service available when needed 3.41 3.05
6 Courteous and friendly service 3.41 3.29
7 Car ready when promised 3.38 3.03
8 Perform only necessary work 3.37 3.11
9 Low prices on service 3.29 2.00
10 Clean up after service work 3.27 3.02
11 Convenient to home 2.52 2.25
12 Convenient to work 2.43 2.49
13 Courtesy buses and cars 2.37 2.35
14 Send out maintenance notices 2.05 3.33
a Ratings obtained from a four-point scale of “extremely important” (4), “important” (3), “slightly important” (2), and “not im-
portant” (1).
b Ratings obtained from a four-point scale of “excellent” (4), “good” (3), “fair” (2), and “poor” (1). A “no basis for judgment”
category was also provided.
368 PART 5 SHAPING THE MARKET OFFERINGS
• Quadrant B shows important service elements that are being performed well; the company
needs to maintain the high performance.
• Quadrant C shows minor service elements that are being delivered in a mediocre way but do
not need any attention.
• Quadrant D shows that a minor service element, “Send out maintenance notices,” is being per-
formed in an excellent manner.
Perhaps the company should spend less on sending out maintenance notices and use the savings to
improve performance on important elements. Management can enhance its analysis by checking
on the competitors’ performance levels on each element.54
SATISFYING CUSTOMER COMPLAINTS On average, 40 percent of customers who
suffer through a bad service experience stop doing business with the company.55 But if those
customers are willing to complain first, they actually offer the company a gift if the complaint is
handled well.
Companies that encourage disappointed customers to complain—and also empower em-
ployees to remedy the situation on the spot—have been shown to achieve higher revenues and
greater profits than companies without a systematic approach for addressing service failures.56
Pizza Hut prints its toll-free number on all pizza boxes. When a customer complains, Pizza
Hut sends a voice mail to the store manager, who must call the customer within 48 hours and
resolve the complaint.
Getting frontline employees to adopt extra-role behaviors, and to advocate the interests and im-
age of the firm to consumers, as well as take initiative and engage in conscientious behavior in deal-
ing with customers, can be a critical asset in handling complaints.57 Customers evaluate complaint
incidents in terms of the outcomes they receive, the procedures used to arrive at those outcomes,
and the nature of interpersonal treatment during the process.58
Companies also are increasing the quality of their call centers and their customer service represen-
tatives (CSRs). “Marketing Insight: Improving Company Call Centers” illustrates what top compa-
nies are doing.
Differentiating Services
Finally, customers who view a service as fairly homogeneous care less about the provider than
about the price. Marketing excellence requires service marketers to continually differentiate their
brands so they are not seen as a commodity.
PRIMARY AND SECONDARY SERVICE OPTIONS Marketers can differentiate their
service offerings in many ways, through people and processes that add value. What the customer
1
2
3
4
5
7
8
6
9
10
11
12
13
14
D. Possible overkill
Slightly Important
Extremely Important
Fa
ir
Pe
rf
or
m
an
ce
Ex
ce
lle
nt
P
er
fo
rm
an
ce
C. Low priority
B. Keep up the good workA. Concentrate here
|Fig. 13.5|
Importance-
Performance Analysis
DESIGNING AND MANAGING SERVICES | CHAPTER 13 369
expects is called the primary service package. Vanguard, the second-largest no-load mutual fund
company, has a unique client ownership structure that lowers costs and permits better fund
returns. Strongly differentiated from many competitors, the brand grew through word of mouth,
PR, and viral marketing.59
The provider can add secondary service features to the package. In the hotel industry, various
chains have introduced such secondary service features as merchandise for sale, free breakfast buf-
fets, and loyalty programs.
The major challenge is that most service offerings and innovations are easily copied. Still,
the company that regularly introduces innovations will gain a succession of temporary ad-
vantages over competitors. Schneider National keeps a step ahead of its competitors by never
standing still.
Schneider National Schneider National
is the world’s largest long-haul truckload freight carrier, with
$3.7 billion in revenues and more than 54,000 bright orange
tractors and trailers on the roads. Although its core benefit is
to move freight from one location to another, Schneider sees
itself in the customer solutions business. Its service guarantees are
backed by monetary incentives for drivers who meet tight schedules;
driver-training programs improve performance. Schneider was the first to
introduce in-cab satellite technology and mobile technology to every driver.
In 2009, it had its biggest award-winning year, garnering 43 awards for
strong customer service, solutions, and commitment to the environment
from shippers, government organizations, and industry media. To actively
recruit the best drivers, Schneider advertises on television shows such as
Marketing InsightMarketing Insight
Improving Company Call Centers
Many firms have learned the hard way that demanding, empowered cus-
tomers will no longer put up with poor service when contacting companies.
After Sprint and Nextel merged, they set out to run their call cen-
ters as cost centers, rather than a means to enhance customer loyalty.
Employee rewards were based on keeping customer calls short, and
when management started to monitor even bathroom trips, morale
sank. With customer churn spinning out of control, Sprint Nextel began
a service improvement plan at the end of 2007 to put more emphasis
on service over efficiency. Among other changes that accompanied the
appointment of the firm’s first chief service officer, call center operators
were rewarded for solving problems on a customer’s first call, rather
than for keeping their calls short. The average customer contacted
customer service four times in 2008, a drop from eight times in 2007.
Some firms are getting smarter about the type of calls they send
overseas to off-shore call centers. They are investing more in training as
well as returning more complex calls to highly trained domestic cus-
tomer service reps. Homeshoring occurs when a customer service rep
works from home with a broadband line and computer. These at-home
reps often provide higher-quality service at less cost and with lower
turnover.
Firms have to manage their number of customer service reps
carefully. One study showed that cutting just four reps at a call center
of three dozen sent the number of customers put on hold for four min-
utes or more from zero to eighty. Firms can also try to reasonably get
more from each rep. USAA cross-trains its call center reps so that
agents who answer investment queries can also respond to insur-
ance-related calls, reducing the number of transfers between agents
and increasing productivity as a result. USAA and other firms such as
KeyBank and Ace Hardware have also consolidated call center opera-
tions into fewer locations, allowing them to maintain their number of
reps in the process.
Finally, keeping call center reps happy and motivated is obviously
also a key to their ability to offer excellent customer service. American
Express lets call center reps choose their own hours and swap shifts
without a supervisor’s approval.
Sources: Michael Sanserino and Cari Tuna, “Companies Strive Harder to
Please Customers,” Wall Street Journal, July 27, 2009, p. B4; Spencer E. Ante,
“Sprint’s Wake-Up Call,” BusinessWeek, March 3, 2008, pp. 54–57; Jena
McGregor, “Customer Service Champs,” BusinessWeek, March 5, 2007;
Jena McGregor, “When Service Means Survival,” BusinessWeek, March 2,
2009, pp. 26–30.
Long-haul truckload freight carrier
Schneider National goes to great
lengths to satisfy its customers and
build its brand.
370 PART 5 SHAPING THE MARKET OFFERINGS
Trick My Truck, on satellite radio, in newspapers, and on-
line; employs Webinars and PR; and partners with AARP,
local organizations, and veterans’ groups. Even painting
the trucks Omaha orange was part of a branding strategy
to improve safety and create awareness.60
INNOVATION WITH SERVICES Innovation
is as vital in services as in any industry. After years of
losing customers to its Hilton and Marriott hotel
competitors, Starwood decided to invest $1.7 billion
in its Sheraton chain of 400 properties worldwide to
give them fresher décor and brighter colors, as well
as more enticing lobbies, restaurants, and cafés. In
explaining the need for the makeover, one
hospitality industry expert noted, “There was a time
when Sheraton was one of the leading brands. But it
lagged in introducing new design and service
concepts and developed a level of inconsistency.”61
On the other hand, consider how these relatively new service categories emerged and how, in
some cases, organizations created creative solutions in existing categories.62
• Online Travel. Online travel agents such as Expedia and Travelocity offer customers the
opportunity to conveniently book travel at discount prices. However, they make money only when
visitors go to their Web sites and book travel. Kayak is a newer online travel agency that applies the
Google business model of collecting money on a per-click basis. Kayak’s marketing emphasis is on
building a better search engine by offering more alternatives, flexibility, and airlines.
• Retail Health Clinics. One of the hardest areas in which to innovate is health care. But
whereas the current health care system is designed to treat a small number of complex cases,
retail health clinics address a large number of simple cases. Retail health clinics such as Quick
Care, RediClinic, and MinuteClinic are often found in drugstores and other retail chain stores
such as Target and Walmart. They typically use nurse practitioners to handle minor illnesses
and injuries such as colds, flu, and ear infections, offer various health and wellness services
such as physicals and exams for high school sports, and perform vaccinations. They seek to of-
fer convenient, predictable service and transparent pricing, without an appointment, seven
days a week. Most visits take no more than 15 minutes, and costs vary from $25 to $100.
• Private Aviation. Initially, private aviation was restricted to owning or chartering a private
plane. Fractional ownership pioneered by NetJets allowed customers to pay a percentage of the
cost of a private plane plus maintenance and a direct hourly cost. Marquis Jets further innovated
with a simple idea of combining prepaid time on the world’s largest, best-maintained fleet, offer-
ing the consistency and benefits of fractional ownership without the long-term commitment.
Many companies are using the Web to offer primary or secondary service features that were
never possible before. Salesforce.com uses cloud computing—centralized computing services de-
livered over the Internet—to run customer-management databases for companies. Häagen-Dazs
estimated it would have had to spend $65,000 for a custom-designed database to stay in contact
with the company’s retail franchises across the country. Instead, it spent only $20,000 to set up an
account with Salesforce.com and pays $125 per month for 20 users to remotely monitor franchises
via the Web.63
Managing Service Quality
The service quality of a firm is tested at each service encounter. If employees are bored, cannot an-
swer simple questions, or are visiting each other while customers are waiting, customers will think
twice about doing business there again. One business that understands how to treat customers right
is USAA.
Retail health clinics are reinvent-
ing patient care for minor illnesses
and injuries.
DESIGNING AND MANAGING SERVICES | CHAPTER 13 371
USAA From its beginnings, USAA focused on selling auto insurance, and later
other insurance products, to those with military service. It increased its share of each cus-
tomer’s business by launching a consumer bank, issuing
credit cards, opening a discount brokerage, and offering a
selection of no-load mutual funds. Though it now conducts
transactions for more than 150 products and services on the phone or
online, USAA boasts one of the highest customer satisfaction ratings of
any company in the United States. It was the first bank to allow iPhone
deposits for its military customers, to routinely text balances to soldiers
in the field, and to heavily discount customers’ car insurance when
they are deployed overseas. A leader in virtually every customer service award or survey, the company
inspired one industry expert to comment: “There is nobody on this earth who understands their cus-
tomer better than USAA.”64
Service outcome and customer loyalty are influenced by a host of variables. One study identified
more than 800 critical behaviors that cause customers to switch services.65 These behaviors fall into
eight categories (see Table 13.3).
A more recent study honed in on the service dimensions customers would most like companies
to measure. As Table 13.4 shows, knowledgeable frontline workers and the ability to achieve
one-call-and-done rose to the top.66
Flawless service delivery is the ideal state for any service organization. “Marketing Memo:
Recommendations for Improving Service Quality” offers a comprehensive set of guidelines to
By relentlessly focusing on its mili-
tary customers, USAA has created
extraordinary levels of customer
satisfaction.
TABLE 13.3 Factors Leading to Customer Switching Behavior
Pricing Response to Service Failure
• High price • Negative response
• Price increases • No response
• Unfair pricing • Reluctant response
• Deceptive pricing Competition
Inconvenience • Found better service
• Location/hours Ethical Problems
• Wait for appointment • Cheat
• Wait for service • Hard sell
Core Service Failure • Unsafe
• Service mistakes • Conflict of interest
• Billing errors Involuntary Switching
• Service catastrophe • Customer moved
Service Encounter Failures • Provider closed
• Uncaring
• Impolite
• Unresponsive
• Unknowledgeable
Source: Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing (April 1995),
pp. 71–82. Reprinted with permission from Journal of Marketing, published by the American Marketing Association.
Sources: Leonard L. Berry, A. Parasuraman, and Valarie A. Zeithaml, “Ten Lessons for Improving Service Quality,” MSI Reports Working Paper Series, No.03-001 (Cambridge,
MA: Marketing Science Institute, 2003), pp. 61–82. See also, Leonard L. Berry’s books, On Great Service: A Framework for Action (New York: Free Press, 2006) and
Discovering the Soul of Service (New York: Free Press, 1999), as well as his articles; Leonard L. Berry, Venkatesh Shankar, Janet Parish, Susan Cadwallader, and Thomas
Dotzel, “Creating New Markets through Service Innovation,” Sloan Management Review (Winter 2006): 56–63; Leonard L. Berry, Stephan H. Haeckel, and Lewis P. Carbone,
“How to Lead the Customer Experience,” Marketing Management (January–February 2003), pp. 18–23; and Leonard L. Berry, Kathleen Seiders, and Dhruv Grewal,
“Understanding Service Convenience,” Journal of Marketing (July 2002), pp. 1–17.
372 PART 5 SHAPING THE MARKET OFFERINGS
m a r k e t i n g
Memo Recommendations for Improving Service Quality
Pioneers in conducting academic service research, Berry, Parasuraman, and
Zeithaml offer 10 lessons they maintain are essential for improving service
quality across service industries.
1. Listening—Service providers should understand what customers re-
ally want through continuous learning about the expectations and per-
ceptions of customers and noncustomers (for instance, by means of a
service-quality information system).
2. Reliability—Reliability is the single most important dimension of service
quality and must be a service priority.
3. Basic service—Service companies must deliver the basics and do
what they are supposed to do—keep promises, use common sense,
listen to customers, keep customers informed, and be determined to
deliver value to customers.
4. Service design—Service providers should take a holistic view of the
service while managing its many details.
5. Recovery—To satisfy customers who encounter a service problem,
service companies should encourage customers to complain (and make
it easy for them to do so), respond quickly and personally, and develop a
problem-resolution system.
6. Surprising customers—Although reliability is the most important
dimension in meeting customers’ service expectations, process dimen-
sions such as assurance, responsiveness, and empathy are most impor-
tant in exceeding customer expectations, for example, by surprising them
with uncommon swiftness, grace, courtesy, competence, commitment,
and understanding.
7. Fair play—Service companies must make special efforts to be fair, and
to demonstrate fairness, to customers and employees.
8. Teamwork—Teamwork is what enables large organizations to deliver
service with care and attentiveness by improving employee motivation
and capabilities.
9. Employee research—Marketers should conduct research with employ-
ees to reveal why service problems occur and what companies must do
to solve problems.
10. Servant leadership—Quality service comes from inspired leadership
throughout the organization; from excellent service-system design;
from the effective use of information and technology; and from a
slow-to-change, invisible, all-powerful, internal force called corpo-
rate culture.
TABLE 13.4 Dimensions of Service Customers Want Companies
to Deliver
Source: Convergys 2008 U.S. Customer Scorecard
0% 10% 20% 30% 40%
65%
64%
62%
54%
49%
49%
45%
43%
38%
31%
50% 60% 70%
Knowledgeable employees
Address my needs on first contact
Treat me like a valued customer
Demonstrates desire to meet my needs
Can quickly access information
Good value for the money
Courteous employees
Is a company/brand I can trust
Treats me fairly
Provides relevant/personalized service
DESIGNING AND MANAGING SERVICES | CHAPTER 13 373
which top service marketing organizations can adhere. Two important considerations in service
delivery are managing customer expectations and incorporating self-service technologies.
Managing Customer Expectations
Customers form service expectations from many sources, such as past experiences, word of mouth,
and advertising. In general, customers compare the perceived service with the expected service.67 If
the perceived service falls below the expected service, customers are disappointed. Successful com-
panies add benefits to their offering that not only satisfy customers but surprise and delight them.
Delighting customers is a matter of exceeding expectations.68
The service-quality model in Figure 13.6 highlights the main requirements for delivering
high service quality.69 It identifies five gaps that cause unsuccessful delivery:
1. Gap between consumer expectation and management perception—Management does not
always correctly perceive what customers want. Hospital administrators may think patients
want better food, but patients may be more concerned with nurse responsiveness.
2. Gap between management perception and service-quality specification—Management
might correctly perceive customers’ wants but not set a performance standard. Hospital ad-
ministrators may tell the nurses to give “fast” service without specifying it in minutes.
3. Gap between service-quality specifications and service delivery—Employees might be
poorly trained, or incapable of or unwilling to meet the standard; they may be held to conflict-
ing standards, such as taking time to listen to customers and serving them fast.
4. Gap between service delivery and external communications—Consumer expectations are
affected by statements made by company representatives and ads. If a hospital brochure shows
a beautiful room but the patient finds it to be cheap and tacky looking, external communica-
tions have distorted the customer’s expectations.
GAP 5
GAP 3GAP 1
GAP 4
GAP 2
CONSUMER
MARKETER
Word-of-mouth
communications
Past experiencePersonal needs
Expected service
Perceived service
Service delivery
(including pre-
and post-contacts)
External
communications
to consumers
Translation of
perceptions into
service-quality
specifications
Management
perceptions of
consumer
expectations
|Fig. 13.6|
Service-Quality Model
Sources: A. Parasuraman, Valarie A. Zeithaml, and
Leonard L. Berry, “A Conceptual Model of Service
Quality and Its Implications for Future Research,”
Journal of Marketing (Fall 1985), p. 44. Reprinted
with permission of the American Marketing
Association. The model is more fully discussed or
elaborated in Valarie Zeithaml, Mary Jo Bitner, and
Dwayne D. Gremler, Services Marketing: Integrating
Customer Focus across the Firm, 4th ed. (New York:
McGraw-Hill, 2006).
374 PART 5 SHAPING THE MARKET OFFERINGS
5. Gap between perceived service and expected service—This gap occurs when the consumer
misperceives the service quality. The physician may keep visiting the patient to show care, but
the patient may interpret this as an indication that something really is wrong.
Based on this service-quality model, researchers identified five determinants of service quality,
in this order of importance:70
1. Reliability—The ability to perform the promised service dependably and accurately.
2. Responsiveness—Willingness to help customers and provide prompt service.
3. Assurance—The knowledge and courtesy of employees and their ability to convey trust and
confidence.
4. Empathy—The provision of caring, individualized attention to customers.
5. Tangibles—The appearance of physical facilities, equipment, personnel, and communication
materials.
Based on these five factors, the researchers developed the 21-item SERVQUAL scale
(see Table 13.5).71 They also note there is a zone of tolerance, or a range where a service
dimension would be deemed satisfactory, anchored by the minimum level consumers are will-
ing to accept and the level they believe can and should be delivered.
The service-quality model in Figure 13.6 highlights some of the gaps that cause unsuccessful
service delivery. Subsequent research has extended the model. One dynamic process model of service
quality was based on the premise that customer perceptions and expectations of service quality
change over time, but at any one point they are a function of prior expectations about what will and
what should happen during the service encounter, as well as the actual service delivered during the
last contact.72 Tests of the dynamic process model reveal that the two different types of expecta-
tions have opposite effects on perceptions of service quality.
1. Increasing customer expectations of what the firm will deliver can lead to improved percep-
tions of overall service quality.
2. Decreasing customer expectations of what the firm should deliver can also lead to improved
perceptions of overall service quality.
TABLE 13.5 SERVQUAL Attributes
Reliability Empathy
• Providing service as promised • Giving customers individual attention
• Dependability in handling customers’ service problems • Employees who deal with customers in a caring fashion
• Performing services right the first time • Having the customer’s best interests at heart
• Providing services at the promised time • Employees who understand the needs of their customers
• Maintaining error-free records • Convenient business hours
• Employees who have the knowledge to answer customer questions
Responsiveness Tangibles
• Keeping customer informed as to when services will be performed • Modern equipment
• Prompt service to customers • Visually appealing facilities
• Willingness to help customers • Employees who have a neat, professional appearance
• Readiness to respond to customers’ requests • Visually appealing materials associated with the service
Assurance
• Employees who instill confidence in customers
• Making customers feel safe in their transactions
• Employees who are consistently courteous
Source: A. Parasuraman, Valarie A. Zeithaml, and Leonard L. Berry, “A Conceptual Model of Service Quality and Its Implications for Future Research,” Journal of Marketing (Fall 1985), pp. 41–50. Reprinted by
permission of the American Marketing Association.
DESIGNING AND MANAGING SERVICES | CHAPTER 13 375
Much work has validated the role of expectations in consumers’ interpretations and evaluations
of the service encounter and the relationship they adopt with a firm over time.73 Consumers are
often forward-looking with respect to their decision to keep or switch from a service relationship.
Any marketing activity that affects current or expected future usage can help to solidify a service
relationship.
With continuously provided services, such as public utilities, health care, financial and comput-
ing services, insurance, and other professional, membership, or subscription services, customers
have been observed to mentally calculate their payment equity—the perceived economic benefits in
relationship to the economic costs. In other words, customers ask themselves, “Am I using this
service enough, given what I pay for it?”
Long-term service relationships can have a dark side. An ad agency client may feel that over time
the agency is losing objectivity, becoming stale in its thinking, or beginning to take advantage of the
relationship.74
Incorporating Self-Service Technologies (SSTs)
Consumers value convenience in services.75 Many person-to-person service interactions are being
replaced by self-service technologies (SSTs). To the traditional vending machines we can add auto-
mated teller machines (ATMs), self-pumping at gas stations, self-checkout at hotels, and a variety
of activities on the Internet, such as ticket purchasing, investment trading, and customization of
products.
Not all SSTs improve service quality, but they can make service transactions more accurate,
convenient, and faster. Obviously, they can also reduce costs. One technology firm, Comverse,
estimates the cost to answer a query through a call center at $7, but only 10 cents online. One
of its clients was able to direct 200,000 calls a week through online self-service support, saving
$52 million a year.76 Every company needs to think about improving its service using SSTs.
Marketing academics and consultants Jeffrey Rayport and Bernie Jaworski define a customer-
service interface as any place at which a company seeks to manage a relationship with a customer,
whether through people, technology, or some combination of the two.77 They feel that although
many companies serve customers through a broad array of interfaces, from retail sales clerks to
Web sites to voice-response telephone systems, the whole often does not add up to the sum of its
parts, increasing complexity, costs, and customer dissatisfaction as a result. Successfully integrat-
ing technology into the workforce thus requires a comprehensive reengineering of the front office
to identify what people do best, what machines do best, and how to deploy them separately and
together.
Some companies have found that the biggest obstacle is not the technology itself, but convinc-
ing customers to use it, especially for the first time. Customers must have a clear sense of their roles
in the SST process, must see a clear benefit, and must feel they can actually use it.78 SST is not for
everyone. Although some automated voices are actually popular with customers—the unfailingly
polite and chipper voice of Amtrak’s “Julie” consistently wins kudos from callers—many can incite
frustration and even rage.
Managing Product-Support
Services
No less important than service industries are product-based industries that must provide a service
bundle. Manufacturers of equipment—small appliances, office machines, tractors, mainframes,
airplanes—all must provide product-support services. Product-support service is becoming a major
battleground for competitive advantage.
Chapter 12 described how products could be augmented with key service differentiators—
ordering ease, delivery, installation, customer training, customer consulting, maintenance,
and repair. Some equipment companies, such as Caterpillar Tractor and John Deere, make a
significant percentage of their profits from these services.79 In the global marketplace,
companies that make a good product but provide poor local service support are seriously
disadvantaged.
376 PART 5 SHAPING THE MARKET OFFERINGS
Many product companies have a stronger Web presence than they had before. They must ensure
that they offer adequate—if not superior—service online as well. “Marketing Memo: Assessing
E-Service Quality” reviews two models of online service quality.
Identifying and Satisfying Customer Needs
Traditionally, customers have had three specific worries about product service:80
• They worry about reliability and failure frequency. A farmer may tolerate a combine that will
break down once a year, but not two or three times a year.
• They worry about downtime. The longer the downtime, the higher the cost. The customer
counts on the seller’s service dependability—the seller’s ability to fix the machine quickly or at
least provide a loaner.81
• They worry about out-of-pocket costs. How much does the customer have to spend on regular
maintenance and repair costs?
A buyer takes all these factors into consideration and tries to estimate the life-cycle cost, which
is the product’s purchase cost plus the discounted cost of maintenance and repair less the
discounted salvage value. A one-computer office will need higher product reliability and faster re-
pair service than an office where other computers are available if one breaks down. An airline needs
100 percent reliability in the air. Where reliability is important, manufacturers or service providers
can offer guarantees to promote sales.
m a r k e t i n g
Memo Assessing E-Service Quality
Academic researchers Zeithaml, Parasuraman, and Malhotra define
online service quality as the extent to which a Web site facilitates
efficient and effective shopping, purchasing, and delivery. They identified
11 dimensions of perceived e-service quality: access, ease of navigation,
efficiency, flexibility, reliability, personalization, security/privacy, respon-
siveness, assurance/trust, site aesthetics, and price knowledge. Some of
these service-quality dimensions were the same online as offline, but
some specific underlying attributes were different. Different dimensions
emerged with e-service quality too. Empathy didn’t seem to be as impor-
tant online, unless there were service problems. Core dimensions of
regular service quality were efficiency, fulfillment, reliability, and privacy;
core dimensions of service recovery were responsiveness, compensa-
tion, and real-time access to help.
Another set of academic researchers, Wolfinbarger and Gilly, devel-
oped a reduced scale of online service quality with four key dimensions:
reliability/fulfillment, Web site design, security/privacy, and customer ser-
vice. The researchers interpret their study findings to suggest that the
most basic building blocks of a “compelling online experience” are relia-
bility and functionality to provide time savings, easy transactions, good
selection, in-depth information, and the “right” level of personalization.
Their 14-item scale looks like this:
Reliability/Fulfillment
The product that came was represented accurately by the Web site.
You get what you ordered from this Web site.
The product is delivered by the time promised by the company.
Web Site Design
This Web site provides in-depth information.
The site doesn’t waste my time.
It is quick and easy to complete a transaction at this Web site.
The level of personalization at this site is about right, not too much or
too little.
This Web site has good selection.
Security/Privacy
I feel that my privacy is protected at this site.
I feel safe in my transactions with this Web site.
This Web site has adequate security transactions.
Customer Service
The company is willing and ready to respond to customer needs.
When you have a problem, the Web site shows a sincere interest in
solving it.
Inquiries are answered promptly.
Sources: Mary Wolfinbarger and Mary C. Gilly, “E-TailQ: Dimensionalizing, Measuring, and Predicting E-Tail Quality,” Journal of Retailing 79 (Fall 2003), pp. 183–98; Valarie A.
Zeithaml, A. Parasuraman, and Arvind Malhotra, “A Conceptual Framework for Understanding E-Service Quality: Implications for Future Research and Managerial Practice,”
Marketing Science Institute Working Paper, Report No. 00-115, 2000.
DESIGNING AND MANAGING SERVICES | CHAPTER 13 377
To provide the best support, a manufacturer must identify the services customers value most
and their relative importance. For expensive equipment, manufacturers offer facilitating services
such as installation, staff training, maintenance and repair services, and financing. They may also
add value-augmenting services that extend beyond the functioning and performance of the product
itself. Johnson Controls reached beyond its climate control equipment and components business to
manage integrated facilities by offering products and services that optimize energy use and im-
prove comfort and security.
A manufacturer can offer, and charge for, product-support services in different ways. One spe-
cialty organic-chemical company provides a standard offering plus a basic level of services. If the
customer wants additional services, it can pay extra or increase its annual purchases to a higher
level, in which case additional services are included. Many companies offer service contracts (also
called extended warranties), in which sellers agree to provide free maintenance and repair services
for a specified period of time at a specified contract price.
Product companies must understand their strategic intent and competitive advantage in
developing services. Are service units supposed to support or protect existing product busi-
nesses or to grow as an independent platform? Are the sources of competitive advantage based
on economies of scale or economies of skill?82 See Figure 13.7 strategies of different service
companies.
Postsale Service Strategy
The quality of customer service departments varies greatly. At one extreme are departments that
simply transfer customer calls to the appropriate person or department for action with little fol-
low-up. At the other extreme are departments eager to receive customer requests, suggestions, and
even complaints and handle them expeditiously. Some firms even proactively contact customers to
provide service after the sale is complete.83
CUSTOMER-SERVICE EVOLUTION Manufacturers usually start by running their own
parts-and-service departments. They want to stay close to the equipment and know its problems.
They also find it expensive and time consuming to train others and discover they can make good
money from parts and service if they are the only supplier and can charge a premium price. In fact,
many equipment manufacturers price their equipment low and compensate by charging high
prices for parts and service.
Strategic Intent
Protect or Enhance Product Expand Independent Service
Economies of scale • Apple’s iPod music download and transaction • Cardinal Healthcare’s hospital inventory-management
management service (iTunes) services
• Otis Elevator’s remote monitoring and diagnostics services • Cincinnati Bell’s billing services (now part of Convergys)
• General Motors’ OnStar auto remote diagnostics service • IBM’s data-center-outsourcing services
• Symantec’s virus protection and data security • Johnson Controls’ integrated facilities-management
services services
Economies of skill • Cisco’s network integration and maintenance • Cincinnati Bell’s call-center-management services (now
services part of Convergys)
• EMC’s storage-management and maintenance • General Electric’s aircraft-engine-maintenance services
services • GE Healthcare’s hospital equipment—support and
• SAP Systems’ integration services diagnostics services for hospital equipment
• UTC’s utilities field support services • IBM’s systems integration services
Source: Byron G. Auguste, Eric P. Harmon, and Vivek Pandit, “The Right Service Strategies for Product Companies,” The McKinsey Quarterly, no. 1 (2006), pp. 41–51. All rights reserved. Reprinted by per-
mission of McKinsey & Company.
|Fig. 13.7|
Service Strategies for Product Companies
So
ur
ce
o
f C
om
pe
tit
iv
e
Ad
va
nt
ag
e
378 PART 5 SHAPING THE MARKET OFFERINGS
Summary
1. A service is any act or performance that one party can
offer to another that is essentially intangible and does
not result in the ownership of anything. It may or may
not be tied to a physical product.
2. Services are intangible, inseparable, variable, and per-
ishable. Each characteristic poses challenges and re-
quires certain strategies. Marketers must find ways to
give tangibility to intangibles, to increase the productiv-
ity of service providers, to increase and standardize the
quality of the service provided, and to match the supply
of services with market demand.
3. Marketing of services faces new realities in the 21st
century due to customer empowerment, customer co-
production, and the need to satisfy employees as well
as customers.
4. In the past, service industries lagged behind manu-
facturing firms in adopting and using marketing con-
cepts and tools, but this situation has changed.
Achieving excellence in service marketing calls not
only for external marketing but also for internal mar-
keting to motivate employees, as well as interactive
marketing to emphasize the importance of both “high
tech” and “high touch.”
5. Top service companies excel at the following practices: a
strategic concept, a history of top-management commit-
ment to quality, high standards, profit tiers, and systems
for monitoring service performance and customer com-
plaints. They also differentiate their brands through primary
and secondary service features and continual innovation.
6. Superior service delivery requires managing customer
expectations and incorporating self-service technolo-
gies. Customers’ expectations play a critical role in their
service experiences and evaluations. Companies must
manage service quality by understanding the effects of
each service encounter.
7. Even product-based companies must provide post-
purchase service. To offer the best support, a manufac-
turer must identify the services customers value most
and their relative importance. The service mix includes
both presale services (facilitating and value-augmenting
services) and postsale services (customer service
departments, repair and maintenance services).
Over time, manufacturers switch more maintenance and repair service to authorized distributors
and dealers. These intermediaries are closer to customers, operate in more locations, and can offer
quicker service. Still later, independent service firms emerge and offer a lower price or faster service.
A significant percentage of auto-service work is now done outside franchised automobile dealerships
by independent garages and chains such as Midas Muffler, and Sears. Independent service organiza-
tions handle mainframes, telecommunications equipment, and a variety of other equipment lines.
THE CUSTOMER-SERVICE IMPERATIVE Customer-service choices are increasing rapidly,
however, and equipment manufacturers increasingly must figure out how to make money on their
equipment, independent of service contracts. Some new-car warranties now cover 100,000 miles before
servicing. The increase in disposable or never-fail equipment makes customers less inclined to pay
2 percent to 10 percent of the purchase price every year for a service. A company with several hundred
laptops, printers, and related equipment might find it cheaper to have its own service people on-site.
Applications
Marketing Debate
Is Service Marketing Different from
Product Marketing?
Some service marketers maintain that service marketing is
fundamentally different from product marketing and relies
on different skills. Some traditional product marketers dis-
agree, saying “good marketing is good marketing.”
Take a position: Product and service marketing are
fundamentally different versus Product and service
marketing are highly related.
Marketing Discussion
Educational Institutions
Colleges, universities, and other educational institutions can
be classified as service organizations. How can you apply
the marketing principles developed in this chapter to your
school? Do you have any advice as to how it could become
a better service marketer?
DESIGNING AND MANAGING SERVICES | CHAPTER 13 379
Marketing Excellence
>>The Ritz-Carlton
president and chief operating officer, explained, “It’s all
about people. Nobody has an emotional experience with a
thing. We’re appealing to emotions.” The Ritz-Carlton’s
38,000 employees at 70 hotels in 24 countries go out of
their way to create unique and memorable experiences for
their guests.
While The Ritz-Carlton is known for training its em-
ployees on exceptional customer service, the hotel also
reinforces its mission and values to its employees on a
daily basis. Each day, managers gather their employees
for a 15-minute “line up.” During this time, managers
touch base with their employees, resolve any impending
problems, and spend the remaining time reading and dis-
cussing what The Ritz-Carlton calls “wow stories.”
The same “wow story” of the day is read to every
single employee around the world. These true stories rec-
ognize an individual employee for his or her outstanding
customer service and also highlight one of the 12 Service
Values. For example, one family staying at the Ritz-Carlton,
Bali, needed a particular type of egg and milk for their son
who suffered from food allergies. Employees could not find
the appropriate items in town, but the executive chef at the
hotel remembered a store in Singapore that sold them. He
contacted his mother-in-law, who purchased the items
and personally flew them over 1,000 miles to Bali for the
family. This example showcased Service Value 6: “I own
and immediately resolve guests’ problems.”
In another instance, a waiter overheard a man telling
his wife, who used a wheelchair, that it was too bad he
couldn’t get her down to the beach. The waiter told the
maintenance crew, and by the next day they had con-
structed a wooden walkway down to the beach and
pitched a tent at the far end where the couple had dinner.
According to Cooper, the daily wow story is “the best way
to communicate what we expect from our ladies and gen-
tlemen around the world. Every story reinforces the ac-
tions we are looking for and demonstrates how each and
every person in our organization contributes to our service
values.” As part of company policy, each employee is en-
titled to spend up to $2,000 on a guest to help deliver an
anticipated need or desire.
The hotel measures the success of its customer
service efforts through Gallup phone interviews, which
ask both functional and emotional questions.
Functional questions ask “How was the meal? Was
your bedroom clean?” while emotional questions
uncover a sense of the customer’s well-being. The Ritz-
Carlton uses these findings as well as day-to-day
experiences to continually enhance and improve the
experience for its guests.
In less than three decades, The Ritz-Carlton has
grown from 4 locations to over 70 and earned two
Malcolm Baldrige Quality Awards—the only company
ever to win the prestigious award twice.
Few brands attain such a high standard of customer
service as the luxury hotel, The Ritz-Carlton. The Ritz-
Carlton dates back to the early 20th century and the orig-
inal Ritz-Carlton Boston, which revolutionized the way
U.S. travelers viewed and experienced customer service
and luxury in a hotel. The Ritz-Carlton Boston was the
first of its kind to provide guests with a private bath in
each guest room, fresh flowers throughout the hotel, and
an entire staff dressed in formal white tie, black tie, or
morning coat attire.
In 1983, hotelier Horst Schulze and a four-person de-
velopment team acquired the rights to the Ritz-Carlton
name and created the Ritz-Carlton concept as it is known
today: a company-wide concentration on both the per-
sonal and the functional side of service. The five-star hotel
provides impeccable facilities but also takes customer
service extremely seriously. Its credo is, “We are Ladies
and Gentlemen serving Ladies and Gentlemen.”
According to the company’s Web site, The Ritz-Carlton
“pledge(s) to provide the finest personal service and facili-
ties for our guests who will always enjoy a warm, relaxed,
yet refined ambience.”
The Ritz-Carlton fulfills this promise by providing im-
peccable training for its employees and executing its Three
Steps of Service and 12 Service Values. The Three Steps of
Service state that employees must use a warm and sincere
greeting always using the guest’s name, anticipate and ful-
fill each guest’s needs, and give a warm good-bye again
using the guest’s name. Every manager carries a laminated
card with the 12 Service Values, which include bullets such
as number 3: “I am empowered to create unique, memo-
rable and personal experiences for our guests,” and num-
ber 10: “I am proud of my professional appearance,
language and behavior.” Simon Cooper, the company
380 PART 5 SHAPING THE MARKET OFFERINGS
Marketing Excellence
>>Mayo Clinic
and with a warm smile. The buildings have been designed
so that, in the words of the architect of one, “patients feel
a little better before they see their doctors.” The 21-story
Gonda Building in Rochester has spectacular wide-open
spaces with the capability of adding 10 more floors. Fine
art hangs on the walls, and doctor’s offices are designed
to feel cozy and comforting rather than sterile and
impersonal.
The lobby of the Mayo Clinic hospital in Scottsdale
has an indoor waterfall and a wall of windows overlooking
mountains. In pediatric exam rooms, resuscitation equip-
ment is hidden behind a large cheery picture. Hospital
rooms feature microwave ovens and chairs that really do
convert to beds because, as one staff member explained,
“People don’t come to the hospital alone.” The newest
emergency medical helicopter was customized to incor-
porate high-tech medical equipment and is one of the
most advanced aircraft in the world.
The other significant difference in serving patients is
Mayo Clinic’s concept of teamwork. A patient can come
to Mayo Clinic with or without a physician’s referral. At
that time, the patient’s team is assembled, which can in-
clude the primary physician, surgeons, radiation oncolo-
gists, radiologists, nurses, residents, or other specialists
with the appropriate skill, experience, and knowledge.
Teams of medical professionals work together to di-
agnose patients’ medical problems, including debating
test results for hours to determine the most accurate di-
agnosis and best treatments. Once a team consensus
has been reached, the leader meets with the patient and
discusses his or her options. Throughout the process, pa-
tients are encouraged to take part in the discussion. If
surgery is necessary, the procedure is often scheduled to
take place within 24 hours, a dramatic difference from the
long wait patients experience at many hospitals. Mayo
Clinic’s doctors understand that those who seek their
care want action as soon as possible.
Mayo’s doctors are put on salary instead of being
paid by the number of patients seen or tests ordered. As
a result, patients receive more individualized attention and
care, and physicians work together instead of against
each other. As one pediatrician at Mayo explained, “We’re
very comfortable with calling colleagues for what I call
Questions
1. How does The Ritz-Carlton match up to competitive
hotels? What are the key differences?
2. Discuss the importance of the “wow stories” in cus-
tomer service for a luxury hotel like The Ritz-Carlton.
Sources: Robert Reiss, “How Ritz-Carlton Stays at Top,” Forbes, October 30, 2009; Carmine Gallo,
“Employee Motivation the Ritz-Carlton Way,” BusinessWeek, February 29, 2008; Carmine Gallo,
“How Ritz-Carlton Maintains Its Mystique,” BusinessWeek, February 13, 2007; Jennifer Robison,
“How The Ritz-Carlton Manages the Mystique,” Gallup Management Journal, December 11, 2008;
The Ritz Carlton, www.RitzCarlton.com.
Mayo Clinic is the first and largest integrated not-for-profit
medical group practice in the world. William and Charles
Mayo founded the clinic over 100 years ago as a small
outpatient facility and pioneered the concept of a medical
group practice—a model that is widely used today.
Mayo Clinic provides exceptional medical care and
leads the nation in many specialties such as cancer, heart
disease, respiratory disorders, and urology. It consistently
ranks at the top of U.S. News & World Report’s Best
Hospitals list and enjoys 85 percent brand recognition
among U.S. adults. It has reached this level of success by
taking a different approach from most clinics and hospi-
tals and putting a relentless focus on the patient’s experi-
ence. The clinic’s two interrelated core values trace back
to its founders and are at the heart of all the organization
does: placing the patient’s interests above all others and
practicing teamwork.
Every aspect of the patient’s experience is considered
at Mayo Clinic’s three campuses in Rochester (MN),
Scottsdale (AZ), and Jacksonville (FL). The moment a pa-
tient walks into one of Mayo Clinic’s facilities, he or she
feels the difference. New patients are welcomed by pro-
fessional greeters who walk them through the administra-
tive processes. Returning patients are greeted by name
Ch
ap
t
er
16
In This Chapter, We
Will Address the
Follo
w
ing
Question
s
1. What major types of marketing
intermediaries occupy this
sector?
2. What marketing decisions do
these marketing intermediaries
make?
3. What are the major trends with
marketing intermediaries?
4. What does the future hold for
private label brands?
Cofounder Tony Hsieh has ensured that a
strong customer-service culture is at the
heart of operations at Zappos, the online
footwear and accessories retailer.
446 PART 6 DELIVERING VALUE
In the previous chapter, we examined marketing intermediaries from the
viewpoint of manufacturers who wanted to build and manage marketing channels. In this chapter,
we view these intermediaries—retailers, wholesalers, and logistical organizations—as requiring
and forging their own marketing strategies in a rapidly changing world. Intermediaries also strive
for marketing excellence and can reap the benefits like any other type of company.
Online footwear retailer Zappos was co-founded by Tony Hsieh in 1999 with superior
customer service and an improved customer experience at the core of its corporate cul-
ture. With free shipping and returns, 24/7 customer service, and fast turnaround on a
wide selection of 200,000 shoe styles from 1,200 makers, Zappos finds that three-
fourths of purchases during any one day are by repeat customers. Unlike many other
companies, Zappos has not outsourced its call centers; Hsieh sees that function as too important. In
fact, Zappos empowers its customer service reps to solve problems. When a customer called to com-
plain that a pair of boots was leaking after a year of use, the customer service rep sent out a new pair
even though the company’s policy is that only unworn shoes are returnable. Every employee has a
chance each year to contribute a passage to the firm’s Culture Book,
about life at Zappos, and how each department implements superior
customer service from selling to warehousing and delivery, to pricing
and billing. Half the interview process for potential new hires is devoted
to finding out whether they are sufficiently outgoing, open-minded, and
creative to be a good cultural fit for the company. Bought by
Amazon.com in 2009 for a reported $850 million but still run separately,
the company now also sells clothing, handbags, and accessories.
Thanks to its success, it even offers two-day, $4,000 seminars to busi-
ness executives eager to learn about the secrets behind Zappos’s
unique corporate culture and approach to customer service.1
Managing Retailing,
Wholesaling, and Logistics
447
While innovative retailers such as Zappos, Sweden’s
H&M, Spain’s Zara and Mango, and Britain’s Topshop have
thrived in recent years, others such as former U.S. stalwarts
Gap, Home Depot, and Kmart have struggled. The more
successful intermediaries use strategic planning, advanced
information systems, and sophisticated marketing tools. They
segment their markets, improve their market targeting and
positioning, and aggressively pursue market expansion and
diversification strategies. In this chapter, we consider marketing
excellence in retailing, wholesaling, and logistics.
Retailing
Retailing includes all the activities in selling goods or services directly to final consumers for per-
sonal, nonbusiness use. A retailer or retail store is any business enterprise whose sales volume
comes primarily from retailing.
Any organization selling to final consumers—whether it is a manufacturer, wholesaler, or
retailer—is doing retailing. It doesn’t matter how the goods or services are sold (in person, by mail,
telephone, vending machine, or on the Internet) or where (in a store, on the street, or in the con-
sumer’s home).
After reviewing the different types of retailers and the new retail marketing environment, we ex-
amine the marketing decisions retailers make. The following are four examples of innovative retail
organizations that have experienced market success in recent years.
448 PART 6 DELIVERING VALUE
Innovative Retail Organizations
Panera Bread. The $2.6 billion Panera Bread restaurant chain targets “food people who
understand and respond to food or those on the verge of that” by selling fresh “real” food–and
lots of warm bread—at full prices that customers are more than willing to pay. An unpreten-
tious atmosphere—no table service, but no time limit—encourages
customers to linger. The brand is seen as family-oriented but also sophis-
ticated, offering an appealing combination of fresh, customizable,
convenient, and affordable food.
GameStop. Video game and entertainment software retailer GameStop
has over 6,000 locations in malls and shopping strips all over the United
States, making it highly convenient for customers. Staffed by hard-core
gamers who like to connect with customers, GameStop boasts a trade-in
policy that gives customers credit for an old game traded in for a new one.
Lumber Liquidators. Lumber Liquidators buys excess wood directly
from lumber mills at a discount and stocks almost 350 kinds of hardwood
flooring, about the same as Lowe’s and Home Depot. It sells at lower
prices because it keeps operating costs down by cutting out the middle-
men and locating stores in inexpensive locations. Lumber Liquidators also
knows a lot about its customers, such as the fact that shoppers who request product samples have a
30 percent likelihood of buying within a month, and that most tend to renovate one room at a time, not
the entire home at once.
Net-a-Porter. London-based Net-a-Porter is an online luxury clothing and accessories retailer
whose Web site combines the style of a fashion magazine with the thrill of shopping at a chic boutique.
Seen by its loyal customers as an authoritative fashion voice, Net-a-Porter stocks over 300 interna-
tional brands, such as Jimmy Choo, Alexander McQueen, Stella McCartney, Givenchy, Marc Jacobs,
and others. The company ships to 170 countries and offers same-day delivery in London and
Manhattan; the average order is $250.
Sources: Kate Rockwood, “Rising Dough, Fast Company, October 2009, pp. 69–71; Devin Leonard, “GameStop Racks Up the Points,” Fortune,
June 9, 2008, pp. 109–22; Helen Coster, “Hardwood Hero,” Forbes, November 30, 2009, pp. 60–62; John Brodie, “The Amazon of Fashion,”
Fortune, September 14, 2009, pp. 86–95.
Types of Retailers
Consumers today can shop for goods and services at store retailers, nonstore retailers, and retail
organizations.
STORE RETAILERS Perhaps the best-known type of store retailer is the department store.
Japanese department stores such as Takashimaya and Mitsukoshi attract millions of shoppers each
year and feature art galleries, restaurants, cooking classes, fitness clubs, and children’s playgrounds.
The most important types of major store retailers are summarized in Table 16.1.
Different formats of store retailers will have different competitive and price dynamics. Discount
stores, for example, compete much more intensely with each other than other formats.2 Retailers
also meet widely different consumer preferences for service levels and specific services. Specifically,
they position themselves as offering one of four levels of service:
1. Self-service—Self-service is the cornerstone of all discount operations. Many customers are
willing to carry out their own “locate-compare-select” process to save money.
2. Self-selection—Customers find their own goods, although they can ask for assistance.
3. Limited service—These retailers carry more shopping goods and services such as credit and
merchandise-return privileges. Customers need more information and assistance.
4. Full service—Salespeople are ready to assist in every phase of the “locate-compare-select”
process. Customers who like to be waited on prefer this type of store. The high staffing cost,
along with the higher proportion of specialty goods and slower-moving items and the many
services, result in high-cost retailing.
Panera Bread appeals to food
lovers of all kinds.
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 449
NONSTORE RETAILING Although the overwhelming bulk of goods and services—
97 percent—is sold through stores, nonstore retailing has been growing much faster than store
retailing. Nonstore retailing falls into four major categories: direct selling, direct marketing (which
includes telemarketing and Internet selling), automatic vending, and buying services:
1. Direct selling, also called multilevel selling and network marketing, is a multibillion-dollar
industry, with hundreds of companies selling door-to-door or at home sales parties.
Well-known in one-to-one selling are Avon, Electrolux, and Southwestern Company of
Nashville (Bibles). Tupperware and Mary Kay Cosmetics are sold one-to-many: A salesperson
goes to the home of a host who has invited friends; the salesperson demonstrates the products
and takes orders. Pioneered by Amway, the multilevel (network) marketing sales system works
by recruiting independent businesspeople who act as distributors. The distributor’s compen-
sation includes a percentage of sales made by those he or she recruits, as well as earnings on
direct sales to customers. These direct-selling firms, now finding fewer consumers at home, are
developing multidistribution strategies.
2. Direct marketing has roots in direct-mail and catalog marketing (Lands’ End, L.L.Bean); it
includes telemarketing (1-800-FLOWERS), television direct-response marketing (HSN, QVC),
and electronic shopping (Amazon.com, Autobytel.com). As people become more accustomed
to shopping on the Internet, they are ordering a greater variety of goods and services from a
wider range of Web sites. In the United States, online sales were estimated to be $210 billion in
2009, with travel being the biggest category ($80 billion).3
3. Automatic vending offers a variety of merchandise, including impulse goods such as soft
drinks, coffee, candy, newspapers, magazines, and other products such as hosiery, cosmetics,
hot food, and paperbacks. Vending machines are found in factories, offices, large retail stores,
gasoline stations, hotels, restaurants, and many other places. They offer 24-hour selling,
self-service, and merchandise that is stocked to be fresh. Japan has the most vending machines
per person—Coca-Cola has over 1 million machines there and annual vending sales of
$50 billion—twice its U.S. figures.
4. Buying service is a storeless retailer serving a specific clientele—usually employees of large
organizations—who are entitled to buy from a list of retailers that have agreed to give dis-
counts in return for membership.
TABLE 16.1 Major Types of Store Retailers
Specialty store: Narrow product line. The Limited, The Body Shop.
Department store: Several product lines. JCPenney, Bloomingdale’s.
Supermarket: Large, low-cost, low-margin, high-volume, self-service store designed to meet total
needs for food and household products. Kroger, Safeway.
Convenience store: Small store in residential area, often open 24/7, limited line of high-turnover
convenience products plus takeout. 7-Eleven, Circle K.
Drug store: Prescription and pharmacies, health and beauty aids, other personal care, small
durable, miscellaneous items. CVS, Walgreens.
Discount store: Standard or specialty merchandise; low-price, low-margin, high-volume stores.
Walmart, Kmart.
Extreme value or hard-discount store: A more restricted merchandise mix than discount stores
but at even lower prices. Aldi, Lidl, Dollar General, Family Dollar.
Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less than retail. Factory
outlets; independent off-price retailers such as TJ Maxx; warehouse clubs such as Costco.
Superstore: Huge selling space, routinely purchased food and household items, plus services (laundry,
shoe repair, dry cleaning, check cashing). Category killer (deep assortment in one category) such as
Staples; combination store such as Jewel-Osco; hypermarket (huge stores that combine supermarket,
discount, and warehouse retailing) such as Carrefour in France and Meijer in the Netherlands.
Catalog showroom: Broad selection of high-markup, fast-moving, brand-name goods sold by
catalog at a discount. Customers pick up merchandise at the store. Inside Edge Ski and Bike.
Source: Data from www.privatelabelmag.com.
450 PART 6 DELIVERING VALUE
CORPORATE RETAILING AND FRANCHISING Although many retail stores are
independently owned, an increasing number are part of a corporate retailing organization. These
organizations achieve economies of scale, greater purchasing power, wider brand recognition, and
better-trained employees than independent stores can usually gain alone. The major types of
corporate retailing—corporate chain stores, voluntary chains, retailer and consumer cooperatives,
franchises, and merchandising conglomerates—are described in Table 16.2.
Franchise businesses such as Subway, Jiffy-Lube, Holiday Inn, Supercuts, and 7-Eleven account
for more than $1 trillion of annual U.S. sales and roughly 40 percent of all retail transactions. One of
every 12 U.S. retail businesses is a franchise establishment; these firms employ 1 in every 16 workers
in the country.4
In a franchising system, individual franchisees are a tightly knit group of enterprises whose sys-
tematic operations are planned, directed, and controlled by the operation’s innovator, called a
franchisor. Franchises are distinguished by three characteristics:
1. The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty
payments.
2. The franchisee pays for the right to be part of the system. Start-up costs include rental and
lease equipment and fixtures, and usually a regular license fee. McDonald’s franchisees may in-
vest as much as $1.6 million in total start-up costs and fees. The franchisee then pays
McDonald’s a certain percentage of sales plus a monthly rent.
3. The franchisor provides its franchisees with a system for doing business. McDonald’s requires
franchisees to attend “Hamburger University” in Oak Brook, Illinois, for two weeks to learn
how to manage the business. Franchisees must follow certain procedures in buying materials.
Franchising benefits both franchisor and franchisee. Franchisors gain the motivation
and hard work of employees who are entrepreneurs rather than “hired hands,” the franchisees’
familiarity with local communities and conditions, and the enormous purchasing power of
being a franchisor. Franchisees benefit from buying into a business with a well-known and
accepted brand name. They find it easier to borrow money for their business from financial
institutions, and they receive support in areas ranging from marketing and advertising to site
selection and staffing.
Franchisees do walk a fine line between independence and loyalty to the franchisor. Some fran-
chisors are giving their franchisees freedom to run their own operations, from personalizing store
names to adjusting offerings and price. Beef ‘O’ Brady’s sports pub franchisees are allowed to set
prices to reflect their local markets. Great Harvest Bread believes in a “freedom franchise” approach
that encourages its franchisee bakers to create new items for their store menus and to share with
other franchisees if they are successful.5
TABLE 16.2 Major Types of Corporate Retail Organizations
Corporate chain store: Two or more outlets owned and controlled, employing central buying and
merchandising, and selling similar lines of merchandise. Gap, Pottery Barn.
Voluntary chain: A wholesaler-sponsored group of independent retailers engaged in bulk buying and
common merchandising. Independent Grocers Alliance (IGA).
Retailer cooperative: Independent retailers using a central buying organization and joint promotion
efforts. Associated Grocers, ACE Hardware.
Consumer cooperative: A retail firm owned by its customers. Members contribute money to open
their own store, vote on its policies, elect a group to manage it, and receive dividends. Local coopera-
tive grocery stores can be found in many markets.
Franchise organization: Contractual association between a franchisor and franchisees, popular in a
number of product and service areas. McDonald’s, Subway, Pizza Hut, Jiffy Lube, 7-Eleven.
Merchandising conglomerate: A corporation that combines several diversified retailing lines and
forms under central ownership, with some integration of distribution and management. Federated
Department Stores renamed itself after one of its best-known retailers, Macy’s, but also owns other
retailers such as Bloomingdale’s.
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 451
As part of their franchise
agreement, new McDonald’s
franchisors must attend the
company’s Hamburger University
for two weeks to learn how to
properly manage their restaurants.
The New Retail Environment
With the onset of the recession in 2008, many retailers had to fundamentally reassess virtually
everything they did. Some adopted a cautious, defensive response, cutting stock levels, slowing ex-
pansion, and discounting deeply. Others were more creative about managing inventory, adjusting
product lines, and carefully avoiding overpromoting. For example, JCPenney held back 60 percent
of inventory for the fall 2009 holiday season, compared to its usual 20 percent, to avoid having
empty shelves and stock-outs on one hand and overflowing shelves and heavy discounting on the
other hand. Some firms, such as the Container Store and Saks, lowered average prices; others, such
as Gilt.com and Neiman Marcus, introduced selective and very short-term deep discounts.
Restoration Hardware chose to move its furniture product lines more upscale.6
Although many of these short-term adjustments were likely to remain longer-term, a number of
other long-term trends are also evident in the retail marketing environment. Here are some that
are changing the way consumers buy and manufacturers and retailers compete (see Table 16.3
for a summary).
• New Retail Forms and Combinations. To better satisfy customers’ need for convenience, a
variety of new retail forms have emerged. Bookstores feature coffee shops. Gas stations in-
clude food stores. Loblaw’s Supermarkets have fitness clubs. Shopping malls and bus and
train stations have peddlers’ carts in their aisles. Retailers are also experimenting with lim-
ited-time “pop-up” stores that let them promote brands to seasonal shoppers for a few weeks
TABLE 16.3 Recent Retail Developments
• New Retail Forms and Combinations
• Growth of Intertype Competition
• Competition between Store-Based and Nonstore-Based Retailing
• Growth of Giant Retailers
• Decline of Middle-Market Retailers
• Growing Investment in Technology
• Global Profile of Major Retailers
• Growth of Shopper Marketing
452 PART 6 DELIVERING VALUE
in busy areas and create buzz. For the 2009 holiday season, Toys “R” Us set up 350 temporary
stores and toy boutiques, in many cases taking over vacant retail space in shopping centers
and malls.7
• Growth of Intertype Competition. Department stores can’t worry just about other depart-
ment stores—discount chains such as Walmart and Tesco are expanding into product areas
such as clothing, health, beauty, and electrical appliances. Different types of stores—discount
stores, catalog showrooms, department stores—all compete for the same consumers by carry-
ing the same type of merchandise.
• Competition between Store-Based and Nonstore-Based Retailing. Consumers now receive
sales offers through direct-mail letters and catalogs, television, cell phones, and the Internet.
The nonstore-based retailers making these offers are taking business away from store-based
retailers. Store-based retailers have responded by increasing their Web presence and finding
different ways to sell online, including through their own Web sites, as well as creating more
involving and engaging experiences in their stores. Store-based retailers want their stores to be
destinations where consumers enjoy rich experiences that captivate all their senses.
Sophisticated lighting, use of appropriate scents, and inviting, intimate designs are all being
increasingly employed.8
• Growth of Giant Retailers. Through their superior information systems, logistical systems,
and buying power, giant retailers such as Walmart are able to deliver good service and im-
mense volumes of product to masses of consumers at appealing prices. They are crowding out
smaller manufacturers that cannot deliver enough quantity and often dictate to the most pow-
erful manufacturers what to make, how to price and promote, when and how to ship, and even
how to improve production and management. Manufacturers need these accounts; otherwise
they would lose 10 percent to 30 percent of the market. Some giant retailers are category killers
that concentrate on one product category, such as pet food (PETCO), home improvement
(Home Depot), or office supplies (Staples). Others are supercenters that combine grocery items
with a huge selection of nonfood merchandise (Walmart).
• Decline of Middle-Market Retailers. We can characterize the retail market today as hourglass
or dog-bone shaped: Growth seems to be centered at the top (with luxury offerings from re-
tailers such as Nordstrom and Neiman Marcus) and at the bottom (with discount pricing
from retailers such as Target and Walmart). As discount retailers improve their quality and im-
age, consumers have been willing to trade down. Target offers Proenza Schouler designs and
Kmart sells an extensive line of Joe Boxer underwear and sleepwear. At the other end of the
spectrum, Coach recently converted 40 of its nearly 300 stores to a more upscale format that
offers higher-priced bags and concierge services. Opportunities are scarcer in the middle
where one-time successful retailers such as Sears, CompUSA, and Montgomery Ward have
struggled or even gone out of business.9
Kohl’s has found some success going after middle-market consumers by bringing in trendy
names such as Lauren Conrad, Vera Wang, Daisy Fuentes, and Tony Hawk. In addition to of-
fering more up-market merchandise, Kohl’s also adapted the stores themselves to make the
shopping experience more convenient and pleasant.10 Marks & Spencer in the United
Kingdom features in-house brands and has built a strong retail brand image. Although these
stores tend to have high operating costs, they command high margins if their in-house brands
are both fashionable and popular.11
• Growing Investment in Technology. Almost all retailers now use technology to produce better
forecasts, control inventory costs, and order electronically from suppliers. Technology is also af-
fecting what happens inside the store. In-store programming on plasma TVs can run continual
demonstrations or promotional messages. After encountering problems measuring store traffic
up and down aisles—GPS on shopping carts didn’t work because consumers tended to aban-
don their carts at times during trips and thermal imaging couldn’t tell the difference between
turkeys and babies during tests—bidirectional infrared sensors sitting on store shelves have
been successfully introduced. Electronic shelf labeling allows retailers to change price levels
instantaneously at any time of the day or week. Retailers are also introducing features to help
customers as they shop. Some supermarkets are employing “smart” shopping carts or mobile
phones that help customers locate items in the store, find out about sales and special offers, and
pay for items more easily. As exciting as these new technologies are, their cost and unproven
effectiveness in many cases can create significant drawbacks.12
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 453
• Global Profile of Major Retailers. Retailers with unique formats and
strong brand positioning are increasingly appearing in other countries. U.S.
retailers such as The Limited and the Gap have become globally prominent.
Walmart operates over 3,600 stores abroad where it does 25 percent of its
business. Dutch retailer Ahold and Belgian retailer Delhaize earn almost
two-thirds and four-fifths of their sales, respectively, in nondomestic mar-
kets. Among foreign-based global retailers in the United States are Italy’s
Benetton, Sweden’s IKEA home furnishings stores, and Japan’s UNIQLO
casual apparel retailer and Yaohan supermarkets.
• Growth of Shopper Marketing. Buoyed by research suggesting that as
much as 70 percent to 80 percent of purchase decisions are made inside
the retail store, firms are increasingly recognizing the importance of influ-
encing consumers at the point of purchase.13 Where and how a product is
displayed and sold can have a significant effect on sales.14 More communi-
cation options are available through in-store advertising such as Walmart
TV.15 Some employ goggle-like devices that record what test customers see
by projecting an infrared beam onto the wearer’s retina. One finding was
that many shoppers ignored products at eye level—the optimum location
was between waist and chest level.16
Marketing Decisions
With this new retail environment as a backdrop, we will examine retailers’ mar-
keting decisions in the areas of target market, channels, product assortment,
procurement, prices, services and store atmosphere, store activities and experi-
ences, communications, and location. We discuss the important topic of private
labels for retailers in the next section.
TARGET MARKET Until it defines and profiles the target market, the retailer cannot make
consistent decisions about product assortment, store decor, advertising messages and media, price,
and service levels. Ann Taylor has used a panel of 3,000 customers to provide feedback on its
merchandise and even its marketing campaign. The firm also solicits employees’ input.17 Whole
Foods has found success by offering a unique shopping experience to a customer base interested in
organic and natural foods.
Whole Foods Market In 284 stores in North America and the United
Kingdom, Whole Foods creates celebrations of food. The markets are bright and well staffed,
and food displays are bountiful and seductive. Whole Foods is the largest organic and natural
foods grocer in the country, offering more than 2,400 items in four lines of private-label prod-
ucts that add up to 11 percent of sales: the premium Whole Foods Market, Whole Kitchen, and
Whole Market lines and the low-priced 365 Everyday Value line. Whole Foods also offers lots of informa-
tion about its food. If you want to know, for instance, whether the chicken in the display case lived a happy,
free-roaming life, you can get a 16-page booklet and an invitation to visit the farm in Pennsylvania where
it was raised. If you can’t find the information you need, you have only to ask a well-trained and knowl-
edgeable employee. Whole Foods’ approach is working, especially for consumers who view organic and
artisanal food as an affordable luxury. From 1991–2009, sales grew at a 28 percent compounded annual
growth rate (CAGR).18
Mistakes in choosing or switching target markets can be costly. When historically mass-
market jeweler Zales decided to chase upscale customers, it replaced one-third of its merchan-
dise, dropping inexpensive, low-quality diamond jewelry for high-margin, fashionable 14-karat
gold and silver pieces and shifting its ad campaign in the process. The move was a disaster.
Zales lost many of its traditional customers without winning over the new customers it had
hoped to attract.19
W
h
o
le
F
o
o
d
s
M
a
rk
e
t
High-tech shopping carts allow
customers to keep track of their
total expenditures, search for
products, find out what is on
sale, and even pay without
waiting in line.
454 PART 6 DELIVERING VALUE
To better hit their targets, retailers are slicing the market into ever-finer segments and introduc-
ing new lines of stores to exploit niche markets with more relevant offerings: Gymboree launched
Janie and Jack, selling apparel and gifts for babies and toddlers; Hot Topic introduced Torrid, selling
fashions for plus-sized teen girls; and Limited Brand’s Tween Brands sells lower-priced fashion to
tween girls.
Channels
Based on a target market analysis and other considerations we reviewed in Chapter 15, retailers
must decide which channels to employ to reach their customers. Increasingly, the answer is multi-
ple channels. Staples sells through its traditional retail channel, a direct-response Internet site, vir-
tual malls, and thousands of links on affiliated sites.
As Chapter 15 explained, channels should be designed to work together effectively. Century-
old department store chain JCPenney has ensured that its Internet, store, and catalog businesses
are fully intertwined. It sells a vast variety of goods online; has made Internet access available
at its 35,000 checkout registers; and allows online shoppers to pick up and return orders at
stores and check which clothes are in stock there. These strategies—as well as the introduction
of a.n.a., a stylish line of women’s clothing—have helped give JCPenney a younger, more up-
scale image.20
Although some experts predicted otherwise, catalogs have actually grown in an Internet world
as more firms use them as branding devices. Victoria’s Secret’s integrated multichannel approach of
retail stores, catalog, and Internet has played a key role in its brand development.
Victoria’s Secret Limited Brands founder Leslie Wexner felt U.S. women
would relish the opportunity to have a European-style lingerie shopping experience. “Women
need underwear, but women want lingerie,” he observed. Wexner’s assumption proved cor-
rect: A little more than a decade after he bought the business in 1982, Victoria’s Secret’s
average customer was buying 8 to 10 bras per year, compared with the national average of
two. To enhance its upscale reputation and glamorous appeal, the brand is endorsed by high-profile super-
models in ads and fashion shows. To expand its accessibility and offer privacy, the company began to
sell directly to consumers. Victoria’s Secret used a comprehensive marketing strategy to connect its retail,
catalog, and Web sales. Wexner sought to make it: “stand [out] as an integrated world-class brand. Across
all channels—catalogue, stores, Internet—the same products are launched at the same time, in exactly
the same way, with the same quality, and same positioning.” Since 1985, Victoria’s Secret has delivered
25 percent annual sales growth, selling through its 1,000-plus stores, catalogs, and company Web site,
posting $5.6 billion in revenues in 2009. Victoria’s Secret ships 400 million catalogs a year, or 1.33 for
every U.S. citizen, and catalog and online orders account for nearly 28 percent of its overall revenue, grow-
ing at double the rate of sales from its stores.21
PRODUCT ASSORTMENT The retailer’s product assortment must match the target market’s
shopping expectations in breadth and depth. A restaurant can offer a narrow and shallow
assortment (small lunch counters), a narrow and deep assortment (delicatessen), a broad and
shallow assortment (cafeteria), or a broad and deep assortment (large restaurant).
Identifying the right product assortment can be especially challenging in fast-moving industries
such as technology or fashion. Urban Outfitters ran into trouble when it strayed from its “hip, but
not too hip” formula, moving to embrace new styles too quickly. Sales fell over 25 percent during
2006.22 On the other hand, active and casual apparel retailer Aéropostale has found success by care-
fully matching its product assortment to its young teen target market’s needs.
Aéropostale Aéropostale has chosen to embrace a key reality of its target market:
11- to 18-year-olds, especially those on the young end, often want to look like other teens. So
while Abercrombie and American Eagle might reduce the number of cargo pants on the sales floor,
Aéropostale will keep an ample supply on hand at an affordable price. Staying on top of the right
V
ic
to
ri
a
’s
S
e
c
re
t
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 455
trends isn’t easy, but Aéropostale is among the most diligent of teen retailers when it comes to
consumer research. In addition to running high school focus groups and in-store product tests,
the company launched an Internet-based program that seeks online shoppers’ input in creat-
ing new styles. It targets 10,000 of its best customers and averages 3,500 participants in each
of 20 tests a year.Aéropostale has gone from being a lackluster performer with only 100 stores
to a powerhouse with 914 total stores in the United States, Puerto Rico, and Canada. Net sales
were up 19 percent in 2008 to $1.9 billion, and net sales from e-commerce business in-
creased 85 percent to $79 million.23
The real challenge begins after defining the store’s product assortment, and that is
to develop a product-differentiation strategy. To better differentiate themselves and
generate consumer interest, some luxury retailers are making their stores and mer-
chandise more varied. Chanel has expanded its “ultralux” goods, including $26,000
alligator bags, while ensuring an ample supply of “must-haves” that are consistently
strong sellers.24 Here are some other possibilities:
• Feature exclusive national brands that are not available at competing
retailers. Saks might get exclusive rights to carry the dresses of a well-known
international designer.
• Feature mostly private-label merchandise. Benetton and Gap design most of
the clothes carried in their stores. Many supermarket and drug chains carry pri-
vate-label merchandise.
• Feature blockbuster distinctive merchandise events. Bloomingdale’s ran a
month-long celebration for the Barbie doll’s 50th anniversary in March 2009.
• Feature surprise or ever-changing merchandise. Off-price apparel retailer TJ Maxx offers
surprise assortments of distress merchandise (goods the owner must sell immediately because
it needs cash), overstocks, and closeouts, totaling 10,000 new items each week at prices 20 per-
cent to 60 percent below department and specialty store regular prices.
• Feature the latest or newest merchandise first. Zara excels in and profits from being first-to-
market with appealing new looks and designs.
• Offer merchandise-customizing services. Harrods of London will make custom-tailored
suits, shirts, and ties for customers, in addition to ready-made menswear.
• Offer a highly targeted assortment. Lane Bryant carries goods for the larger woman. Brookstone
offers unusual tools and gadgets for the person who wants to shop in a “toy store for grown-ups.”
Merchandise may vary by geographical market. Electronics superstore Best Buy reviewed each of its
25,000 SKUs to adjust its merchandise according to income level and buying habits of shoppers. It also
puts different store formats and staffs in different areas—a location with computer sophisticates gets a
different store treatment than one with less technically sophisticated shoppers.25 Macy’s and Ross Stores
employ micro-merchandising and let managers select a significant percentage of store assortments.26
PROCUREMENT After deciding on the product-assortment strategy, the retailer must establish
merchandise sources, policies, and practices. In the corporate headquarters of a supermarket chain,
specialist buyers (sometimes called merchandise managers) are responsible for developing brand
assortments and listening to salespersons’ presentations.
Retailers are rapidly improving their skills in demand forecasting, merchandise selection, stock
control, space allocation, and display. They use computers to track inventory, compute economic
order quantities, order goods, and analyze dollars spent on vendors and products. Supermarket
chains use scanner data to manage their merchandise mix on a store-by-store basis.
Some stores are experimenting with radio frequency identification (RFID) systems made up of
“smart” tags—microchips attached to tiny radio antennas—and electronic readers. The smart tags
can be embedded on products or stuck on labels, and when the tag is near a reader, it transmits a
unique identifying number to its computer database. The use of RFIDs has been steadily increas-
ing. Coca-Cola and Gillette use them to monitor inventory and track goods in real time as they
move from factories to supermarkets to shopping baskets.27
When retailers do study the economics of buying and selling individual products, they typically
find that a third of their square footage is tied up in products that don’t make an economic profit
Aéropostale’s “Teens for Jeans”
cause marketing campaign encour-
ages its customers to donate used
jeans for homeless teens in North
America.
456 PART 6 DELIVERING VALUE
for them (profit above the cost of capital). Another third is typically allocated to product categories
that break even. The final third of the space creates the vast majority of the economic profit, yet
many retailers are unaware which third of their products generate it.28
Stores are using direct product profitability (DPP) to measure a product’s handling costs (re-
ceiving, moving to storage, paperwork, selecting, checking, loading, and space cost) from the time
it reaches the warehouse until a customer buys it in the retail store. They learn to their surprise that
the gross margin on a product often bears little relation to the direct product profit. Some high-
volume products may have such high handling costs that they are less profitable and deserve less
shelf space than low-volume products.
Trader Joe’s has differentiated itself on its innovative procurement strategy.
Trader Joe’s Los Angeles–based Trader Joe’s has carved out a special niche as
a “gourmet food outlet discount warehouse hybrid,” selling a constantly rotating assortment of
upscale specialty food and wine at lower-than-average prices. Roughly 80 percent of what it
stocks sells under private labels (compared to only 16 percent at most supermarkets), many
with a strong environmentally friendly message. For procurement, Trader Joe’s has adopted a
“less is more” philosophy. Every store carries about 3,000 products, compared to 55,000 at a conventional
supermarket, and only what it can buy and sell at a good price, even if that means changing stock weekly.
Its 18 expert buyers go directly to hundreds of suppliers, not to intermediaries, and 20 percent to 25 percent
of its suppliers are overseas. With thousands of vendor relationships all around the world, Trader Joe’s has
a success formula that’s difficult to copy. In addition, a product finds a space on the shelf only if it’s approved
by a tasting panel; there is one on each coast to satisfy regional tastes. The company introduces as many as
20 products a week to replace unpopular items.29
PRICES Prices are a key positioning factor and must be set in relationship to the target market,
product-and-service assortment mix, and competition.30 All retailers would like high turns × earns
(high volumes and high gross margins), but the two don’t usually go together. Most retailers fall into
the high-markup, lower-volume group (fine specialty stores) or the low-markup, higher-volume group
(mass merchandisers and discount stores). Within each of these groups are further gradations. Bijan on
Rodeo Drive in Beverly Hills prices suits starting at $1,000 and shoes at $400. At the other end, Target
has skillfully combined a hip image with discount prices to offer customers a strong value proposition.
Target In the mid-1980s, Kmart was the dominant mass retailer, and Walmart was
growing rapidly. Sensing a gap in the market for “cheap chic” retail, Target strove to set itself
apart from the other big-box retailers by enhancing the design quality of its product selection, fo-
cusing on merchandise that was contemporary and unique. The company’s team of merchandis-
ers traveled the world looking for the next hot items and trends to bring to the shelves.Target also
differentiated its merchandising layout, using low shelves, halogen and
track lighting, and wider aisles and avoiding “visual clutter” in stores. With
the slogan “Expect More, Pay Less,” Target seeks to build an up-market ca-
chet for its brand without losing price-conscious consumers. It introduced a
line of products from world-renowned designers such as Michael Graves,
Isaac Mizrahi, Mossimo Giannulli, and Liz Lange and has kept innovating
with its merchandising model. In 2006, it introduced U.S. consumers to the
concept of “fast fashion,” already popular in Europe, to help keep the prod-
uct selection fresh, which in turn led to more frequent shopper visits.31
Most retailers will put low prices on some items to serve as traffic
builders or loss leaders or to signal their pricing policies.32 They will
run storewide sales. They will plan markdowns on slower-moving mer-
chandise. Shoe retailers, for example, expect to sell 50 percent of their
shoes at the normal markup, 25 percent at a 40 percent markup, and
the remaining 25 percent at cost.
Tr
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As part of its “cheap chic” retail
strategy, Target sells products from
famous designers, such as the
Harlem Design Series from New
York fashion visionary Stephen
Burrows.
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 457
As Chapter 14 noted, some retailers such as Walmart have abandoned “sales pricing” in favor of
everyday low pricing (EDLP). EDLP can lead to lower advertising costs, greater pricing stability, a
stronger image of fairness and reliability, and higher retail profits. Supermarket chains practicing
everyday low pricing can be more profitable than those practicing high–low sale pricing, but only
in certain circumstances.33
SERVICES Retailers must decide on the services mix to offer customers:
• Prepurchase services include accepting telephone and mail orders, advertising, window and
interior display, fitting rooms, shopping hours, fashion shows, and trade-ins.
• Postpurchase services include shipping and delivery, gift wrapping, adjustments and returns,
alterations and tailoring, installations, and engraving.
• Ancillary services include general information, check cashing, parking, restaurants, repairs,
interior decorating, credit, rest rooms, and baby-attendant service.
Another differentiator is unerringly reliable customer service, whether face-to-face, across phone
lines, or via online chat. Barnes & Noble hires clean-cut people with a passion for customer service
and a general love of books; Borders employees are more likely to be tattooed or have multiple body
piercings. The company prides itself on the diversity of its employees and hires people who radiate
excitement about particular books and music, rather than simply finding a book for a customer.34
Whatever retailers do to enhance customer service, they must keep women in mind.
Approximately 85 percent of everything sold in the United States is bought or influenced by a
woman, and women are fed up with the decline in customer service. They are finding every possible
way to get around the system, from ordering online to resisting fake sales to just doing without.35
And when they do shop, they want well-organized layouts, helpful staff, and speedy checkouts.36
STORE ATMOSPHERE Atmosphere is another element in the store arsenal. Every store has a
look, and a physical layout that makes it hard or easy to move around (see “Marketing Memo:
Helping Stores to Sell”). Kohl’s floor plan is modeled after a racetrack loop and is designed to
convey customers smoothly past all the merchandise in the store. It includes a middle aisle that
hurried shoppers can use as a shortcut and yields higher spending levels than many competitors.37
Retailers must consider all the senses in shaping the customer’s experience. Varying the tempo of
music affects average time and dollars spent in the supermarket. Sony Style stores are seasoned with
a subtle vanilla and mandarin orange fragrance, and every surface, from countertops to paneling, is
designed to be touchable. Bloomingdale’s uses different essences in different departments: baby
powder in the baby store; suntan lotion in the bathing suit area; lilacs
in lingerie; and cinnamon and pine scent during the holiday season.38
STORE ACTIVITIES AND EXPERIENCES The growth of
e-commerce has forced traditional brick-and-mortar retailers to
respond. In addition to their natural advantages, such as products
that shoppers can actually see, touch, and test; real-life customer
service; and no delivery lag time for most purchases, stores also
provide a shopping experience as a strong differentiator.39
The store atmosphere should match shoppers’ basic motivations —
if customers are likely to be in a task-oriented and functional mind-
set, then a simpler, more restrained in-store environment may be
better.40 On the other hand, some retailers of experiential products
are creating in-store entertainment to attract customers who want
fun and excitement.41 REI, seller of outdoor gear and clothing
products, allows consumers to test climbing equipment on 25-foot or
even 65-foot walls in the store and to try GORE-TEX raincoats under
a simulated rain shower. Bass Pro Shops, a retailer of outdoor sports
equipment, features giant aquariums, waterfalls, trout ponds, archery
and rifle ranges, fly-tying demonstrations and some with an outdoor
pond to test equipment, indoor driving range and putting greens, and
classes in everything from ice fishing to conservation—all free.
Its first and largest showroom in Missouri is the number one tourist
destination in the state.
Bass Pro Shops sells its outdoor
sports equipment in an experien-
tial retail environment conducive
to product demos and tests.
Sources: Paco Underhill, Call of the Mall: The Geography of Shopping (New York: Simon & Schuster, 2004); Paco Underhill, Why We Buy: The Science of Shopping (New York:
Simon & Schuster, 1999). See also, Kenneth Hein, “Shopping Guru Sees Death of Detergent Aisle,” Brandweek, March 27, 2006, p. 11; Bob Parks, “5 Rules of Great Design,”
Business 2.0 (March 2003): 47–49; Russell Boniface, “I Spy a Shopper!” AIArchitect, June 2006; Susan Berfield, “Getting the Most Out of Every Shopper, BusinessWeek,
February 9, 2009, pp. 45–46; www.envirosell.com.
458 PART 6 DELIVERING VALUE
COMMUNICATIONS Retailers use a wide range of communication tools to generate traffic
and purchases. They place ads, run special sales, issue money-saving coupons, and run frequent-
shopper-reward programs, in-store food sampling, and coupons on shelves or at checkout points.
They work with manufacturers to design point-of-sale materials that reflect both their images.42
Upscale retailers place tasteful, full-page ads in magazines such as Vogue, Vanity Fair, or Esquire
and carefully train salespeople to greet customers, interpret their needs, and handle complaints.
Off-price retailers will arrange their merchandise to promote bargains and savings, while
conserving on service and sales assistance. Retailers are also using interactive and social media to
pass on information and create communities around their brands.43 Casual dining chain
Houlihan’s created a social network site, HQ, to gain honest, immediate feedback from 10,500
invitation-only “Houlifan” customers in return for insider information.
LOCATION The three keys to retail success are often said to be “location, location, and
location.” Department store chains, oil companies, and fast-food franchisers exercise great care in
selecting regions of the country in which to open outlets, then particular cities, and then particular
sites. Retailers can place their stores in the following locations:
• Central business districts. The oldest and most heavily trafficked city areas, often known as
“downtown”
m a r k e t i n g
Memo Helping Stores to Sell
In pursuit of higher sales volume, retailers are studying their store environ-
ments for ways to improve the shopper experience. Paco Underhill is man-
aging director of the retail consultant Envirosell, whose clients include
McDonald’s, Starbucks, Estée Lauder, Blockbuster, Citibank, Gap, Burger
King, CVS, and Wells Fargo. Using a combination of in-store video recording
and observation, Underhill and his colleagues study 50,000 people each
year as they shop. He offers the following advice for fine-tuning retail space:
• Attract shoppers and keep them in the store. The amount of time
shoppers spend in a store is perhaps the single most important factor
in determining how much they buy. To increase shopping time, give
shoppers a sense of community; recognize them in some way; give
them ways to deal with their accessories, such as chairs in convenient
locations for boyfriends, husbands, children, or bags; and make the
environment both familiar and fresh each time they come in.
• Honor the “transition zone.” On entering a store, people need to slow
down and sort out the stimuli, which means they will likely be moving too
fast to respond positively to signs, merchandise, or sales clerks in the
zone they cross before making that transition. Make sure there are clear
sight lines. Create a focal point for information within the store. Most
right-handed people turn right upon entering a store.
• Avoid overdesign. Store fixtures, point-of-sales information, packaging,
signage, and flat-screen televisions can combine to create a visual cacoph-
ony. Use crisp and clear signage—“Our Best Seller” or “Our Best Student
Computer”—where people feel comfortable stopping and facing the right
way.Window signs, displays, and mannequins communicate best when an-
gled 10 to 15 degrees to face the direction that people are moving.
• Don’t make them hunt. Put the most popular products up front to
reward busy shoppers and encourage leisurely shoppers to look more.
At Staples, ink cartridges are one of the first products shoppers
encounter after entering.
• Make merchandise available to the reach and touch. It is hard to
overemphasize the importance of customers’ hands. A store can offer
the finest, cheapest, sexiest goods, but if the shopper cannot reach or
pick them up, much of their appeal can be lost.
• Make kids welcome. If kids feel welcome, parents will follow. Take a
three-year-old’s perspective and make sure there are engaging sights at
eye level. A virtual hopscotch pattern or dinosaur on the floor can turn a
boring shopping trip for a child into a friendly experience.
• Note that men do not ask questions. Men always move faster than
women do through a store’s aisles. In many settings, it is hard to get
them to look at anything they had not intended to buy. Men also do not
like asking where things are. If a man cannot find the section he is look-
ing for, he will wheel about once or twice, then leave the store without
ever asking for help.
• Remember women need space. A shopper, especially a woman, is
far less likely to buy an item if her derriere is brushed, even lightly, by an-
other customer when she is looking at a display. Keeping aisles wide and
clear is crucial.
• Make checkout easy. Be sure to have the right high-margin goods
near cash registers to satisfy impulse shoppers. People love to buy
candy when they check out—so satisfy their sweet tooth.
TABLE 16.4 Top 10 Private Label Categories–2009
(billions of dollars
)
• Milk ($8.1)
• Bread & Baked Good ($4.2)
• Cheese ($3.5)
• Medications/Remedies/Vitamins ($3.4)
• Paper Products ($2.6)
• Eggs—Fresh ($1.9)
• Fresh Produce ($1.5)
• Packaged Meat ($1.5)
• Pet Food ($1.5)
• Unprepared Meat/Frozen Seafood ($1.4)
Source: Data from www.privatelabelmag.com. December 9, 2010. Used with permission.
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 459
• Regional shopping centers. Large suburban malls containing 40 to 200 stores, typically fea-
turing one or two nationally known anchor stores, such as Macy’s or Lord & Taylor or a com-
bination of big-box stores such as PETCO, Payless Shoes, Borders, or Bed Bath & Beyond, and
a great number of smaller stores, many under franchise operation44
• Community shopping centers. Smaller malls with one anchor store and 20 to 40 smaller stores
• Shopping strips. A cluster of stores, usually in one long building, serving a neighborhood’s
needs for groceries, hardware, laundry, shoe repair, and dry cleaning
• A location within a larger store. Certain well-known retailers—McDonald’s, Starbucks,
Nathan’s, Dunkin’ Donuts—locate new, smaller units as concession space within larger stores
or operations, such as airports, schools, or department stores.
• Stand-alone stores. Some retailers such as Kohl’s and JCPenney are avoiding malls and shop-
ping centers to locate new stores in free-standing sites on streets, so they are not connected
directly to other retail stores.
In view of the relationship between high traffic and high rents, retailers must decide on the most
advantageous locations for their outlets, using traffic counts, surveys of consumer shopping habits,
and analysis of competitive locations.
Private Labels
A private label brand (also called a reseller, store, house, or distributor brand) is a brand that
retailers and wholesalers develop. Benetton, The Body Shop, and Marks & Spencer carry mostly
own-brand merchandise. In grocery stores in Europe and Canada, store brands account for as
much as 40 percent of the items sold. In Britain, the largest food chains, roughly half of what
Sainsbury and Tesco sell is store-label goods.
For many manufacturers, retailers are both collaborators and competitors. According to the
Private Label Manufacturers’ Association, store brands now account for one of every four items
sold in U.S. supermarkets, drug chains, and mass merchandisers, up from 19 percent in 1999. In
one study, seven of ten shoppers believed the private label products they bought were as good as, if
not better than, their national brand. Setting aside beverages, private labels account for roughly 30
percent of all food served in U.S. homes, and virtually every household purchases private label
brands from time to time.45
Private labels are rapidly gaining ascendance in a way that has many manufacturers of name
brands running scared. Some experts believe though that 50 percent is the natural limit for volume
of private labels to carry because (1) consumers prefer certain national brands, and (2) many prod-
uct categories are not feasible or attractive on a private-label basis.46 Table 16.4 displays the
product categories that have the highest private-label sales.
460 PART 6 DELIVERING VALUE
Role of Private Labels
Why do intermediaries sponsor their own brands?47 First, these brands can be more profitable.
Intermediaries search for manufacturers with excess capacity that will produce private label goods
at low cost. Other costs, such as research and development, advertising, sales promotion, and phys-
ical distribution, are also much lower, so private labels can generate a higher profit margin.
Retailers also develop exclusive store brands to differentiate themselves from competitors. Many
price-sensitive consumers prefer store brands in certain categories. These preferences give retailers
increased bargaining power with marketers of national brands.
Private label or store brands should be distinguished from generics. Generics are unbranded,
plainly packaged, less expensive versions of common products such as spaghetti, paper towels, and
canned peaches. They offer standard or lower quality at a price that may be as much as 20 percent
to 40 percent lower than nationally advertised brands and 10 percent to 20 percent lower than the
retailer’s private-label brands. The lower price is made possible by lower-cost labeling and packag-
ing and minimal advertising, and sometimes lower-quality ingredients. Generics can be found in a
wide range of different products, even medicines.
Generic Drugs Generic drugs have become big business. Branded drug sales
actually declined for the first time in 2009. By making knockoffs faster and in larger quantities,
Israel’s Teva has become the world’s biggest generic drugmaker, with revenue of $14 billion.
Pharma giant Novartis is one of the world’s top five makers of branded drugs, with such suc-
cesses as Diovan for high blood pressure and Gleevec for cancer, but it has
also become the world’s second-largest maker of generic drugs following
its acquisition of Sandoz, HEXAL, Eon Labs, and others. Other pharmaceu-
tical companies such as Sanofi-Aventis and GlaxoSmithKline have entered
the generic drug market not in the United States but in emerging markets
in Eastern Europe, Latin America, and Asia, where some consumers cannot
afford expensive brand-name drugs but worry about counterfeit or
low-quality drugs. These consumers are willing to pay at least a small pre-
mium for a drug backed by a trusted company.48
Private-Label Success Factors
In the confrontation between manufacturers’ and private labels, retail-
ers have many advantages and increasing market power.49 Because shelf
space is scarce, many supermarkets charge a slotting fee for accepting a new brand, to cover the cost of
listing and stocking it. Retailers also charge for special display space and in-store advertising space.
They typically give more prominent display to their own brands and make sure they are well stocked.
Retailers are building better quality into their store brands. Supermarket retailers are adding
premium store-brand items like organics or creating new products without direct competition,
such as three-minute microwaveable snack pizzas. They are also emphasizing attractive, innovative
packaging. Some are even advertising aggressively: Safeway ran a $100 million integrated commu-
nication program that featured TV and print ads, touting the store brand’s quality.50
Loblaw Since 1984, when its President’s Choice line of foods made its debut, the term
private label has brought Loblaw instantly to mind. Toronto-based Loblaw’s Decadent Chocolate
Chip Cookie quickly became a Canadian leader and showed how innovative store brands could
compete effectively with national brands by matching or even exceeding their quality. A finely tuned
brand strategy for its premium President’s Choice line and its no-frills, yellow-labeled No Name line
(which the company relaunched with a vengeance during the recent recession) has helped differentiate its stores
and built Loblaw into a powerhouse in Canada and the United States.The President’s Choice line of products has
become so successful that Loblaw is licensing it to noncompetitive retailers in other countries. In 2010, Loblaw
introduced a new tier of low-priced store brands, priced slightly above the No Name line, to be made available at
its chain of 175 No Frills “hard discount” grocery stores.51
Generic drugs have become big
business as a means to lower
health care costs.
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MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 461
Although retailers get credit for the success of private labels, the growing power of store brands
has also benefited from the weakening of national brands. Many consumers have become more price
sensitive, a trend reinforced by the continuous barrage of coupons and price specials that has trained
a generation to buy on price. Competing manufacturers and national retailers copy and duplicate
the quality and features of the best brands in a category, reducing physical product differentiation.
Moreover, by cutting marketing communication budgets, some firms have made it harder to create
any intangible differences in brand image. A steady stream of brand extensions and line extensions
has blurred brand identity at times and led to a confusing amount of product proliferation.
Bucking these trends, many manufacturers or national brands are fighting back. “Marketing
Insight: Manufacturer’s Respond to the Private Label Threat,” describes the strategies and tactics
being taken to compete more effectively with private labels.
Wholesaling
Wholesaling includes all the activities in selling goods or services to those who buy for resale or
business use. It excludes manufacturers and farmers because they are engaged primarily in produc-
tion, and it excludes retailers. The major types of wholesalers are described in Table 16.5.
Wholesalers (also called distributors) differ from retailers in a number of ways. First, wholesalers
pay less attention to promotion, atmosphere, and location because they are dealing with business
customers rather than final consumers. Second, wholesale transactions are usually larger than retail
Marketing InsightMarketing Insight
Manufacturer’s Response
to the Private Label Threat
To maintain their marketplace power, leading brand marketers are in-
vesting significantly in R&D to bring out new brands, line extensions,
features, and quality improvements to stay a step ahead of the store
brands. They are also investing in strong “pull” advertising programs to
maintain high consumer brand recognition and preference and over-
come the in-store marketing advantage that private labels can enjoy.
Top-brand marketers also are seeking to partner with major mass dis-
tributors in a joint search for logistical economies and competitive
strategies that produce savings for both sides. Cutting all unnecessary
costs allows national brands to command a price premium, although it
can’t exceed the value perceptions of consumers.
University of North Carolina’s Jan-Benedict E. M. Steenkamp and
London Business School’s Nirmalya Kumar offer four strategic recom-
mendations for manufacturers to compete against or collaborate with
private labels.
• Fight selectively where manufacturers can win against private la-
bels and add value for consumers, retailers, and shareholders. This
is typically where the brand is one or two in the category or occu-
pying a premium niche position. Procter & Gamble rationalized its
portfolio, selling off various brands such as Sunny Delight juice
drink, Jif peanut butter, and Crisco shortening, in part so it could
concentrate on strengthening its 20+ brands with more than
$1 billion in sales.
• Partner effectively by seeking win-win relationships with retailers
through strategies that complement the retailer’s private labels.
Estée Lauder created four brands (American Beauty, Flirt, Good
Skin, and Grassroots) exclusively for Kohl’s, to help the retailer
generate volume and protect its more prestigious brands in the
process. Manufacturers selling through hard discounters such as
Lidl and Aldi have increased sales by finding new customers who
have not previously bought the brand.
• Innovate brilliantly with new products to help beat private labels.
Continuously launching incremental new products keeps the
manufacturer brands looking fresh, but the firm must also periodically
launch radical new products and protect the intellectual property of all
brands. Kraft doubled its number of patent lawyers to make sure its
innovations were legally protected as much as possible.
• Create winning value propositions by imbuing brands with symbolic
imagery as well as functional quality that beats private labels. Too
many manufacturer brands have let private labels equal and some-
times better them on functional quality. In addition, to have a win-
ning value proposition, marketers need to monitor pricing and
ensure that perceived benefits equal the price premium.
Sources: James A. Narus and James C. Anderson, “Contributing as a Distributor
to Partnerships with Manufacturers,” Business Horizons (September–October
1987); Nirmalya Kumar and Jan-Benedict E. M. Steenkamp, Private Label Strategy:
How to Meet the Store-Brand Challenge (Boston: Harvard Business School Press,
2007); Nirmalya Kumar, “The Right Way to Fight for Shelf Domination,”
Advertising
Age, January 22, 2007; Jan-Benedict E. M. Steenkamp and Nirmalya Kumar,
“Don’t Be Undersold, Harvard Business Review, December 2009, p. 91.
462 PART 6 DELIVERING VALUE
transactions, and wholesalers usually cover a larger trade area than retailers. Third, the government
deals with wholesalers and retailers differently in terms of legal regulations and taxes.
Why do manufacturers not sell directly to retailers or final consumers? Why are wholesalers
used at all? In general, wholesalers are more efficient in performing one or more of the following
functions:
• Selling and promoting. Wholesalers’ sales forces help manufacturers reach many small busi-
ness customers at a relatively low cost. They have more contacts, and buyers often trust them
more than they trust a distant manufacturer.
• Buying and assortment building. Wholesalers are able to select items and build the assort-
ments their customers need, saving them considerable work.
• Bulk breaking. Wholesalers achieve savings for their customers by buying large carload lots
and breaking the bulk into smaller units.
• Warehousing. Wholesalers hold inventories, thereby reducing inventory costs and risks to
suppliers and customers.
• Transportation. Wholesalers can often provide quicker delivery to buyers because they are
closer to the buyers.
• Financing. Wholesalers finance customers by granting credit, and finance suppliers by order-
ing early and paying bills on time.
• Risk bearing. Wholesalers absorb some risk by taking title and bearing the cost of theft, dam-
age, spoilage, and obsolescence.
• Market information. Wholesalers supply information to suppliers and customers regarding
competitors’ activities, new products, price developments, and so on.
TABLE 16.5 Major Wholesaler Types
Merchant wholesalers: Independently owned businesses that take title to the merchandise they
handle. They are full-service and limited-service jobbers, distributors, and mill supply houses.
Full-service wholesalers: Carry stock, maintain a sales force, offer credit, make deliveries, provide
management assistance. Wholesale merchants sell primarily to retailers: Some carry several merchan-
dise lines, some carry one or two lines, others carry only part of a line. Industrial distributors sell to
manufacturers and also provide services such as credit and delivery.
Limited-service wholesalers: Cash and carry wholesalers sell a limited line of fast-moving goods to
small retailers for cash. Truck wholesalers sell and deliver a limited line of semiperishable goods to
supermarkets, grocery stores, hospitals, restaurants, hotels. Drop shippers serve bulk industries such
as coal, lumber, and heavy equipment. They assume title and risk from the time an order is accepted to
its delivery. Rack jobbers serve grocery retailers in nonfood items. Delivery people set up displays, price
goods, and keep inventory records; they retain title to goods and bill retailers only for goods sold to the
end of the year. Producers’ cooperatives assemble farm produce to sell in local markets. Mail-order
wholesalers send catalogs to retail, industrial, and institutional customers; orders are filled and sent by
mail, rail, plane, or truck.
Brokers and agents: Facilitate buying and selling, on commission of 2 percent to 6 percent of the
selling price; limited functions; generally specialize by product line or customer type. Brokers bring
buyers and sellers together and assist in negotiation; they are paid by the party hiring them—food bro-
kers, real estate brokers, insurance brokers. Agents represent buyers or sellers on a more permanent
basis. Most manufacturers’ agents are small businesses with a few skilled salespeople: Selling agents
have contractual authority to sell a manufacturer’s entire output; purchasing agents make purchases
for buyers and often receive, inspect, warehouse, and ship merchandise; commission merchants take
physical possession of products and negotiate sales.
Manufacturers’ and retailers’ branches and offices: Wholesaling operations conducted by sellers
or buyers themselves rather than through independent wholesalers. Separate branches and offices are
dedicated to sales or purchasing. Many retailers set up purchasing offices in major market centers.
Specialized wholesalers: Agricultural assemblers (buy the agricultural output of many farms), petro-
leum bulk plants and terminals (consolidate the output of many wells), and auction companies (auction
cars, equipment, etc., to dealers and other businesses).
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 463
• Management services and counseling. Wholesalers often help retailers improve their opera-
tions by training sales clerks, helping with store layouts and displays, and setting up account-
ing and inventory-control systems. They may help industrial customers by offering training
and technical services.
Trends in Wholesaling
Wholesaler-distributors have faced mounting pressures in recent years from new sources of com-
petition, demanding customers, new technologies, and more direct-buying programs by large
industrial, institutional, and retail buyers. Manufacturers’ major complaints against wholesalers
are: They don’t aggressively promote the manufacturer’s product line and they act more like order
takers; they don’t carry enough inventory and therefore don’t fill customers’ orders fast enough;
they don’t supply the manufacturer with up-to-date market, customer, and competitive informa-
tion; they don’t attract high-caliber managers to bring down their own costs; and they charge too
much for their services.
Savvy wholesalers have rallied to the challenge and adapted their services to meet their suppli-
ers’ and target customers’ changing needs. They recognize that they must add value to the channel.
Arrow Electronics Arrow Electronics is a global provider of products,
services, and solutions to the electronic component and computer product industries. It serves
as a supply channel partner for more than 900 suppliers and 125,000 original equipment
manufacturers, contract manufacturers, and commercial customers through a global network
of 310 locations in 51 countries and territories. With huge contract manufacturers buying
more parts directly from suppliers, distributors such as Arrow are being squeezed out. To better compete,
Arrow has embraced services, providing financing, on-site inventory management, parts-tracking
software, and chip programming. Services helped quadruple Arrow’s share price in five years, and the
company approached $15 billion in sales in 2009.52
Wholesalers have worked to increase asset productivity by managing inventories and receivables
better. They’re also reducing operating costs by investing in more advanced materials-handling tech-
nology, information systems, and the Internet. Finally, they’re improving their strategic decisions
about target markets, product assortment and services, price, communications, and distribution.
Narus and Anderson interviewed leading industrial distributors and identified four ways they
strengthened their relationships with manufacturers:
1. They sought a clear agreement with their manufacturers about their expected functions in the
marketing channel.
2. They gained insight into the manufacturers’ requirements by visiting their plants and attend-
ing manufacturer association conventions and trade shows.
3. They fulfilled their commitments to the manufacturer by meeting the volume targets, paying
bills promptly, and feeding back customer information to their manufacturers.
4. They identified and offered value-added services to help their suppliers.53
The wholesaling industry remains vulnerable to one of the most enduring trends—fierce resist-
ance to price increases and the winnowing out of suppliers based on cost and quality. The trend to-
ward vertical integration, in which manufacturers try to control or own their intermediaries, is still
strong. One firm that succeeds in the wholesaling business is W.W. Grainger.
W.W. Grainger W.W. Grainger is the leading supplier of facilities mainte-
nance products that help 1.8 million businesses and institutions stay up and running. Sales for
2008 were $6.9 billion. Grainger serves customers through a network of over 600 branches
in North America and China, 18 distribution centers, numerous catalogs and direct-mail
pieces, and four Web sites to guarantee product availability and quick service. Its 4,000-plus-
page catalog features 138,000 products, such as motors, lighting, material handlers, fasteners, tools, and
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464 PART 6 DELIVERING VALUE
safety supplies, and customers can purchase over 300,000 products at Grainger.com. The distribution
centers are linked by satellite network, which has reduced customer-response time and boosted sales.
Helped by more than 3,000 suppliers, Grainger offers customers a total of more than 900,000 supplies
and repair parts in all.54
Market Logistics
Physical distribution starts at the factory. Managers choose a set of warehouses (stocking points)
and transportation carriers that will deliver the goods to final destinations in the desired time or
at the lowest total cost. Physical distribution has now been expanded into the broader concept of
supply chain management (SCM). Supply chain management starts before physical distribution
and means strategically procuring the right inputs (raw materials, components, and capital
equipment), converting them efficiently into finished products, and dispatching them to the fi-
nal destinations. An even broader perspective looks at how the company’s suppliers themselves
obtain their inputs.
The supply chain perspective can help a company identify superior suppliers and distributors
and help them improve productivity and reduce costs. Consumer goods manufacturers admired
for their supply chain management include P&G, Kraft, General Mills, PepsiCo, and Nestlé; note-
worthy retailers include Walmart, Target, Publix, Costco, Kroger, and Meijer.55
Firms are also striving to improve the environmental impact and sustainability of their supply
chain by shrinking their carbon footprint and using recyclable packaging. Johnson & Johnson
switched to Forest Stewardship Council (FSC)–certified paperboard for its BAND-AID brand
boxes. As one executive noted, “Johnson & Johnson and its operating companies are positioned to
make paper and packaging procurement decisions that could help influence responsible forest
management.”56
Market logistics includes planning the infrastructure to meet demand, then implementing and
controlling the physical flows of materials and final goods from points of origin to points of use, to
meet customer requirements at a profit. Market logistics planning has four steps:57
1. Deciding on the company’s value proposition to its customers. (What on-time delivery stan-
dard should we offer? What levels should we attain in ordering and billing accuracy?)
2. Selecting the best channel design and network strategy for reaching the customers. (Should
the company serve customers directly or through intermediaries? What products should we
source from which manufacturing facilities? How many warehouses should we maintain and
where should we locate them?)
3. Developing operational excellence in sales forecasting, warehouse management, transporta-
tion management, and materials management
4. Implementing the solution with the best information systems, equipment, policies, and procedures
Studying market logistics leads managers to find the most efficient way to deliver value. For ex-
ample, a software company might traditionally produce and package software disks and manuals,
ship them to wholesalers, which ship them to retailers, which sell them to customers, who bring
them home to download onto their PCs. Market logistics offers two superior delivery systems. The
first lets the customer download the software directly onto his or her computer. The second allows
the computer manufacturer to download the software onto its products. Both solutions eliminate
the need for printing, packaging, shipping, and stocking millions of disks and manuals.
Integrated Logistics Systems
The market logistics task calls for integrated logistics systems (ILS), which include materials man-
agement, material flow systems, and physical distribution, aided by information technology (IT).
Information systems play a critical role in managing market logistics, especially via computers,
point-of-sale terminals, uniform product bar codes, satellite tracking, electronic data interchange
(EDI), and electronic funds transfer (EFT). These developments have shortened the order-cycle
time, reduced clerical labor, reduced errors, and provided improved control of operations. They
have enabled companies to promise “the product will be at dock 25 at 10:00 AM tomorrow,” and
deliver on that promise.
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 465
Market logistics encompass several activities. The first is sales forecasting, on the basis of which
the company schedules distribution, production, and inventory levels. Production plans indicate
the materials the purchasing department must order. These materials arrive through inbound
transportation, enter the receiving area, and are stored in raw-material inventory. Raw materials are
converted into finished goods. Finished-goods inventory is the link between customer orders and
manufacturing activity. Customers’ orders draw down the finished-goods inventory level, and
manufacturing activity builds it up. Finished goods flow off the assembly line and pass through
packaging, in-plant warehousing, shipping-room processing, outbound transportation, field ware-
housing, and customer delivery and servicing.
Management has become concerned about the total cost of market logistics, which can
amount to as much as 30 percent to 40 percent of the product’s cost. In the U.S. grocery busi-
ness, waste or “shrink” affects 8 percent to 10 percent of perishable goods, costing $20 billion an-
nually. To reduce shrink, grocery retailer Stop & Shop looked across its entire fresh-food supply
chain and reduced everything from the size of suppliers’ boxes to the number of products on
display. With these changes, the supermarket chain cut shrink by almost a third, saving over
$50 million and eliminating 36,000 pounds of rotten food, improving customer satisfaction at
the same time.58
Many experts call market logistics “the last frontier for cost economies,” and firms are deter-
mined to wring every unnecessary cost out of the system: In 1982, logistics represented 14.5 percent
of U.S. GDP; by 2007, the share had dropped to about 10 percent.59 Lower market-logistics costs
will permit lower prices, yield higher profit margins, or both. Even though the cost of market logis-
tics can be high, a well-planned program can be a potent tool in competitive marketing.
Many firms are embracing lean manufacturing, originally pioneered by Japanese firms such as
Toyota, to produce goods with minimal waste of time, materials, and money. CONMED’s dispos-
able devices are used by a hospital somewhere in the world every 90 seconds to insert and remove
fluid around joints during orthoscopic surgery,
ConMed To streamline production, medical manufacturer ConMed set out to link
its operations as closely as possible to the ultimate buyer of its products. Rather than moving
manufacturing to China, which might have lowered labor costs
but could have also risked long lead times, inventory buildup,
and unanticipated delays, the firm put new production
processes into place to assemble its disposable products only after hospi-
tals placed orders. Some 80 percent of orders were predictable enough
that demand forecasts updated every few months could set hourly produc-
tion targets. As proof of the firm’s new efficiency, the assembly area for
fluid-injection devices went from covering 3,300 square feet and stocking
$93,000 worth of parts to 650 square feet and $6,000 worth of parts.
Output per worker increased 21 percent.60
Lean manufacturing must be implemented thoughtfully and mon-
itored closely. Toyota’s recent crisis in product safety that resulted in
extensive product recalls has been attributed in part to the fact that
some aspects of the lean manufacturing approach—eliminating overlap by using common parts and
designs across multiple product lines, and reducing the number of suppliers to procure parts in
greater scale—can backfire when quality-control issues arise.61
Market-Logistics Objectives
Many companies state their market-logistics objective as “getting the right goods to the right places
at the right time for the least cost.” Unfortunately, this objective provides little practical guidance.
No system can simultaneously maximize customer service and minimize distribution cost.
Maximum customer service implies large inventories, premium transportation, and multiple ware-
houses, all of which raise market-logistics costs.
By redesigning its production
assembly, medical manufacturer
ConMed significantly increased
productivity.
466 PART 6 DELIVERING VALUE
Nor can a company achieve market-logistics efficiency by asking each market-logistics manager
to minimize his or her own logistics costs. Market-logistics costs interact and are often negatively
related. For example:
• The traffic manager favors rail shipment over air shipment because rail costs less. However, be-
cause the railroads are slower, rail shipment ties up working capital longer, delays customer
payment, and might cause customers to buy from competitors who offer faster service.
• The shipping department uses cheap containers to minimize shipping costs. Cheaper contain-
ers lead to a higher rate of damaged goods and customer ill will.
• The inventory manager favors low inventories. This increases stock-outs, back orders, paper-
work, special production runs, and high-cost, fast-freight shipments.
Given that market-logistics activities require strong trade-offs, managers must make decisions
on a total-system basis. The starting point is to study what customers require and what competitors
are offering. Customers are interested in on-time delivery, supplier willingness to meet emergency
needs, careful handling of merchandise, and supplier willingness to take back defective goods and
resupply them quickly.
The company must then research the relative importance of these service outputs. For example,
service-repair time is very important to buyers of copying equipment. Xerox developed a service
delivery standard that “can put a disabled machine anywhere in the continental United States back
into operation within three hours after receiving the service request.” It then designed a service
division of personnel, parts, and locations to deliver on this promise.
The company must also consider competitors’ service standards. It will normally want to match
or exceed the competitors’ service level, but the objective is to maximize profits, not sales. Some
companies offer less service and charge a lower price; other companies offer more service and
charge a premium price.
The company ultimately must establish some promise it makes to the market. Coca-Cola wants
to “put Coke within an arm’s length of desire.” Lands’ End, the giant clothing retailer, aims to
respond to every phone call within 20 seconds and to ship every order within 24 hours of receipt.
Some companies define standards for each service factor. One appliance manufacturer has estab-
lished the following service standards: to deliver at least 95 percent of the dealer’s orders within seven
days of order receipt, to fill them with 99 percent accuracy, to answer dealer inquiries on order status
within three hours, and to ensure that merchandise damaged in transit does not exceed 1 percent.
Given the market-logistics objectives, the company must design a system that will minimize the
cost of achieving these objectives. Each possible market-logistics system will lead to the following cost:
M � T � FW � VW � S
where M = total market-logistics cost of proposed system
T � total freight cost of proposed system
FW � total fixed warehouse cost of proposed system
VW � total variable warehouse costs (including inventory) of proposed system
S � total cost of lost sales due to average delivery delay under proposed system
Choosing a market-logistics system calls for examining the total cost (M) associated with differ-
ent proposed systems and selecting the system that minimizes it. If it is hard to measure S, the com-
pany should aim to minimize T � FW � VW for a target level of customer service.
Market-Logistics Decisions
The firm must make four major decisions about its market logistics: (1) How should we handle or-
ders (order processing)? (2) Where should we locate our stock (warehousing)? (3) How much stock
should we hold (inventory)? and (4) How should we ship goods (transportation)?
ORDER PROCESSING Most companies today are trying to shorten the order-to-payment
cycle—that is, the elapsed time between an order’s receipt, delivery, and payment. This cycle has
many steps, including order transmission by the salesperson, order entry and customer credit
check, inventory and production scheduling, order and invoice shipment, and receipt of
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 467
payment. The longer this cycle takes, the lower the customer’s satisfaction and the lower the
company’s profits.
WAREHOUSING Every company must store finished goods until they are sold, because
production and consumption cycles rarely match. Consumer-packaged-goods companies have
been reducing their number of stocking locations from 10 to 15 to about 5 to 7, and
pharmaceutical and medical distributors have cut theirs from 90 to about 45. On the one hand,
more stocking locations mean goods can be delivered to customers more quickly, but warehousing
and inventory costs are higher. To reduce these costs, the company might centralize its inventory in
one place and use fast transportation to fill orders.
Some inventory is kept at or near the plant, and the rest in warehouses in other locations. The
company might own private warehouses and also rent space in public warehouses. Storage ware-
houses store goods for moderate to long periods of time. Distribution warehouses receive goods
from various company plants and suppliers and move them out as soon as possible. Automated
warehouses employ advanced materials-handling systems under the control of a central computer
and are increasingly becoming the norm.
Some warehouses are now taking on activities formerly done in the plant. These include assem-
bly, packaging, and constructing promotional displays. Postponing finalization of the offering to
the warehouse can achieve savings in costs and finer matching of offerings to demand.
INVENTORY Salespeople would like their companies to carry enough stock to fill all customer
orders immediately. However, this is not cost-effective. Inventory cost increases at an accelerating
rate as the customer-service level approaches 100 percent. Management needs to know how much
sales and profits would increase as a result of carrying larger inventories and promising faster order
fulfillment times, and then make a decision.
As inventory draws down, management must know at what stock level to place a new order. This
stock level is called the order (or reorder) point. An order point of 20 means reordering when the
stock falls to 20 units. The order point should balance the risks of stock-out against the costs of
overstock. The other decision is how much to order. The larger the quantity ordered, the less fre-
quently an order needs to be placed. The company needs to balance order-processing costs and
inventory-carrying costs. Order-processing costs for a manufacturer consist of setup costs and
running costs (operating costs when production is running) for the item. If setup costs are low, the
manufacturer can produce the item often, and the average cost per item is stable and equal to the
running costs. If setup costs are high, however, the manufacturer can reduce the average cost per
unit by producing a long run and carrying more inventory.
Order-processing costs must be compared with inventory-carrying costs. The larger the average
stock carried, the higher the inventory-carrying costs. These carrying costs include storage charges,
cost of capital, taxes and insurance, and depreciation and obsolescence. Carrying costs might run as
high as 30 percent of inventory value. This means that marketing managers who want their compa-
nies to carry larger inventories need to show that the larger inventories would produce incremental
gross profits to exceed incremental carrying costs.
We can determine the optimal order quantity by observing how order-processing costs and inventory-
carrying costs sum up at different order levels. Figure 16.1 shows that the order-processing
Total cost per unit
Inventory-carrying
cost per unit
Order-processing
cost per unit
Order Quantity
Co
st
p
er
U
ni
t (
do
lla
rs
)
Q*
|Fig. 16.1|
Determining Optimal
Order Quantity
468 PART 6 DELIVERING VALUE
cost per unit decreases with the number of units ordered because the order costs are spread over
more units. Inventory-carrying charges per unit increase with the number of units ordered, because each
unit remains longer in inventory. We sum the two cost curves vertically into a total-cost curve and project
the lowest point of the total-cost curve on the horizontal axis to find the optimal order quantity Q*.62
Companies are reducing their inventory costs by treating inventory items differently, position-
ing them according to risk and opportunity. They distinguish between bottleneck items (high risk,
low opportunity), critical items (high risk, high opportunity), commodities (low risk, high oppor-
tunity), and nuisance items (low risk, low opportunity).63 They are also keeping slow-moving
items in a central location and carrying fast-moving items in warehouses closer to customers. All
these strategies give them more flexibility should anything go wrong, as it often does, be it a dock
strike in California, a typhoon in Taiwan, a tsunami in Asia, or a hurricane in New Orleans.64
The ultimate answer to carrying near-zero inventory is to build for order, not for stock. Sony calls
it SOMO, “Sell one, make one.” Dell’s inventory strategy for years has been to get the customer to
order a computer and pay for it in advance. Then Dell uses the customer’s money to pay suppliers
to ship the necessary components. As long as customers do not need the item immediately, every-
one can save money. Some retailers are unloading excess inventory on eBay where, by cutting
out the traditional liquidator middleman, they can make 60 to 80 cents on the dollar as opposed to
10 cents.65 And some suppliers are snapping up excess inventory to create opportunity.
Cameron Hughes “If a winery has an eight-barrel lot, it may only use five
barrels for its customers,” says Cameron Hughes, a wine “négociant” who buys the excess juice
from high-end wineries and wine brokers and combines it to make limited edition, premium
blends that taste much more expensive than their price tags. Négociants have been around a
long time, first as middlemen who sold or shipped wine as wholesalers, but the profession has
expanded as opportunists such as Hughes became more involved in effectively making their
own wines. Hughes doesn’t own any grapes, bottling machines, or trucks. He outsources the
bottling, and he sells directly to retailers such as Costco, Sam’s Club, and Safeway, eliminat-
ing middlemen and multiple markups. Hughes never knows which or how many excess lots of
wine he will have, but he’s turned it to his advantage—he creates a new product with every
batch. This rapid turnover is part of Costco’s appeal for him. The discount store’s customers
love the idea of finding a rare bargain, and Hughes promotes his wines through in-store wine
tastings and insider e-mails that alert Costco customers to upcoming numbered lots. Because
lots sell out quickly, fans subscribe to Cameron’s e-mail alerts at chwine.com that tell them
when a new lot will be sold.66
TRANSPORTATION Transportation choices affect product pricing, on-time
delivery performance, and the condition of the goods when they arrive, all of which
affect customer satisfaction.
In shipping goods to its warehouses, dealers, and customers, the company can
choose rail, air, truck, waterway, or pipeline. Shippers consider such criteria as speed,
frequency, dependability, capability, availability, traceability, and cost. For speed, air,
rail, and truck are the prime contenders. If the goal is low cost, then the choice is wa-
ter or pipeline.
Shippers are increasingly combining two or more transportation modes, thanks to containeriza-
tion. Containerization consists of putting the goods in boxes or trailers that are easy to transfer be-
tween two transportation modes. Piggyback describes the use of rail and trucks; fishyback, water
and trucks; trainship, water and rail; and airtruck, air and trucks. Each coordinated mode offers
specific advantages. For example, piggyback is cheaper than trucking alone yet provides flexibility
and convenience.
Shippers can choose private, contract, or common carriers. If the shipper owns its own truck or
air fleet, it becomes a private carrier. A contract carrier is an independent organization selling trans-
portation services to others on a contract basis. A common carrier provides services between prede-
termined points on a scheduled basis and is available to all shippers at standard rates.
To reduce costly handing at arrival, some firms are putting items into shelf-ready packaging so
they don’t need to be unpacked from a box and placed on a shelf individually. In Europe, P&G uses
Cameron Hughes has grown a
thriving business by using excess
lots of wine as input to his limited-
edition premium wines.
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 469
a three-tier logistic system to schedule deliveries of fast- and slow-moving goods, bulky items, and
small items in the most efficient way.67 To reduce damage in shipping, the size, weight, and fragility
of the item must be reflected in the crating technique used, the density of foam cushioning, etc.68
Organizational Lessons
Market-logistics strategies must be derived from business strategies, rather than solely from cost
considerations. The logistics system must be information-intensive and establish electronic links
among all the significant parties. Finally, the company should set its logistics goals to match or
exceed competitors’ service standards and should involve members of all relevant teams in the
planning process.
Today’s stronger demands for logistical support from large customers will increase suppliers’
costs. Customers want more frequent deliveries so they don’t have to carry as much inventory. They
want shorter order-cycle times, which means suppliers must have high in-stock availability.
Customers often want direct store delivery rather than shipments to distribution centers. They
want mixed pallets rather than separate pallets. They want tighter promised delivery times. They
may want custom packaging, price tagging, and display building.
Suppliers can’t say “no” to many of these requests, but at least they can set up different logistical
programs with different service levels and customer charges. Smart companies will adjust their of-
ferings to each major customer’s requirements. The company’s trade group will set up differentiated
distribution by offering different bundled service programs for different customers.
Summary
1. Retailing includes all the activities involved in selling
goods or services directly to final consumers for per-
sonal, nonbusiness use. Retailers can be understood
in terms of store retailing, nonstore retailing, and retail
organizations.
2. Like products, retail-store types pass through stages of
growth and decline. As existing stores offer more ser-
vices to remain competitive, costs and prices go up,
which opens the door to new retail forms that offer a mix
of merchandise and services at lower prices. The major
types of retail stores are specialty stores, department
stores, supermarkets, convenience stores, discount
stores, extreme value or hard-discount store, off-price
retailers, superstores, and catalog showrooms.
3. Although most goods and services are sold through
stores, nonstore retailing has been growing. The major
types of nonstore retailing are direct selling (one-to-one
selling, one-to-many party selling, and multilevel net-
work marketing), direct marketing (which includes e-
commerce and Internet retailing), automatic vending,
and buying services.
4. Although many retail stores are independently owned,
an increasing number are falling under some form of
corporate retailing. Retail organizations achieve many
economies of scale, greater purchasing power, wider
brand recognition, and better-trained employees.
The major types of corporate retailing are corporate
chain stores, voluntary chains, retailer cooperatives,
consumer cooperatives, franchise organizations, and
merchandising conglomerates.
5. The retail environment has changed considerably in re-
cent years; as new retail forms have emerged, intertype
and store-based versus nonstore-based competition has
increased, the rise of giant retailers has been matched by
the decline of middle-market retailers, investment in
technology and global expansion has grown, and shop-
per marketing inside stores has become a priority.
6. Like all marketers, retailers must prepare marketing
plans that include decisions on target markets, chan-
nels, product assortment and procurement, prices,
services, store atmosphere, store activities and experi-
ences, communications, and location.
7. Wholesaling includes all the activities in selling goods
or services to those who buy for resale or business
use. Wholesalers can perform functions better and
more cost-effectively than the manufacturer can. These
functions include selling and promoting, buying and
assortment building, bulk breaking, warehousing,
transportation, financing, risk bearing, dissemination of
market information, and provision of management
services and consulting.
8. There are four types of wholesalers: merchant whole-
salers; brokers and agents; manufacturers’ and retailers’
sales branches, sales offices, and purchasing offices;
and miscellaneous wholesalers such as agricultural
assemblers and auction companies.
470 PART 6 DELIVERING VALUE
9. Like retailers, wholesalers must decide on target mar-
kets, product assortment and services, price, promo-
tion, and place. The most successful wholesalers are
those who adapt their services to meet suppliers’ and
target customers’ needs.
10. Producers of physical products and services must de-
cide on market logistics—the best way to store and
move goods and services to market destinations; to co-
ordinate the activities of suppliers, purchasing agents,
manufacturers, marketers, channel members, and cus-
tomers. Major gains in logistical efficiency have come
from advances in information technology.
Applications
Marketing Debate
Should National-Brand Manufacturers
Also Supply Private-Label Brands?
Ralston-Purina, Borden, ConAgra, and Heinz have all admit-
ted to supplying products—sometimes lower in quality—to
be used for private labels. Other marketers, however, criticize
this “if you can’t beat them, join them” strategy, maintaining
that these actions, if revealed, may create confusion or even
reinforce a perception by consumers that all brands in a
category are essentially the same.
Take a position: Manufacturers should feel free to sell
private labels as a source of revenue versus National
manufacturers should never get involved with private
labels.
Marketing Discussion
Retail Customer Loyalty
Think of your favorite stores. What do they do that encour-
ages your loyalty? What do you like about the in-store expe-
rience? What further improvements could they make?
Marketing Excellence
>>Zara
Spain’s Zara has
become Europe’s leading apparel retailer, pro-
viding consumers with current, high fashion styles at reason-
able prices. With over $8.7 billion in sales and more than
1,500 stores, the company’s success has come from break-
ing virtually every traditional rule in the retailing industry.
The first Zara store opened in 1975. By the 1980s,
Zara’s founder, Amancio Ortega, was working with
computer programmers to develop a new distribution
model that would revolutionize the clothing industry. This
new model takes several strategic steps to reduce the lead
time from design to distribution to just two weeks—a signif-
icant difference from the industry average of six to nine
months. As a result, the company makes approximately
20,000 different items a year, about triple what Gap or H&M
make in a year. By reducing lead times to a fraction of its
competitors, Zara has been able to provide “fast fashion”
for its consumers at affordable prices. The company’s suc-
cess lies within four key strategic elements:
Design and Production. Zara employs hundreds of
designers at its headquarters in Spain. Thus, new
styles are constantly being created and put into pro-
duction while others are tweaked with new colors or
patterns. The firm enforces the speed at which it puts
these designs into production by locating half its pro-
duction facilities nearby in Spain, Portugal, and
Morocco. Zara produces only a small quantity of each
collection and is willing to experience occasional
shortages to preserve an image of exclusivity. Clothes
with a longer shelf life, like T-shirts, are outsourced to
lower-cost suppliers in Asia and Turkey. With tight
control on its manufacturing process, Zara can move
MANAGING RETAILING, WHOLESALING, AND LOGISTICS | CHAPTER 16 471
more rapidly than any of its competitors and contin-
ues to deliver fresh styles to its stores every week.
Logistics. Zara distributes all its merchandise, regard-
less of origin, from Spain. Its distribution process is
designed so that the time from receipt of an order to
delivery in the store averages 24 hours in Europe and
48 hours in the United States and Asia. Having 50 per-
cent of its production facilities nearby is key to the
success of this model. All Zara stores receive new
shipments twice a week, and the small quantities of
each collection not only bring consumers back into
Zara stores over and over but also entice them to make
purchases more quickly. While an average shopper in
Spain visits a high street (or main street) store three
times a year, shoppers average 17 trips to Zara stores.
Some Zara fans know exactly when new shipments
arrive and show up early that day to be the first in line
for the latest fashions. These practices keep sales
strong throughout the year and help the company sell
more products at full price—85 percent of its mer-
chandise versus the industry average of 60 percent.
Customers. Everything revolves around Zara’s cus-
tomers. The retailer reacts to customers’ changing
needs, trends, and tastes with daily reports from Zara
shop managers about which products and styles
have sold and which haven’t. With up to 70 percent
of their salaries coming from commission, managers
have a strong incentive to stay on top of things.
Zara’s designers don’t have to predict what fashion
trends will be in the future. They react to customer
feedback—good and bad—and if something fails, the
line is withdrawn immediately. Zara cuts its losses
and the impact is minimal due to the low quantities of
each style produced.
Stores. Zara has never run an advertising campaign.
The stores, 90 percent of which it owns, are the key
advertising element and are located in prestigious
high-traffic locations around the world. Zara spends
significant time and effort regularly changing store
windows to help lure customers in. In comparison to
other retailers, which spend 3 percent to 4 percent of
revenues on big brand-building campaigns, Zara
spends just 0.3 percent.
The company’s success comes from having com-
plete control over all the parts of its business—
design, production, and distribution. Louis Vuitton’s fash-
ion director, Daniel Piette, described Zara as “possibly the
most innovative and devastating retailer in the world.”
Now, as Zara continues to expand into new markets and
countries, it risks losing some of its speed and will have to
work hard to continue providing the same “newness”’ all
over the world that it does so well in Europe. It is also
making a somewhat belated major push online that will
need to work within its existing business model.
Questions
1. Would Zara’s model work for other retailers? Why or
why not?
2. How is Zara going to expand successfully all over
the world with the same level of speed and instant
fashion?
Sources: Rachel Tiplady, “Zara: Taking the Lead in Fast-Fashion.” BusinessWeek, April 4, 2006;
enotes.com, Inditex overview; “Zara: A Spanish Success Story.” CNN, June 15, 2001; “Fashion
Conquistador,” BusinessWeek, September 4, 2006; Caroline Raux, “The Reign of Spain.” The
Guardian, October 28, 2002; Kerry Capell, “Zara Thrives by Breaking All the Rules,”
BusinessWeek, October 20, 2008, p. 66; Christopher Bjork, “Zara Is to Get Big Online Push,”
Wall Street Journal, September 17, 2009, p. B8.
Marketing Excellence
>>Best Buy
Best Buy is the world’s largest consumer electronics re-
tailer, with $34.2 billion in sales in fiscal 2009. Sales
boomed in the 1980s as Best Buy expanded nationally
and made some risky business decisions, like putting its
sales staff on salary instead of commission pay. This deci-
sion created a more consumer-friendly, low-pressure
shopping atmosphere and resulted in an instant spike in
overall revenues. In the 1990s, Best Buy ramped up its
computer product offerings and, by 1995, was the
biggest seller of home PCs, a powerful position during the
Internet boom.
At the turn of the century, Best Buy faced new com-
petitors like Costco and Walmart, which started ramping
up their electronics divisions and product offerings. Best
Buy believed the best way to differentiate itself was to in-
crease its focus on customer service by selling product
warranties and offering personal services like installation
and at-home delivery. Its purchase of Geek Squad, a
472 PART 6 DELIVERING VALUE
24-hour computer service company, proved extremely
profitable and strategic as home and small office networks
became more complex and the need for personal comput-
ing attention increased. By 2004, Best Buy had placed a
Geek Squad station in each of its stores, providing con-
sumers with personal computing services in the stores,
online, on the phone, and at home.
Today, Best Buy has adopted a corporate strategy it
calls Customer-Centricity. It has segmented its broad cus-
tomer base into a handful of specific targets such as the
affluent tech geek, the busy suburban mom, the young
gadget enthusiast, and the price-conscious family dad.
Next, it uses extensive research and analysis to determine
which segments are the most abundant and lucrative in
each market. Finally, it configures its stores and trains its
employees to target those shoppers and encourage them
to keep coming back again and again. For example, stores
targeting affluent tech geeks have separate home theatre
departments with knowledgeable salespeople who can
spend time discussing all the different product options.
Stores with a high volume of suburban mom shoppers of-
fer personal shopping assistants to help mom get in and
out as quickly as possible with the exact items she needs.
Sometimes a store will experience a new type of lu-
crative shopper. In the coastal town of Baytown, Texas,
the local Best Buy observed frequent visits from Eastern
European workers coming off cargo ships and oil tankers.
These men and women were using their precious free
time to race over to Best Buy and search the aisles for
Apple’s iPods and laptops, which are cheaper in the
United States than in Europe. To cater to this unique con-
sumer, the local Best Buy rearranged its store, moved
iPods, MacBooks, and their accessories from the back of
the store to the front, and added signage in simple
English. The result: sales from these European workers
increased 67 percent.
This local ingenuity paired with the ability to cater to
each market and segment’s needs have helped Best Buy
survive the electronics storm while competitors like
CompUSA and Circuit City have failed. The business is
tough, with thin profit margins and continuously evolving
products. However, with over 1,300 stores, including loca-
tions in Canada, Mexico, China, and Turkey, Best Buy has
a 19 percent market share and a trusted, consumer-
friendly brand.
Questions
1. What are the keys to Best Buy’s success? What are
the risks going forward?
2. How else can Best Buy compete against new com-
petitors like Walmart and online companies?
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Ch
ap
ter
17
In This Chapter, We Will Address
the Following Questions
1. What is the role of marketing communications?
2. How do marketing communications work?
3. What are the major steps in developing effective communications?
4. What is the communications mix, and how should it be set?
5. What is an integrated marketing communications program?
Ocean Spray has revitalized its brand
through extensive new product develop-
ment and a thoroughly integrated modern
marketing communications program.
PART 7 Communicating Value
Chapter 17 | Designing and Managing Integrated Marketing
Communications
Chapter 18 | Managing Mass Communications: Advertising, Sales Promotions, Events and Experiences, and Public Relations
Chapter 19 | Managing Personal Communications: Direct and Interactive Marketing, Word of Mouth, and Personal Selling
Modern marketing calls for more than developing a good product, pricing it
attractively, and making it accessible. Companies must also communicate with their present and
potential stakeholders and the general public. For most marketers, therefore, the question is not
whether to communicate but rather what to say, how and when to say it, to whom, and how often.
Consumers can turn to hundreds of cable and satellite TV channels, thousands of magazines and
newspapers, and millions of Internet pages. They are taking a more active role in deciding what
communications they want to receive as well as how they want to communicate to others about
the products and services they use. To effectively reach and influence target markets, holistic
marketers are creatively employing multiple forms of communications. Ocean Spray—an agricultural
cooperative of cranberry growers—has used a variety of communication vehicles to turn its sales
fortunes around.
Facing stiff competition, a number of adverse consumer trends, and nearly a decade of
declining sales, Ocean Spray COO Ken Romanzi and Arnold Worldwide decided to
“reintroduce the cranberry to America” as the “surprisingly versatile little fruit that
supplies modern-day benefits,” through a true 360-degree campaign that used all
facets of marketing communications to reach consumers in a variety of settings. The
intent was to support the full range of products—cranberry sauce, fruit juices, and dried cranberries
in different forms—and leverage the fact that the brand was born in the cranberry bogs and
remained there still. The agency decided to tell an authentic, honest, and perhaps surprising story
dubbed “Straight from the Bog.” The campaign was designed to also reinforce two key brand bene-
fits—that Ocean Spray products tasted good and were good for you. PR played a crucial role.
Miniature bogs were brought to Manhattan and featured on an NBC Today morning segment.
A “Bogs across America Tour” brought the experience to Los Angeles,
Chicago, and even London. Television and print advertising featured
two growers (depicted by actors) standing waist-deep in a bog and
talking, often humorously, about what they did. The campaign also
included a Web site, in-store displays, and events for consumers as
well as for members of the growers’ cooperative itself. Product inno-
vation was crucial, too; new flavor blends were introduced, along with
a line of 100 percent juice drinks, diet and light versions, and Craisins
sweetened dried cranberries. The campaign hit the mark, lifting sales
an average of 10 percent each year from 2005 to 2009 despite
continued decline in the fruit juice category.1
Designing and Managing
Integrated Marketing
Communications
475
Done right, marketing communications can have
a huge payoff. This chapter describes how
communications
work and what marketing communications can do for a
company. It also addresses how holistic marketers combine
and integrate marketing communications. Chapter 18
examines mass (nonpersonal) communications (advertising,
sales promotion, events and experiences, and public
relations and publicity); Chapter 19 examines personal
communications (direct and interactive marketing, word-of-
mouth marketing, and personal selling).
476 PART 7 COMMUNICATING VALUE
The Role of Marketing
Communications
Marketing communications are the means by which firms attempt to inform, persuade, and remind
consumers—directly or indirectly—about the products and brands they sell. In a sense, marketing
communications represent the voice of the company and its brands; they are a means by which the
firm can establish a dialogue and build relationships with consumers. By strengthening customer
loyalty, marketing communications can contribute to customer equity.
Marketing communications also work for consumers when they show how and why a product is
used, by whom, where, and when. Consumers can learn who makes the product and what the com-
pany and brand stand for, and they can get an incentive for trial or use. Marketing communications
allow companies to link their brands to other people, places, events, brands, experiences, feelings,
and things. They can contribute to brand equity—by establishing the brand in memory and creat-
ing a brand image—as well as drive sales and even affect shareholder value.2
The Changing Marketing Communications
Environment
Technology and other factors have profoundly changed the way consumers process communica-
tions, and even whether they choose to process them at all. The rapid diffusion of multipurpose
smart phones, broadband and wireless Internet connections, and ad-skipping digital video
recorders (DVRs) have eroded the effectiveness of the mass media. In 1960, a company could reach
80 percent of U.S. women with one 30-second commercial aired simultaneously on three TV net-
works: ABC, CBS, and NBC. Today, the same ad would have to run on 100 channels or more to
achieve this marketing feat. Consumers not only have more choices of media, they can also decide
whether and how they want to receive commercial content. “Marketing Insight: Don’t Touch That
Remote” describes developments in television advertising.
Marketing InsightMarketing Insight
Don’t Touch That Remote
That consumers are more in charge in the marketplace is perhaps
nowhere more evident than in television broadcasting, where DVRs
allow consumers to skip past ads with a push of the fast-forward button.
Estimates had DVRs in 34 percent of U.S. households at the end of
2009, and of viewers who use them, between 60 percent and
70 percent fast-forward through commercials (the others either like
ads, don’t mind them, or can’t be bothered).
Is that all bad? Surprisingly, research shows that while focusing on
an ad in order to fast-forward through it, consumers actually retain and
recall a fair amount of information. The most successful ads in “fast-
forward mode” were those consumers had already seen, that used
familiar characters, and that didn’t have lots of scenes. It also helped to
have brand-related information in the center of the screen, where viewers’
eyes focus while skipping through. Although consumers are still more
likely to recall an ad the next day if they’ve watched it live, some brand
recall occurs even after an ad was deliberately zapped.
Another challenge marketers have faced for a long time is viewers’
tendency to switch channels during commercial breaks. Recently, how-
ever, Nielsen, which handles television program ratings, has begun to
offer ratings for specific ads. Before, advertisers had to pay based on
the rating of the program, even if as many as 5 percent to 15 percent of
consumers temporarily tuned away. Now they can pay based on the
actual commercial audience available when their ad is shown. To
increase viewership during commercial breaks, the major broadcast and
cable networks are shortening breaks and delaying them until viewers
are more likely to be engaged in a program.
Sources: Andrew O’Connell, “Advertisers: Learn to Love the DVR,” Harvard Business
Review, April 2010, p. 22; Erik du Plesis, “Digital Video Recorders and Inadvertent
Advertising Exposure,” Journal of Advertising Research 49 (June 2009); S. Adam
Brasel and James Gips, “Breaking Through Fast-Forwarding: Brand Information and
Visual Attention,” Journal of Marketing 72 (November 2008), pp. 31–48; “Watching
the Watchers,” Economist, November 15, 2008, p. 77; Stephanie Kang, “Why DVR
Viewers Recall Some TV Spots,” Wall Street Journal, February 26, 2008; Kenneth
C. Wilbur, “How Digital Video Recorder Changes Traditional Television Advertising,”
Journal of Advertising 37 (Summer 2008), pp. 143–49; Burt Helm, “Cable Takes
a Ratings Hit,” BusinessWeek, September 24, 2007.
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 477
Ads are appearing everywhere—
even on eggs for this popular CBS
television show.
But as some marketers flee traditional media, they still encounter challenges. Commercial clut-
ter is rampant. The average city dweller is exposed to an estimated 3,000 to 5,000 ad messages a day.
Short-form video content and ads appear at gas stations, grocery stores, doctors’ offices, and
big-box retailers. Supermarket eggs have been stamped with the name of CBS programs; subway
turnstiles carry GEICO’s name; Chinese food cartons promote Continental Airlines; and US
Airways has sold ads on its motion sickness bags. Dubai sold corporate branding rights to 23 of the
47 stops and two metro lines in its new mass transit rail system.3
Marketing communications in almost every medium and form have been on the rise, and some
consumers feel they are increasingly invasive. Marketers must be creative in using technology but
not intrude in consumers’ lives. Consider what Motorola did to solve that problem.4
Motorola At Hong Kong International Airport, Motorola’s special promotion enabled
loved ones to “Say Goodbye” via photos and messages sent from their phones to digital
billboards in the departure area. When they checked into the gate area, travelers saw photos of
the friends and family who had just dropped them off as part of a digital billboard in the image of
a giant Motorola mobile phone. The company also offered departing travelers special instructions
for using their phones to send a Motorola-branded good-bye video to friends and families, featuring soccer
star David Beckham and Asian pop star Jay Chou.
Motorola’s high-tech promotion
creatively allowed passengers and
those left behind to say one last
good-bye with digital billboards.
478 PART 7 COMMUNICATING VALUE
Marketing Communications, Brand Equity,
and Sales
In this new communication environment, although advertising is often a central element of a
marketing communications program, it is usually not the only one—or even the most important
one—for sales and building brand and customer equity. Like many other firms, over a five-year
period from 2004 to 2008, Kimberly-Clark cut the percentage of its marketing budget spent on TV
from 60 percent to a little over 40 percent as it invested more heavily in Internet and experiential
marketing.5 Consider Gap’s effort in launching a new line of jeans.6
Gap By 2009, with sales slumping, Gap decided to celebrate the 40th anniversary of
the opening of its first Gap store by introducing the “Born to Fit” 1969 Premium Jeans line. For
its launch, Gap moved away from its typical media-intensive ad campaign, as exemplified by
its popular 1998 “Khakis Swing” holiday ads. The campaign featured newer communications
elements such as a Facebook page, video clips, a realistic online fashion show on a virtual
catwalk, and a StyleMixer iPhone app. The app enabled users to mix and match clothes and organize
outfits, get feedback from Facebook friends, and receive discounts when near a Gap store. Simultaneous
in-store acoustic shows across 700 locations and temporary pop-up denim stores in major urban locations
added to the buzz.
MARKETING COMMUNICATIONS MIX The marketing communications mix consists
of eight major modes of communication:7
1. Advertising—Any paid form of nonpersonal presentation and promotion of ideas, goods,
or services by an identified sponsor via print media (newspapers and magazines), broadcast
media (radio and television), network media (telephone, cable, satellite, wireless), electronic
media (audiotape, videotape, videodisk, CD-ROM, Web page), and display media (billboards,
signs, posters).
2. Sales promotion—A variety of short-term incentives to encourage trial or purchase of a prod-
uct or service including consumer promotions (such as samples, coupons, and premiums),
trade promotions (such as advertising and display allowances), and business and sales force
promotions (contests for sales reps).
3. Events and experiences—Company-sponsored activities and programs designed to create
daily or special brand-related interactions with consumers, including sports, arts, entertain-
ment, and cause events as well as less formal activities.
4. Public relations and publicity—A variety of programs directed internally to employees of the
company or externally to consumers, other firms, the government, and media to promote or
protect a company’s image or its individual product communications.
5. Direct marketing—Use of mail, telephone, fax, e-mail, or Internet to communicate directly
with or solicit response or dialogue from specific customers and prospects.
6. Interactive marketing—Online activities and programs designed to engage customers or
prospects and directly or indirectly raise awareness, improve image, or elicit sales of products
and services.
7. Word-of-mouth marketing—People-to-people oral, written, or electronic communications
that relate to the merits or experiences of purchasing or using products or services.
8. Personal selling—Face-to-face interaction with one or more prospective purchasers for the
purpose of making presentations, answering questions, and procuring orders.
Table 17.1 lists numerous communication platforms. Company communication goes
beyond these. The product’s styling and price, the shape and color of the package, the salesperson’s
manner and dress, the store décor, the company’s stationery—all communicate something to buy-
ers. Every brand contact delivers an impression that can strengthen or weaken a customer’s view of
a company.8
Marketing communication activities contribute to brand equity and drive sales in many ways:
by creating brand awareness, forging brand image in consumers’ memories, eliciting positive brand
judgments or feelings, and strengthening consumer loyalty.
G
a
p
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 479
TABLE 17.1 Common Communication Platforms
Advertising Sales Promotion
Events and
Experiences
Public Relations
and Publicity
Direct and
Interactive
Marketing
Word-of-Mouth
Marketing Personal Selling
Print and
broadcast ads
Packaging–outer
Packaging inserts
Cinema
Brochures and
booklets
Posters and
leaflets
Directories
Reprints of ads
Billboards
Display signs
Point-of-purchase
displays
DVDs
Contests, games,
sweepstakes, lotteries
Premiums and gifts
Sampling
Fairs and trade
shows
Exhibits
Demonstrations
Coupons
Rebates
Low-interest financing
Trade-in allowances
Continuity programs
Tie-ins
Sports
Entertainment
Festivals
Arts
Causes
Factory tours
Company
museums
Street activities
Press kits
Speeches
Seminars
Annual reports
Charitable donations
Publications
Community relations
Lobbying
Identity media
Company magazine
Catalogs
Mailings
Telemarketing
Electronic
shopping
TV shopping
Fax
Voice mail
Company blogs
Web sites
Person-to-person
Chat rooms
Blogs
Sales presentations
Sales meetings
Incentive programs
Samples
Fairs and trade
shows
MARKETING COMMUNICATION EFFECTS The way brand associations are formed
does not matter. In other words, whether a consumer has an equally strong, favorable, and unique
brand association of Subaru with the concepts “outdoors,” “active,” and “rugged” because of
exposure to a TV ad that shows the car driving over rugged terrain at different times of the year, or
because Subaru sponsors ski, kayak, and mountain bike events, the impact in terms of Subaru’s
brand equity should be identical.
But these marketing communications activities must be integrated to deliver a consistent
message and achieve the strategic positioning. The starting point in planning marketing commu-
nications is a communication audit that profiles all interactions customers in the target market
may have with the company and all its products and services. For example, someone interested in
purchasing a new laptop computer might talk to others, see television ads, read articles, look for
information on the Internet, and look at laptops in a store.
To implement the right communications programs and allocate dollars efficiently, marketers
need to assess which experiences and impressions will have the most influence at each stage of the
buying process. Armed with these insights, they can judge marketing communications according to
their ability to affect experiences and impressions, build customer loyalty and brand equity, and
drive sales. For example, how well does a proposed ad campaign contribute to awareness or to cre-
ating, maintaining, or strengthening brand associations? Does a sponsorship improve consumers’
brand judgments and feelings? Does a promotion encourage consumers to buy more of a product?
At what price premium?
In building brand equity, marketers should be “media neutral” and evaluate all communication
options on effectiveness (how well does it work?) and efficiency (how much does it cost?). Personal
financial Web site Mint challenged market leader Intuit—and was eventually acquired by the
company—on a marketing budget a fraction of what companies typically spend. A well-read blog,
a popular Facebook page, and other social media—combined with extensive PR—helped attract
the younger crowd the Mint brand was after.9 Philips also took another tack in launching a
new product.10
480 PART 7 COMMUNICATING VALUE
Philips Carousel When Dutch electronics leader Philips wanted to demon-
strate the quality of the “world’s first cinema proportion” TV, it chose to create Carousel, an
interactive, long-form Internet film. In this Cannes Grand Prix award-winning effort, online
viewers could control the story of a botched robbery while seeing the benefits of the new
$3,999 home cinema TV. The film showed an epic “frozen moment”
cops and robbers shootout sequence that included clowns, explosions, a
decimated hospital, and lots of broken glass, bullet casings, and money.
By clicking hot spots in the video, viewers could toggle between the new
set’s 21:9 display proportion and a conventional flat screen’s 16:9, as
well as activate the set’s signature Ambilight backlighting. The success
of the campaign led Phillips to launch a “Parallel Lines” campaign with
five short films from famed director Ridley Scott’s shop, promoting its
whole range of home cinema TVs.
The Communications Process
Models
Marketers should understand the fundamental elements of effective communications. Two models
are useful: a macromodel and a micromodel.
MACROMODEL OF THE COMMUNICATIONS PROCESS Figure 17.1 shows a
macromodel with nine key factors in effective communication. Two represent the major parties—
sender and receiver. Two represent the major tools—message and media. Four represent major
communication functions—encoding, decoding, response, and feedback. The last element in the
system is noise, random and competing messages that may interfere with the intended
communication.11
Senders must know what audiences they want to reach and what responses they want to get.
They must encode their messages so the target audience can decode them. They must transmit the
message through media that reach the target audience and develop feedback channels to monitor
the responses. The more the sender’s field of experience overlaps that of the receiver, the more
effective the message is likely to be. Note that selective attention, distortion, and retention
processes—concepts first introduced in Chapter 6—may be operating during communication.
MICROMODEL OF CONSUMER RESPONSES Micromodels of marketing communications
concentrate on consumers’ specific responses to communications. Figure 17.2 summarizes four
classic response hierarchy models.
All these models assume the buyer passes through cognitive, affective, and behavioral stages, in
that order. This “learn-feel-do” sequence is appropriate when the audience has high involvement
with a product category perceived to have high differentiation, such as an automobile or house. An
alternative sequence, “do-feel-learn,” is relevant when the audience has high involvement but per-
ceives little or no differentiation within the product category, such as an airline ticket or personal
SENDER Encoding Decoding
ResponseFeedback
Noise
RECEIVERMessage
Media
|Fig. 17.1|
Elements in the
Communications
Process
The runaway success of the inter-
active, long-form Internet film
Carousel for its new Home
Cinema TV model led Philips to
launch an even more extensive
follow-up campaign.
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 481
Stages
AIDA
Modela
Hierarchy-of-Effects
Modelb
Innovation-
Adoption
Modelc
Models
Communications
Modeld
Cognitive
Stage Attention
Awareness
Awareness
Exposure
Knowledge Cognitive response
Reception
Affective
Stage
Liking Attitude
Conviction
Interest
Desire Intention
Preference
Interest
Evaluation
Behavior
Stage
BehaviorPurchaseAction
Trial
Adoption
|Fig. 17.2|
Response Hierarchy
Models
Sources: aE. K. Strong, The Psychology of Selling
(New York: McGraw-Hill, 1925), p. 9; bRobert J.
Lavidge and Gary A. Steiner, “A Model for Predictive
Measurements of Advertising Effectiveness,” Journal
of Marketing (October 1961), p. 61; cEverett M.
Rogers, Diffusion of Innovation (New York: Free
Press, 1962), pp. 79–86; dvarious sources.
computer. A third sequence,“learn-do-feel,” is relevant when the audience has low involvement and
perceives little differentiation, such as with salt or batteries. By choosing the right sequence, the
marketer can do a better job of planning communications.12
Let’s assume the buyer has high involvement with the product category and perceives high
differentiation within it. We will illustrate the hierarchy-of-effects model (the second column of
Figure 17.2) in the context of a marketing communications campaign for a small Iowa college
named Pottsville:
• Awareness. If most of the target audience is unaware of the object, the communicator’s task is
to build awareness. Suppose Pottsville seeks applicants from Nebraska but has no name recog-
nition there, although 30,000 Nebraska high school juniors and seniors could be interested in
it. The college might set the objective of making 70 percent of these students aware of its name
within one year.
• Knowledge. The target audience might have brand awareness but not know much more.
Pottsville may want its target audience to know it is a private four-year college with excellent
programs in English, foreign languages, and history. It needs to learn how many people in the
target audience have little, some, or much knowledge about Pottsville. If knowledge is weak,
Pottsville may select brand knowledge as its communications objective.
• Liking. Given target members know the brand, how do they feel about it? If the audience
looks unfavorably on Pottsville College, the communicator needs to find out why. In the case
of real problems, Pottsville will need to fix these and then communicate its renewed quality.
Good public relations calls for “good deeds followed by good words.”
• Preference. The target audience might like the product but not prefer it to others. The
communicator must then try to build consumer preference by comparing quality, value,
performance, and other features to those of likely competitors.
• Conviction. A target audience might prefer a particular product but not develop a conviction
about buying it. The communicator’s job is to build conviction and intent to apply among stu-
dents interested in Pottsville College.
• Purchase. Finally, some members of the target audience might have conviction but not quite
get around to making the purchase. The communicator must lead these consumers to take the
final step, perhaps by offering the product at a low price, offering a premium, or letting them
try it out. Pottsville might invite selected high school students to visit the campus and attend
some classes, or it might offer partial scholarships to deserving students.
482 PART 7 COMMUNICATING VALUE
To see how fragile the communication process is, assume the probability of each of the six steps
being successfully accomplished is 50 percent. The laws of probability suggest that the likelihood of
all six steps occurring successfully, assuming they are independent events, is .5 × .5 × .5 × .5 × .5 × .5,
which equals 1.5625 percent. If the probability of each step’s occurring were, on average, a more
moderate 10 percent, then the joint probability of all six events occurring is .0001 percent—or only
1 chance in 1,000,000!
To increase the odds for a successful marketing communications campaign, marketers must
attempt to increase the likelihood that each step occurs. For example, the ideal ad campaign would
ensure that:
1. The right consumer is exposed to the right message at the right place and at the right time.
2. The ad causes the consumer to pay attention but does not distract from the intended message.
3. The ad properly reflects the consumer’s level of understanding of and behaviors with the
product and the brand.
4. The ad correctly positions the brand in terms of desirable and deliverable points-of-difference
and points-of-parity.
5. The ad motivates consumers to consider purchase of the brand.
6. The ad creates strong brand associations with all these stored communications effects so they
can have an impact when consumers are considering making a purchase.
The challenges in achieving success with communications necessitates careful planning, a topic we
turn to next.
Developing Effective
Communications
Figure 17.3 shows the eight steps in developing effective communications. We begin with the
basics: identifying the target audience, determining the objectives, designing the communications,
selecting the channels, and establishing the budget.
Identify the Target Audience
The process must start with a clear target audience in mind: potential buyers of the company’s
products, current users, deciders, or influencers, and individuals, groups, particular publics, or the
general public. The target audience is a critical influence on the communicator’s decisions about
what to say, how, when, where, and to whom.
Though we can profile the target audience in terms of any of the market segments identified in
Chapter 8, it’s often useful to do so in terms of usage and loyalty. Is the target new to the category or
a current user? Is the target loyal to the brand, loyal to a competitor, or someone who switches
between brands? If a brand user, is he or she a heavy or light user? Communication strategy will dif-
fer depending on the answers. We can also conduct image analysis by profiling the target audience
in terms of brand knowledge.
Determine the Communications Objectives
As we showed with Pottsville College, marketers can set communications objectives at any level of the hi-
erarchy-of-effects model. John R. Rossiter and Larry Percy identify four possible objectives, as follows:13
1. Category Need—Establishing a product or service category as necessary to remove or satisfy a
perceived discrepancy between a current motivational state and a desired motivational state.
A new-to-the-world product such as electric cars will always begin with a communications
objective of establishing category need.
2. Brand Awareness—Fostering the consumer’s ability to recognize or recall the brand within
the category, in sufficient detail to make a purchase. Recognition is easier to achieve than
recall—consumers asked to think of a brand of frozen entrées are more likely to recognize
Stouffer’s distinctive orange packages than to recall the brand. Brand recall is important
outside the store; brand recognition is important inside the store. Brand awareness provides a
foundation for brand equity.
Manage integrated
marketing
communications
Measure
results
Decide on
media mix
Establish
budget
Select
channels
Design
communications
Determine
objectives
Identify target
audience
|Fig. 17.3|
Steps in Developing
Effective
Communications
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 483
3. Brand Attitude—Helping consumers evaluate the brand’s perceived ability to meet a cur-
rently relevant need. Relevant brand needs may be negatively oriented (problem removal,
problem avoidance, incomplete satisfaction, normal depletion) or positively oriented (sen-
sory gratification, intellectual stimulation, or social approval). Household cleaning products
often use problem solution; food products, on the other hand, often use sensory-oriented
ads emphasizing appetite appeal.
4. Brand Purchase Intention—Moving consumers to decide to purchase the brand or take
purchase-related action. Promotional offers like coupons or two-for-one deals encourage
consumers to make a mental commitment to buy. But many consumers do not have an
expressed category need and may not be in the market when exposed to an ad, so they are
unlikely to form buy intentions. In any given week, only about 20 percent of adults may be
planning to buy detergent, only 2 percent to buy a carpet cleaner, and only 0.25 percent to
buy a car.
The most effective communications can achieve multiple objectives. To promote its Smart Grid
technology program, GE pushed a number of buttons.14
GE Smart Grid The vision of GE’s Smart Grid program is to fundamentally
overhaul the United States’ power grid, making it more efficient and sustainable and able also to
deliver renewable-source energy such as wind and solar. An integrated campaign of print, TV,
and online ads and an online augmented-reality demo was designed to increase understanding
and support of the Smart Grid and GE’s leadership in solving technological problems. GE and its
agency partner BBDO chose to employ engaging creative and familiar cultural references to address the tech-
nical issues involved. In its 2009 Super Bowl launch TV spot, the famous scarecrow character from The
Wizard of Oz was shown bouncing along the top of a transmission tower singing, “If I Only Had a Brain.” A
narrator voiced over the key communication message, “Smart Grid makes the way we distribute electricity
more efficient simply by making it more intelligent.” One online ad used a flock of birds on electrical wires
chirping and flapping their wings in synchronized rhythm to Rossini’s “Barber of Seville.” Another showed
power lines becoming banjo strings for electrical pylons to play “O Susannah.” After drawing the audience in,
the ads lay out the basic intent of the Smart Grid with links to more information. The augmented-reality GE
microsite PlugIntoTheSmartGrid.com allowed users to create a digital hologram of Smart Grid technology us-
ing computer peripherals and 3D graphics.
GE’s Smart Grid campaign has
accomplished several different
objectives for the GE brand,
including strengthening the
company’s reputation as
innovative.
484 PART 7 COMMUNICATING VALUE
Design the Communications
Formulating the communications to achieve the desired response requires solving three problems:
what to say (message strategy), how to say it (creative strategy), and who should say it (message source).
MESSAGE STRATEGY In determining message strategy, management searches for appeals,
themes, or ideas that will tie in to the brand positioning and help establish points-of-parity or
points-of-difference. Some of these may be related directly to product or service performance (the
quality, economy, or value of the brand), whereas others may relate to more extrinsic
considerations (the brand as being contemporary, popular, or traditional).
Researcher John C. Maloney felt buyers expected one of four types of reward from a product:
rational, sensory, social, or ego satisfaction.15 Buyers might visualize these rewards from results-
of-use experience, product-in-use experience, or incidental-to-use experience. Crossing the four
types of rewards with the three types of experience generates 12 types of messages. For example,
the appeal “gets clothes cleaner” is a rational-reward promise following results-of-use experi-
ence. The phrase “real beer taste in a great light beer” is a sensory-reward promise connected
with product-in-use experience.
CREATIVE STRATEGY Communications effectiveness depends on how a message is being
expressed, as well as on its content. If a communication is ineffective, it may mean the wrong
message was used, or the right one was poorly expressed. Creative strategies are the way marketers
translate their messages into a specific communication. We can broadly classify them as either
informational or transformational appeals.16
Informational Appeals An informational appeal elaborates on product or service attributes or
benefits. Examples in advertising are problem solution ads (Excedrin stops the toughest headache
pain), product demonstration ads (Thompson Water Seal can withstand intense rain, snow, and
heat), product comparison ads (DIRECTV offers better HD options than cable or other satellite
operators), and testimonials from unknown or celebrity endorsers (NBA phenomenon LeBron
James pitching Nike, Sprite, and McDonald’s). Informational appeals assume strictly rational
processing of the communication on the consumer’s part. Logic and reason rule.
Carl Hovland’s research at Yale has shed much light on informational appeals and their rela-
tionship to such issues as conclusion drawing, one-sided versus two-sided arguments, and order
of argument presentation. Some early experiments supported stating conclusions for the audi-
ence. Subsequent research, however, indicates that the best ads ask questions and allow readers
and viewers to form their own conclusions.17 If Honda had hammered away that the Element was
for young people, this strong definition might have blocked older drivers from buying it. Some
stimulus ambiguity can lead to a broader market definition and more spontaneous purchases.
You might expect one-sided presentations that praise a product to be more effective than
two-sided arguments that also mention shortcomings. Yet two-sided messages may be more
appropriate, especially when negative associations must be overcome.18 Two-sided messages are
more effective with more educated audiences and those who are initially opposed.19 Chapter 6
described how Domino’s took the drastic step of admitting its
pizza’s taste problems to try to change the minds of consumers
with negative perceptions.
Finally, the order in which arguments are presented is impor-
tant.20 In a one-sided message, presenting the strongest argument
first arouses attention and interest, important in media where the
audience often does not attend to the whole message. With a captive
audience, a climactic presentation might be more effective. For a
two-sided message, if the audience is initially opposed, the commu-
nicator might start with the other side’s argument and conclude
with his or her strongest argument.21
Transformational Appeals A transformational appeal elaborates
on a nonproduct-related benefit or image. It might depict what kind
of person uses a brand (VW advertised to active, youthful people
with its famed “Drivers Wanted” campaign) or what kind of
experience results from use (Pringles advertised “Once You Pop, the
Pringles capitalized on the popping
sound that occurs when its pack-
age is opened to develop a highly
successful ad campaign.
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 485
Fun Don’t Stop” for years). Transformational appeals often attempt to stir up emotions that will
motivate purchase.
Communicators use negative appeals such as fear, guilt, and shame to get people to do things
(brush their teeth, have an annual health checkup) or stop doing things (smoking, abusing alcohol,
overeating). Fear appeals work best when they are not too strong, when source credibility is high,
and when the communication promises, in a believable and efficient way, to relieve the fear it
arouses. Messages are most persuasive when moderately discrepant with audience beliefs. Stating
only what the audience already believes at best just reinforces beliefs, and if the messages are too
discrepant, audiences will counterargue and disbelieve them.22
Communicators also use positive emotional appeals such as humor, love, pride, and joy.
Motivational or “borrowed interest” devices—such as the presence of cute babies, frisky puppies,
popular music, or provocative sex appeals—are often employed to attract attention and raise in-
volvement with an ad. These techniques are thought necessary in the tough new media environ-
ment characterized by low-involvement consumer processing and competing ad and programming
clutter. Attention-getting tactics are often too effective. They may also detract from comprehension,
wear out their welcome fast, and overshadow the product.23 Thus, one challenge is figuring out
how to “break through the clutter” and deliver the intended message.
Even highly entertaining and creative means of expression must still keep the appropriate
consumer perspective. Toyota was sued in Los Angeles for a promotional campaign designed to
create buzz for its youth-targeted Toyota Matrix. The online effort featured a series of e-mails to
customers from a fictitious drunken British soccer hooligan, Sebastian Bowler. In his e-mails, he
announced that he knew the recipient and was coming to stay with his pit bull, Trigger, to “avoid
the cops.” In her suit, the plaintiff said she was so convinced that “a disturbed and aggressive”
stranger was headed to her house that she slept with a machete next to her in bed.24
The magic of advertising is to bring concepts on a piece of paper to life in the minds of the
consumer target. In a print ad, the communicator must decide on headline, copy, illustration,
and color.25 For a radio message, the communicator must choose words, voice qualities, and
vocalizations. The sound of an announcer promoting a used automobile should be different
from one promoting a new Cadillac. If the message is to be carried on television or in person, all
these elements plus body language must be planned. For the message to go online, layout, fonts,
graphics, and other visual and verbal information must be laid out.
MESSAGE SOURCE Messages delivered by attractive or popular sources can achieve higher
attention and recall, which is why advertisers often use celebrities as spokespeople.
Celebrities are likely to be effective when they are credible or personify a key product attribute.
Statesman-like Dennis Haysbert for State Farm insurance, rugged Brett Favre for Wrangler jeans,
and one-time television sweetheart Valerie Bertinelli for Jenny Craig weight loss program have all
been praised by consumers as good fits. Celine Dion, however, failed to add glamour—or sales—to
Chrysler, and even though she was locked into a three-year, $14 million deal, she was let go. Ozzy
Osbourne would seem an odd choice to advertise “I Can’t Believe It’s Not Butter” given his seem-
ingly perpetual confusion.
What is important is the spokesperson’s credibility. The three most often identified sources of
credibility are expertise, trustworthiness, and likability.26 Expertise is the specialized knowledge the
communicator possesses to back the claim. Trustworthiness describes how objective and honest the
source is perceived to be. Friends are trusted more than strangers or salespeople, and people who
are not paid to endorse a product are viewed as more trustworthy than people who are paid.27
Likability describes the source’s attractiveness. Qualities such as candor, humor, and naturalness
make a source more likable.
The most highly credible source would score high on all three dimensions—expertise, trust-
worthiness, and likability. Pharmaceutical companies want doctors to testify about product
benefits because doctors have high credibility. Charles Schwab became the centerpiece of ads
for his $4 billion-plus discount brokerage firm via the “Talk to Chuck” corporate advertising
campaign. Another credible pitchman was boxer George Foreman and his multimillion-selling
Lean, Mean, Fat-Reducing Grilling Machine. “Marketing Insight: Celebrity Endorsements as a
Strategy” focuses on the use of testimonials.
If a person has a positive attitude toward a source and a message, or a negative attitude toward
both, a state of congruity is said to exist. But what happens if a consumer hears a likable celebrity
praise a brand she dislikes? Charles Osgood and Percy Tannenbaum believe attitude change will take
486 PART 7 COMMUNICATING VALUE
place in the direction of increasing the amount of congruity between the two evaluations.28 The
consumer will end up respecting the celebrity somewhat less or the brand somewhat more. If she
encounters the same celebrity praising other disliked brands, she will eventually develop a negative
view of the celebrity and maintain negative attitudes toward the brands. The principle of
congruity implies that communicators can use their good image to reduce some negative feelings
toward a brand but in the process might lose some esteem with the audience.
Select the Communications Channels
Selecting an efficient means to carry the message becomes more difficult as channels of communi-
cation become more fragmented and cluttered. Communications channels may be personal and
nonpersonal. Within each are many subchannels.
PERSONAL COMMUNICATIONS CHANNELS Personal communications channels let
two or more persons communicate face-to-face or person-to-audience through a phone, surface
Marketing InsightMarketing Insight
Celebrity Endorsements as a
Strategy
A well-chosen celebrity can draw attention to a product or brand—as
Priceline found when it picked Star Trek icon William Shatner to star in
campy ads to reinforce its low-price image. The quirky campaigns have
run over a decade, and Shatner’s decision to receive compensation in
the form of stock options reportedly allowed him to net over $600 mil-
lion for his work. The right celebrity can also lend his or her image to a
brand. To reinforce its high status and prestige image, American Express
has used movie legends Robert De Niro and Martin Scorsese in ads.
The choice of celebrity is critical. The person should have high
recognition, high positive affect, and high appropriateness or “fit” with
the product. Paris Hilton, Howard Stern, and Donald Trump have high
recognition but negative affect among many groups. Johnny Depp has
high recognition and high positive affect but might not seem relevant,
for example, for advertising a new financial service. Tom Hanks and
Oprah Winfrey could successfully advertise a large number of products
because they have extremely high ratings for familiarity and likability
(known as the Q factor in the entertainment industry).
Celebrities can play a more fundamentally strategic role for their
brands, not only endorsing a product but also helping to design, posi-
tion, and sell merchandise and services. Believing elite athletes have
unique insights into sports performance, Nike often brings its athletic
endorsers in on product design. Tiger Woods, Paul Casey, and Stewart
Cink have helped to design, prototype, and test new golf clubs and balls
at Nike Golf’s Research & Development facility dubbed “The Oven.”
Some celebrities lend their talents to brands without directly using
their fame. A host of movie and TV stars—including Kiefer Sutherland
(Bank of America), Alec Baldwin (Blockbuster), Patrick Dempsey (State
Farm), Lauren Graham (Special K), and Regina King (Always)—do un-
credited commercial voice-overs. Although advertisers assume some
viewers will recognize the voices, the basic rationale for uncredited
celebrity voice-overs is the incomparable voice talents and skills they
bring from their acting careers.
Using celebrities poses certain risks. The celebrity might hold out
for a larger fee at contract renewal or withdraw. And just like movies and
album releases, celebrity campaigns can be expensive flops. The
celebrity might lose popularity or, even worse, get caught in a scandal or
embarrassing situation, as did Tiger Woods in a heavily publicized 2009
episode. Besides carefully checking endorsers’ backgrounds, some
marketers are choosing to use more than one to lessen their brand’s
exposure to any single person’s flaws.
Another solution is for marketers to create their own brand celebri-
ties. Dos Equis beer, imported from Mexico, grew U.S. sales by over
20 percent during the recent recession by riding on the popularity of its
“Most Interesting Man in the World” ad campaign. Suave, debonair, with
an exotic accent and a silver beard, the character has hundreds of thou-
sands of Facebook friends despite being, of course, completely ficti-
tious. Videos of his exploits log millions of views on YouTube. He even
served as the basis of The Most Interesting Show in the World tour of
the brand’s 14 biggest urban markets, which featured one-of-a-kind
circus-type performers such as a flaming bowling-ball-juggling stunt
comedian, a robot-inspired break dancer, and a contortionist who
shoots arrows with her feet. Through a combination of advertising and
media coverage, almost 100 million media impressions were achieved
on the tour.
Sources: Scott Huver, “Here’s the Pitch!,” TV Guide, May 23, 2010; Linda
Massarella, “Shatner’s Singing a Happy Tune,” Toronto Sun, May 2, 2010; “Nike
Golf Celebrates Achievements and Successes of Past Year,” www.worldgolf.com,
January 2, 2009; Piet Levy, “Keeping It Interesting,” Marketing News, October 30,
2009, p. 8; Keith Naughton, “The Soft Sell,” Newsweek, February 2, 2004, pp. 46–47;
Irving Rein, Philip Kotler, and Martin Scoller, The Making and Marketing of
Professionals into Celebrities (Chicago: NTC Business Books, 1997).
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 487
mail, or e-mail. They derive their effectiveness from
individualized presentation and feedback and include direct
and interactive marketing, word-of-mouth marketing, and
personal selling.
We can draw a further distinction between advocate,
expert, and social communications channels. Advocate chan-
nels consist of company salespeople contacting buyers in the
target market. Expert channels consist of independent ex-
perts making statements to target buyers. Social channels
consist of neighbors, friends, family members, and associ-
ates talking to target buyers.
A study by Burson-Marsteller and Roper Starch
Worldwide found that one influential person’s word of
mouth tends to affect the buying attitudes of two other
people, on average. That circle of influence, however, jumps
to eight online. Word about good companies travels fast;
word about bad companies travels even faster. Reaching the
right people is key.
More advertisers now seek greater earned media—unso-
licited professional commentary, personal blog entries, so-
cial network discussion—as a result of their paid media marketing efforts. Kimberly-Clark ran a
30-second TV spot prior to the Academy Awards in March 2010 for its Poise brand, which fea-
tured Whoopi Goldberg portraying famous women in history who may have suffered from incon-
tinence. The goal was to get people talking, and talk they did! A social media avalanche followed,
culminating in a Saturday Night Live spoof, which eventually added up to 200 million PR impres-
sions in total.29
Personal influence carries especially great weight (1) when products are expensive, risky, or pur-
chased infrequently, and (2) when products suggest something about the user’s status or taste.
People often ask others to recommend a doctor, plumber, hotel, lawyer, accountant, architect, in-
surance agent, interior decorator, or financial consultant. If we have confidence in the recommen-
dation, we normally act on the referral. Service providers clearly have a strong interest in building
referral sources.
Even business-to-business marketers can benefit from strong word of mouth. Here is how John
Deere created anticipation and excitement when introducing its 764 High Speed Dozer, the cate-
gory’s first launch in 25 years.30
John Deere Leading up to the unveiling of its high-speed dozer at the industry’s
largest CONEXPO trade show, John Deere created an extensive PR campaign. First, e-mail an-
nouncements were sent to all trade show registrants with images of the dozer covered in a tarp
and teasing headlines, such as “Just a Few Years Ahead of the Competition” and “The Shape of
Things to Come.” Editors received an invitation to attend a closed-door press conference where
they were given a VIP pass and admittance to a special viewing area at the CONEXPO show. Finally, editors
were told they could also register for a special, invitation-only press conference with John Deere senior
executives, including its CEO. Approximately 2,000 people attended the trade show for a rock-star unveiling
of the dozer, with about 80 editors present. Customers at the event who declared their desire for the machine
helped Deere staff secure more leads. Press reaction was also extremely positive, including several trade
magazine cover stories on the dozer and three segments on CNBC. The integrated effort on behalf of John
Deere, which included print ads in trade publications, took home the Grand CEBA Award in American
Business Media’s annual awards competition.
NONPERSONAL (MASS) COMMUNICATIONS CHANNELS Nonpersonal channels
are communications directed to more than one person and include advertising, sales promotions,
events and experiences, and public relations. Much recent growth has taken place through events
and experiences. Events marketers who once favored sports events are now using other venues such
as art museums, zoos, and ice shows to entertain clients and employees. AT&T and IBM sponsor
William Shatner has become the
quirky but beloved spokesperson
for Priceline in its advertising.
488 PART 7 COMMUNICATING VALUE
symphony performances and art exhibits, Visa is an active sponsor of the Olympics,
and Harley-Davidson sponsors annual motorcycle rallies.
Companies are searching for better ways to quantify the benefits of sponsorship
and demanding greater accountability from event owners and organizers. They are
also creating events designed to surprise the public and create a buzz. Many efforts amount to guer-
rilla marketing tactics. As part of a $100 million global advertising and marketing campaign for its
line of televisions, LG Electronics developed an elaborate promotion for a fake new TV series,
Scarlet, including a heavily promoted Hollywood world premiere. Inside, attendees found a new se-
ries of actual LG TVs with a red back panel. Teaser TV and online commercials and extensive PR
backed the effort.31
Events can create attention, although whether they have a lasting effect on brand awareness,
knowledge, or preference will vary considerably depending on the quality of the product, the event
itself, and its execution.
INTEGRATION OF COMMUNICATIONS CHANNELS Although personal communi-
cation is often more effective than mass communication, mass media might be the major means of
stimulating personal communication. Mass communications affect personal attitudes and
behavior through a two-step process. Ideas often flow from radio, television, and print to opinion
leaders, and from these to less media-involved population groups.
This two-step flow has several implications. First, the influence of mass media on public opin-
ion is not as direct, powerful, and automatic as marketers have supposed. It is mediated by opinion
leaders, people whose opinions others seek or who carry their opinions to others. Second, the two-
step flow challenges the notion that consumption styles are primarily influenced by a “trickle-
down” or “trickle-up” effect from mass media. People interact primarily within their own social
groups and acquire ideas from opinion leaders in their groups. Third, two-step communication
suggests that mass communicators should direct messages specifically to opinion leaders and let
them carry the message to others.
Establish the Total Marketing Communications Budget
One of the most difficult marketing decisions is determining how much to spend on marketing
communications. John Wanamaker, the department store magnate, once said, “I know that half of
my advertising is wasted, but I don’t know which half.”
Industries and companies vary considerably in how much they spend on marketing communi-
cations. Expenditures might be 40 percent to 45 percent of sales in the cosmetics industry, but only
Through its print ad and trade show efforts, John Deere created buzz and much
word of mouth in anticipation of the launch of its new high-speed dozer.
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 489
5 percent to 10 percent in the industrial-equipment industry. Within a given indus-
try, there are low- and high-spending companies.
How do companies decide on the communication budget? We will describe four
common methods: the affordable method, the percentage-of-sales method, the com-
petitive-parity method, and the objective-and-task method.
AFFORDABLE METHOD Some companies set the communication budget at
what they think the company can afford. The affordable method completely ignores
the role of promotion as an investment and the immediate impact of promotion on
sales volume. It leads to an uncertain annual budget, which makes long-range
planning difficult.
PERCENTAGE-OF-SALES METHOD Some companies set communication
expenditures at a specified percentage of current or anticipated sales or of the sales
price. Automobile companies typically budget a fixed percentage based on the
planned car price. Oil companies appropriate a fraction of a cent for each gallon of
gasoline sold under their own label.
Supporters of the percentage-of-sales method see a number of advantages. First,
communication expenditures will vary with what the company can afford. This
satisfies financial managers, who believe expenses should be closely related to the
movement of corporate sales over the business cycle. Second, it encourages manage-
ment to think of the relationship among communication cost, selling price, and
profit per unit. Third, it encourages stability when competing firms spend approxi-
mately the same percentage of their sales on communications.
In spite of these advantages, the percentage-of-sales method has little to justify it.
It views sales as the determiner of communications rather than as the result. It leads
to a budget set by the availability of funds rather than by market opportunities. It
discourages experimentation with countercyclical communication or aggressive
spending. Dependence on year-to-year sales fluctuations interferes with long-range
planning. There is no logical basis for choosing the specific percentage, except what
has been done in the past or what competitors are doing. Finally, it does not encour-
age building the communication budget by determining what each product and
territory deserves.
COMPETITIVE-PARITY METHOD Some companies set their communication budget to
achieve share-of-voice parity with competitors. There are two supporting arguments: that
competitors’ expenditures represent the collective wisdom of the industry, and that maintaining
competitive parity prevents communication wars. Neither argument is valid. There are no
grounds for believing competitors know better. Company reputations, resources, opportunities,
and objectives differ so much that communication budgets are hardly a guide. And there is no
evidence that budgets based on competitive parity discourage communication wars.
OBJECTIVE-AND-TASK METHOD The objective-and-task method calls upon marketers to
develop communication budgets by defining specific objectives, determining the tasks that must be
performed to achieve these objectives, and estimating the costs of performing them. The sum of
these costs is the proposed communication budget.
Suppose Dr. Pepper Snapple Group wants to introduce a new natural energy drink, called
Sunburst, for the casual athlete.32 Its objectives might be as follows:
1. Establish the market share goal. The company estimates 50 million potential users and sets a
target of attracting 8 percent of the market—that is, 4 million users.
2. Determine the percentage of the market that should be reached by advertising. The adver-
tiser hopes to reach 80 percent (40 million prospects) with its advertising message.
3. Determine the percentage of aware prospects that should be persuaded to try the
brand. The advertiser would be pleased if 25 percent of aware prospects (10 million) tried
Sunburst. It estimates that 40 percent of all triers, or 4 million people, will become loyal
users. This is the market goal.
To promote its new line of televi-
sions, LG pretended to launch a
fake new TV series, even holding
a heavily promoted premiere.
490 PART 7 COMMUNICATING VALUE
4. Determine the number of advertising impressions per 1 percent trial rate. The advertiser es-
timates that 40 advertising impressions (exposures) for every 1 percent of the population will
bring about a 25 percent trial rate.
5. Determine the number of gross rating points that would have to be purchased. A gross rating
point is one exposure to 1 percent of the target population. Because the company wants to achieve
40 exposures to 80 percent of the population, it will want to buy 3,200 gross rating points.
6. Determine the necessary advertising budget on the basis of the average cost of buying a
gross rating point. To expose 1 percent of the target population to one impression costs an
average of $3,277. Therefore, 3,200 gross rating points will cost $10,486,400 (= $3,277 ×
3,200) in the introductory year.
The objective-and-task method has the advantage of requiring management to spell out its as-
sumptions about the relationship among dollars spent, exposure levels, trial rates, and regular usage.
COMMUNICATION BUDGET TRADE-OFFS A major question is how much weight
marketing communications should receive in relationship to alternatives such as product
improvement, lower prices, or better service. The answer depends on where the company’s
products are in their life cycles, whether they are commodities or highly differentiable products,
whether they are routinely needed or must be “sold,” and other considerations. Marketing
communications budgets tend to be higher when there is low channel support, much change in the
marketing program over time, many hard-to-reach customers, more complex customer decision
making, differentiated products and nonhomogeneous customer needs, and frequent product
purchases in small quantities.33
In theory, marketers should establish the total communications budget so the marginal profit
from the last communication dollar just equals the marginal profit from the last dollar in the best
noncommunication use. Implementing this principle, however, is not easy.
Deciding on the Marketing
Communications Mix
Companies must allocate the marketing communications budget over the eight major modes of com-
munication—advertising, sales promotion, public relations and publicity, events and experiences,
direct marketing, interactive marketing, word-of-mouth marketing, and the sales force. Within the
same industry, companies can differ considerably in their media and channel choices. Avon concen-
trates its promotional funds on personal selling, whereas Revlon spends heavily on advertising.
Electrolux spent heavily on a door-to-door sales force for years, whereas Hoover has relied more on
advertising. Table 17.2 breaks down spending on some major forms of communication.
Companies are always searching for ways to gain efficiency by substituting one communications
tool for others. Many are replacing some field sales activity with ads, direct mail, and telemarketing.
One auto dealer dismissed his five salespeople and cut prices, and sales exploded. The substitutabil-
ity among communications tools explains why marketing functions need to be coordinated.
Characteristics of the Marketing Communications Mix
Each communication tool has its own unique characteristics and costs. We briefly review them here
and discuss them in more detail in Chapters 18 and 19.
ADVERTISING Advertising reaches geographically dispersed buyers. It can build up a long-term
image for a product (Coca-Cola ads) or trigger quick sales (a Macy’s ad for a weekend sale). Certain
forms of advertising such as TV can require a large budget, whereas other forms such as newspaper
do not. The mere presence of advertising might have an effect on sales: Consumers might believe a
heavily advertised brand must offer “good value.”34 Because of the many forms and uses of
advertising, it’s difficult to make generalizations about it.35 Yet a few observations are worthwhile:
1. Pervasiveness—Advertising permits the seller to repeat a message many times. It also allows
the buyer to receive and compare the messages of various competitors. Large-scale advertising
says something positive about the seller’s size, power, and success.
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 491
2. Amplified expressiveness—Advertising provides opportunities for dramatizing the company
and its brands and products through the artful use of print, sound, and color.
3. Control—The advertiser can choose the aspects of the brand and product on which to focus
communications.
SALES PROMOTION Companies use sales promotion tools—coupons, contests, premiums,
and the like—to draw a stronger and quicker buyer response, including short-run effects such as
highlighting product offers and boosting sagging sales. Sales promotion tools offer three
distinctive benefits:
1. Ability to be attention-getting—They draw attention and may lead the consumer to the product.
2. Incentive—They incorporate some concession, inducement, or contribution that gives value
to the consumer.
3. Invitation—They include a distinct invitation to engage in the transaction now.
PUBLIC RELATIONS AND PUBLICITY Marketers tend to underuse public relations, yet a
well-thought-out program coordinated with the other communications-mix elements can be
extremely effective, especially if a company needs to challenge consumers’ misconceptions. The
appeal of public relations and publicity is based on three distinctive qualities:
1. High credibility—News stories and features are more authentic and credible to readers than ads.
2. Ability to reach hard-to-find buyers—Public relations can reach prospects who prefer to
avoid mass media and targeted promotions.
3. Dramatization—Public relations can tell the story behind a company, brand, or product.
TABLE 17.2 Advertising and
Digital Marketing Communications
Forecast for 2010
Global Advertising Spend Projections 2009–2010 % Change 2010 $ (billions)
Cinema 2.0% 2.23
Internet 12.0% 60.35
Magazines �4.0% 43.10
Newspapers �4.0% 97.85
Outdoor 2.0% 29.61
Radio �2.0% 33.10
Television 2.0% 174.94
Total 0.9% 441.19
Source: ZenithOptimedia, December 2009.
Digital Marketing Communications
Display Advertising 7% 8.40
Email Marketing 8% 1.36
Mobile Marketing 44% 0.56
Search Marketing 15% 17.80
Social Media 31% 0.94
Total 13% 29.01
Source: Data from Figure 4 in US Interactive Marketing Forecast 2009 to 2014. Forester Reseach, Inc. July, 2009.
Source: Table from Piet Levy, “The Oscar-Contending Drama: Finding the Right Marketing Mix,” Marketing News, January 30, 2009, p. 15.
492 PART 7 COMMUNICATING VALUE
EVENTS AND EXPERIENCES There are many advantages to events and experiences as long
as they have the following characteristics:
1. Relevant—A well-chosen event or experience can be seen as highly relevant because the
consumer is often personally invested in the outcome.
2. Engaging—Given their live, real-time quality, events and experiences are more actively engag-
ing for consumers.
3. Implicit—Events are typically an indirect “soft sell.”
DIRECT AND INTERACTIVE MARKETING Direct and interactive marketing messages
take many forms—over the phone, online, or in person. They share three characteristics:
1. Customized—The message can be prepared to appeal to the addressed individual.
2. Up-to-date—A message can be prepared very quickly.
3. Interactive—The message can be changed depending on the person’s response.
WORD-OF-MOUTH MARKETING Word of mouth also takes many forms both online or
offline. Three noteworthy characteristics are:
1. Influential—Because people trust others they know and respect, word of mouth can be highly
influential.
2. Personal—Word of mouth can be a very intimate dialogue that reflects personal facts, opinions,
and experiences.
3. Timely—Word of mouth occurs when people want it to and are most interested, and it often
follows noteworthy or meaningful events or experiences.
PERSONAL SELLING Personal selling is the most effective tool at later stages of the buying
process, particularly in building up buyer preference, conviction, and action. Personal selling has
three notable qualities:
1. Personal interaction—Personal selling creates an immediate and interactive episode between
two or more persons. Each is able to observe the other’s reactions.
2. Cultivation—Personal selling also permits all kinds of relationships to spring up, ranging
from a matter-of-fact selling relationship to a deep personal friendship.
3. Response—The buyer is often given personal choices and encouraged to directly respond.
Factors in Setting the Marketing Communications Mix
Companies must consider several factors in developing their communications mix: type of product
market, consumer readiness to make a purchase, and stage in the product life cycle.
TYPE OF PRODUCT MARKET Communications-mix allocations vary between consumer
and business markets. Consumer marketers tend to spend comparatively more on sales promotion
and advertising; business marketers tend to spend comparatively more on personal selling. In
general, personal selling is used more with complex, expensive, and risky goods and in markets
with fewer and larger sellers (hence, business markets).
Although marketers rely more on sales calls in business markets, advertising still plays a signifi-
cant role:
• Advertising can provide an introduction to the company and its products.
• If the product has new features, advertising can explain them.
• Reminder advertising is more economical than sales calls.
• Advertisements offering brochures and carrying the company’s phone number or Web address
are an effective way to generate leads for sales representatives.
• Sales representatives can use copies of the company’s ads to legitimize their company and products.
• Advertising can remind customers how to use the product and reassure them about their purchase.
Advertising combined with personal selling can increase sales over personal selling alone.
Corporate advertising can improve a company’s reputation and improve the sales force’s chances of
getting a favorable first hearing and early adoption of the product.36 IBM’s corporate marketing
effort is a notable success in recent years.37
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 493
IBM Smarter Planet Working with long-time ad agency Ogilvy & Mather,
IBM launched “Smarter Planet” in 2008 as a business strategy and multiplatform communications
program to promote the way in which IBM technology and expertise helps industry, government,
transportation, energy, education, health care, cities, and other businesses work better and
“smarter.” The point was that technology has evolved so far that many of the world’s problems are
now fixable. Emphasizing the United States, the United Kingdom, Germany, and China, the campaign began in-
ternally to inform and inspire IBM employees about how they could contribute to building a “Smarter Planet.”An
unconventional “Mandate for Change” series offered long-form, content-rich print ads in the business world’s
top newspapers outlining how IBM would address 25 key issues to make the
world work better. Targeted TV ads and detailed online interactive ads pro-
vided more support and substance. A “Smarter Cities” tour hosted major
events at which IBM and other experts discussed and debated challenges all
cities face: transportation, energy, health care, education, and public safety.
The success of the overall “Smarter Planet” campaign was evident in the sig-
nificant improvements in IBM’s image as a company “making the world bet-
ter” and “known for solving its clients’ most challenging problems.” Despite a
recession, significant increases occurred in new business opportunities and
the number of companies interested in doing business with IBM.
On the flip side, personal selling can also make a strong contribu-
tion in consumer-goods marketing. Some consumer marketers use
the sales force mainly to collect weekly orders from dealers and to see
that sufficient stock is on the shelf. Yet an effectively trained com-
pany sales force can make four important contributions:
1. Increase stock position. Sales reps can persuade dealers to take
more stock and devote more shelf space to the company’s brand.
2. Build enthusiasm. Sales reps can build dealer enthusiasm by
dramatizing planned advertising and communications support
for the company’s brand.
3. Conduct missionary selling. Sales reps can sign up more
dealers.
4. Manage key accounts. Sales reps can take responsibility for
growing business with the most important accounts.
BUYER-READINESS STAGE Communication tools vary in cost-
effectiveness at different stages of buyer readiness. Figure 17.4
shows the relative cost-effectiveness of three communication tools.
Advertising and publicity play the most important roles in the
awareness-building stage. Customer comprehension is primarily
affected by advertising and personal selling. Customer conviction is
influenced mostly by personal selling. Closing the sale is influenced
mostly by personal selling and sales promotion. Reordering is also
affected mostly by personal selling and sales promotion, and
somewhat by reminder advertising.
PRODUCT LIFE-CYCLE STAGE In the introduction stage of
the product life cycle, advertising, events and experiences, and
publicity have the highest cost-effectiveness, followed by personal
selling to gain distribution coverage and sales promotion and direct
marketing to induce trial. In the growth stage, demand has its own
momentum through word of mouth and interactive marketing. Advertising, events and experiences,
and personal selling all become more important in the maturity stage. In the decline stage, sales
promotion continues strong, other communication tools are reduced, and salespeople give the
product only minimal attention.
IBM’s “Smarter Planet” corporate
brand campaign, which has met
with great success, sometimes
breaks the rules, as with this
text-heavy print ad.
494 PART 7 COMMUNICATING VALUE
Measuring Communication Results
Senior managers want to know the outcomes and revenues resulting from their communications invest-
ments. Too often, however, their communications directors supply only inputs and expenses: press clip-
ping counts, numbers of ads placed, media costs. In fairness, communications directors try to translate
inputs into intermediate outputs such as reach and frequency (the percentage of target market exposed
to a communication and the number of exposures), recall and recognition scores, persuasion changes,
and cost-per-thousand calculations. Ultimately, behavior-change measures capture the real payoff.
After implementing the communications plan, the communications director must measure its
impact. Members of the target audience are asked whether they recognize or recall the message,
how many times they saw it, what points they recall, how they felt about the message, and what are
their previous and current attitudes toward the product and the company. The communicator
should also collect behavioral measures of audience response, such as how many people bought the
product, liked it, and talked to others about it.
Figure 17.5 provides an example of good feedback measurement. We find 80 percent of the
consumers in the total market are aware of brand A, 60 percent have tried it, and only 20 percent
who tried it are satisfied. This indicates that the communications program is effective in creating
awareness, but the product fails to meet consumer expectations. In contrast, 40 percent of the
consumers in the total market are aware of brand B and only 30 percent have tried it, but 80 percent
of them are satisfied. In this case, the communications program needs to be strengthened to take
advantage of the brand’s potential power.
Managing the Integrated Marketing
Communications Process
Many companies still rely on only one or two communication tools. This practice persists in spite
of the fragmenting of mass markets into a multitude of minimarkets, each requiring its own ap-
proach; the proliferation of new types of media; and the growing sophistication of consumers. The
Stages of Buyer Readiness
Co
st
E
ffe
ct
iv
en
es
s
Awareness
Advertising and publicity Sales promotion Personal selling
Comprehension Conviction Order Reorder
|Fig. 17.4|
Cost-Effectiveness of
Three Different
Communication Tools
at Different Buyer-
Readiness Stages
100%
market
100%
market80%
aware
60%
tried
80%
disappointed
Total Awareness Brand
Trial
Satisfaction Total Awareness Brand
Trial
Satisfaction
20%
not aware
40%
did not
try
60% not
aware
40%
aware
80%
satisfied
20%
satisfied
20%
disappointed
30% tried
70% did
not try
Brand A Brand B|Fig. 17.5|
Current Consumer
States for Two Brands
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 495
wide range of communication tools, messages, and audiences makes it imperative that companies
move toward integrated marketing communications. Companies must adopt a “360-degree view”
of consumers to fully understand all the different ways that communications can affect consumer
behavior in their daily lives.38
The American Marketing Association defines integrated marketing communications (IMC) as “a
planning process designed to assure that all brand contacts received by a customer or prospect for a prod-
uct, service, or organization are relevant to that person and consistent over time.” This planning process
evaluates the strategic roles of a variety of communications disciplines—for example, general advertis-
ing, direct response, sales promotion, and public relations—and skillfully combines these disciplines to
provide clarity, consistency, and maximum impact through the seamless integration of messages.
Media companies and ad agencies are expanding their capabilities to offer multiplatform deals
for marketers. These expanded capabilities make it easier for marketers to assemble various media
properties—as well as related marketing services—in an integrated communication program.
Table 17.3 displays the different lines of businesses for marketing and advertising services giant WPP.
Coordinating Media
Media coordination can occur across and within media types, but marketers should combine
personal and nonpersonal communications channels through multiple-vehicle, multiple-stage
campaigns to achieve maximum impact and increase message reach and impact.
Promotions can be more effective when combined with advertising, for example.39 The aware-
ness and attitudes created by advertising campaigns can increase the success of more direct sales
TABLE 17.3 WPP’s Lines of Businesses
Advertising
Global, national and specialist advertising services from a range of top international and specialist agencies, amongst them Grey, JWT, Ogilvy &
Mather, United Network and Y&R
Media Investment Management
Above- and below-the-line media planning and buying and specialist sponsorship and branded entertainment services from GroupM companies
MediaCom, Mediaedge:cia, Mindshare, Maxus and others
Consumer Insight
WPP’s Kantar companies, including TNS, Millward Brown, The Futures Company and many other specialists in brand, consumer, media and
marketplace insight, work with clients to generate and apply great insights
Public Relations & Public Affairs
Corporate, consumer, financial and brand-building services from PR and lobbying firms Burson-Marsteller, Cohn & Wolfe, Hill & Knowlton,
Ogilvy Public Relations Worldwide and others
Branding & Identity
Consumer, corporate and employee branding and design services, covering identity, packaging, literature, events, training and architecture
from Addison, The Brand Union, Fitch, Lambie-Nairn, Landor Associates, The Partners and others
Direct, Promotion & Relationship Marketing
The full range of general and specialist customer, channel, direct, field, retail, promotional and point-of-sale services from Bridge Worldwide,
G2, OgilvyOne, OgilvyAction, RTC Relationship Marketing, VML, Wunderman and others.
Healthcare Communications
CommonHealth, GCI Health, ghg, Ogilvy Healthworld, Sudler & Hennessey and others provide integrated healthcare marketing solutions from
advertising to medical education and online marketing
Specialist Communications
A comprehensive range of specialist services, from custom media and multicultural marketing to event, sports, youth and entertainment
marketing; corporate and business-to-business; media, technology and production services
WPP Digital
Through WPP Digital, WPP companies and their clients have access to a portfolio of digital experts including 24/7 Real Media, Schematic and BLUE
Source: Adapted from WPP, “What We Do,” www.wpp.com/wpp/about/whatwedo/ (as at 1 October 2010). Used with permission.
Source: Adapted from Kevin Lane Keller, Strategic Brand Management, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008).
496 PART 7 COMMUNICATING VALUE
pitches. Advertising can convey the positioning of a brand and benefit from online display advertis-
ing or search engine marketing that offers a stronger call to action.40
Many companies are coordinating their online and offline communications activities. Web
addresses in ads (especially print ads) and on packages allow people to more fully explore a com-
pany’s products, find store locations, and get more product or service information. Even if con-
sumers don’t order online, marketers can use Web sites in ways that drive them into stores to buy.
Implementing IMC
In recent years, large ad agencies have substantially improved their integrated offerings. To facilitate
one-stop shopping, these agencies have acquired promotion agencies, public relations firms, package-
design consultancies, Web site developers, and direct-mail houses. They are redefining themselves as
communications companies that assist clients to improve their overall communications effectiveness
by offering strategic and practical advice on many forms of communication.41 Many international
clients such as IBM (Ogilvy), Colgate (Young & Rubicam), and GE (BBDO) have opted to put a sub-
stantial portion of their communications work through one full-service agency. The result is inte-
grated and more effective marketing communications at a much lower total communications cost.
Integrated marketing communications can produce stronger message consistency and help
build brand equity and create greater sales impact.42 It forces management to think about every
way the customer comes in contact with the company, how the company communicates its posi-
tioning, the relative importance of each vehicle, and timing issues. It gives someone the responsibility—
where none existed before—to unify the company’s brand images and messages as they come
through thousands of company activities. IMC should improve the company’s ability to reach the
right customers with the right messages at the right time and in the right place.43 “Marketing
Memo: How Integrated Is Your IMC Program?” provides some guidelines.
m a r k e t i n g
Memo How Integrated Is Your IMC Program?
In assessing the collective impact of an IMC program, the marketer’s over-
riding goal is to create the most effective and efficient communications
program possible. The following six criteria can help determine whether
communications are truly integrated.
• Coverage. Coverage is the proportion of the audience reached by
each communication option employed, as well as how much overlap
exists among communication options. In other words, to what extent
do different communication options reach the designated target
market and the same or different consumers making up that market?
• Contribution. Contribution is the inherent ability of a marketing
communication to create the desired response and communication
effects from consumers in the absence of exposure to any other
communication option. How much does a communication affect
consumer processing and build awareness, enhance image, elicit
responses, and induce sales?
• Commonality. Commonality is the extent to which common associa-
tions are reinforced across communication options; that is, the extent to
which information conveyed by different communication options share
meaning. The consistency and cohesiveness of the brand image is
important because it determines how easily existing associations and
responses can be recalled and how easily additional associations and
responses can become linked to the brand in memory.
• Complementarity. Communication options are often more effective when
used in tandem. Complementarity relates to the extent to which different
associations and linkages are emphasized across communication options.
Different brand associations may be most effectively established by capi-
talizing on those marketing communication options best suited to eliciting
a particular consumer response or establishing a particular type of brand
association. Many of the TV ads during the Super Bowl—America’s
biggest media event—are designed to create curiosity and interest so that
consumers go online and engage in social media and word of mouth to
experience and find more detailed information.44 A 2010 Super Bowl spot
for Snickers candy bar featuring legendary TV comedienne Betty White
resulted in over 3.5 million visits to the brand’s Web site after it was run.
• Versatility. In any integrated communication program, when consumers
are exposed to a particular marketing communication, some will have
already been exposed to other marketing communications for the brand,
and some will not have had any prior exposure. Versatility refers to the
extent to which a marketing communication option is robust and “works”
for different groups of consumers.The ability of a marketing communication
to work at two levels—effectively communicating to consumers who have
or have not seen other communications—is critically important.
• Cost. Marketers must weigh evaluations of marketing communications
on all these criteria against their cost to arrive at the most effective and
efficient communications program.
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 497
Summary
1. Modern marketing calls for more than developing a
good product, pricing it attractively, and making it
accessible to target customers. Companies must also
communicate with present and potential stakeholders
and with the general public.
2. The marketing communications mix consists of eight
major modes of communication: advertising, sales
promotion, public relations and publicity, events and
experiences, direct marketing, interactive marketing,
word-of-mouth marketing, and personal selling.
3. The communications process consists of nine elements:
sender, receiver, message, media, encoding, decoding,
response, feedback, and noise. To get their messages
through, marketers must encode their messages in a
way that takes into account how the target audience
usually decodes messages. They must also transmit
the message through efficient media that reach the
target audience and develop feedback channels to
monitor response to the message.
4. Developing effective communications requires eight
steps: (1) Identify the target audience, (2) determine the
communications objectives, (3) design the communica-
tions, (4) select the communications channels, (5) es-
tablish the total communications budget, (6) decide on
the communications mix, (7) measure the communica-
tions results, and (8) manage the integrated marketing
communications process.
5. In identifying the target audience, the marketer needs to
close any gap that exists between current public per-
ception and the image sought. Communications objec-
tives can be to create category need, brand awareness,
brand attitude, or brand purchase intention.
6. Designing the communication requires solving three
problems: what to say (message strategy), how to say it
(creative strategy), and who should say it (message
source). Communications channels can be personal
(advocate, expert, and social channels) or nonpersonal
(media, atmospheres, and events).
7. Although other methods exist, the objective-and-task
method of setting the communications budget, which
calls upon marketers to develop their budgets by defining
specific objectives, is typically most desirable.
8. In choosing the marketing communications mix, mar-
keters must examine the distinct advantages and costs
of each communication tool and the company’s market
rank. They must also consider the type of product
market in which they are selling, how ready consumers
are to make a purchase, and the product’s stage in the
company, brand, and product.
9. Measuring the effectiveness of the marketing communi-
cations mix requires asking members of the target
audience whether they recognize or recall the commu-
nication, how many times they saw it, what points they
recall, how they felt about the communication, and
what are their previous and current attitudes toward the
company, brand, and product.
10. Managing and coordinating the entire communications
process calls for integrated marketing communications
(IMC): marketing communications planning that recog-
nizes the added value of a comprehensive plan to eval-
uate the strategic roles of a variety of communications
disciplines, and that combines these disciplines to
provide clarity, consistency, and maximum impact
through the seamless integration of discrete messages.
Applications
Marketing Debate
Has TV Advertising Lost Its Power?
Long deemed the most successful marketing medium, tele-
vision advertising is increasingly criticized for being too ex-
pensive and, even worse, no longer as effective as it once
was. Critics maintain that consumers tune out too many ads
by zipping and zapping and that it is difficult to make a
strong impression. The future, claim some, is with online
advertising. Supporters of TV advertising disagree, contend-
ing that the multisensory impact of TV is unsurpassed and
that no other media option offers the same potential impact.
Take a position: TV advertising has faded in impor-
tance versus TV advertising is still the most powerful
advertising medium.
Marketing Discussion
Communications Audit
Pick a brand and go to its Web site. Locate as many forms
of communication as you can find. Conduct an informal
communications audit. What do you notice? How consis-
tent are the different communications?
498 PART 7 COMMUNICATING VALUE
Marketing Excellence
>>Red Bull
Red Bull’s
integrated marketing communica-
tions mix has been so successful that the company has
created an entirely new drink category—functional en-
ergy drinks—and has become a multibillion-dollar brand
among competition from beverage kings like Coca-Cola
and Pepsi. In less than 20 years, Red Bull has become
the energy drink market leader by skillfully connecting
with the global youth. Dietrich Mateschitz founded Red
Bull in Austria and introduced the energy drink into
Hungary, its first foreign market, in 1992. Today, Red
Bull sells 4 billion cans of energy drinks each year in
over 160 countries.
So how does Red Bull do it? The answer: differently
than others. For years, Red Bull offered just one product,
Red Bull Energy Drink, in one size—a slick silver 250 ml.
(8.3 oz.) can with a European look and feel. Red Bull’s
ingredients—amino acid taurine, B-complex vitamins,
caffeine, and carbohydrates—mean it’s highly caffeinated
and energizing, so fans have called it “liquid cocaine” and
“speed in a can.” Over the last decade, Red Bull has intro-
duced three additional products: Red Bull Sugarfree, Red
Bull Energy Shots, and Red Bull Cola—each slight varia-
tions of the original energy drink.
Since its beginning, Red Bull has used little traditional
advertising and no print, billboards, banner ads, or Super
Bowl spots. While the company runs minimal television
commercials, the animated spots and tagline “Red Bull
Gives You Wiiings” are meant to amuse its young audi-
ence and connect in a nontraditional, nonpushy manner.
Red Bull builds buzz about the product through
grassroots, viral marketing tactics, starting with its “seed-
ing program” that microtargets trendy shops, clubs, bars,
and stores. As one Red Bull executive explained, “We go
to on-premise accounts first, because the product gets a
lot of visibility and attention. It goes faster to deal with
individual accounts, not big chains and their authorization
process.” Red Bull is easily accepted at clubs because “in
clubs, people are open to new things.”
Once Red Bull has gained some momentum in the
bars, it next moves into convenience stores located near
colleges, gyms, health-food stores, and supermarkets,
prime locations for its target audience of men and women
aged 16 to 29. Red Bull has also been known to target
college students directly by providing them with free
cases of Red Bull and encouraging them to throw a party.
Eventually, Red Bull moves into restaurants and finally,
into supermarkets.
Red Bull’s marketing efforts strive to build its brand
image of authenticity, originality, and community in several
ways. First, Red Bull targets opinion leaders by sampling
its product, a lot. Free Red Bull energy drinks are available
at sports competitions, in limos before award shows, and
at exclusive after-parties. Free samples are passed out on
college campuses and city streets, given to those who
look like they need a lift.
Next, Red Bull aligns itself with a wide variety of ex-
treme sports, athletes, teams, events, and artists (in
music, dance, and film). From motor sports to mountain
biking, snowboarding to surfing, dancing to extreme
sailing, there is no limit to the craziness of a Red Bull
event or sponsorship. A few have become notorious for
taking originality and extreme sporting to the limit, in-
cluding the annual Flugtag. At Flugtag, contestants
build homemade flying machines that must weigh less
than 450 pounds, including the pilot. Teams then launch
their contraptions off a specially designed Red Bull
branded ramp, 30 feet above a body of water. Crowds
of up to 300,000 young consumers cheer on as the
contestants and their “planes” stay true to the brand’s
slogan: “Red Bull gives you wings!”
Another annual event, the Red Bull Air Race, tests the
limits of sanity. Twelve of the world’s top aerobatic stunt
pilots compete in a 3.5 mile course through a low-level
aerial racetrack made up of air-filled Red Bull branded py-
lons 33 feet apart and reaching 65 feet in height. In other
words, pilots fly planes with a 26-foot wingspan through a
gap of 33 feet at 230 mph. These Red Bull–branded
planes crash occasionally, but to date no fatalities have
ever occurred.
Red Bull’s Web site provides consumers with infor-
mation about how to find Red Bull events, videos of and
interviews with Red Bull–sponsored athletes, and clips of
amazing feats that will be tested next. For example, Bull
Stratos is a mission one man is undertaking to free-fall
from 120,000 feet, or 23 miles high. The jump will be at-
tempted from the edge of space and, if successful, it will
mark the first time a human being has reached supersonic
speeds in a free fall.
Red Bull buys traditional advertising once the
market is mature and the company needs to reinforce
DESIGNING AND MANAGING INTEGRATED MARKETING COMMUNICATIONS | CHAPTER 17 499
the brand to its consumers. As one Red Bull executive
explained, “Media is not a tool that we use to estab-
lish the market. It is a critical part. It’s just later in the
development.”
Red Bull’s “anti-marketing” IMC strategy has been
extremely successful connecting with its young con-
sumers. It falls directly in line with the company’s mission
to be seen as unique, original, and rebellious—just as its
Generation Y consumers want to be viewed.
Questions
1. What are Red Bull’s greatest strengths and risks as
more companies (like Coca-Cola, Pepsi, and Monster)
enter the energy drink category and gain market
share?
2. Should Red Bull do more traditional advertising? Why
or why not?
3. Discuss the effectiveness of Red Bull’s sponsorships,
for example, Bull Stratos. Is this a good use of Red
Bull’s marketing budget? Where should the company
draw the line?
Sources: Kevin Lane Keller, “Red Bull: Managing a High-Growth Brand,” Best Practice Cases in
Branding, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008); Peter Ha, “Red Bull Stratos: Man
Will Freefall from Earth’s Stratosphere,” Time, January 22, 2010; Red Bull, www.redbull.com.
Marketing Excellence
>>Target
Like other dis-
count retailers, Target sells a wide variety of
products, including clothing, jewelry, sporting goods,
household supplies, toys, electronics, and health and
beauty products. However, since its founding in 1962,
Target has focused on differentiating itself from the com-
petition. This became evident in the mid-1980s when
Kmart dominated the mass retail industry and Walmart
was growing rapidly. Kmart and Walmart’s marketing
messages communicated their low price promise, but
their merchandise was perceived as cheap and low-
quality. Target sensed a gap in the market for “cheap chic”
retail and set out to distinguish itself from the other big-
box retailers.
Target planned to build an up-market cachet for its
brand without losing its relevance for price-conscious
consumers. It positioned itself as a high-fashion brand
with trendy styles and quality merchandise at affordable
low prices. To fulfill this brand promise, Target’s teams of
merchandisers travel the world looking for the next hot
items. Next, Target brings these trends to the shelves
faster than its competitors.
Many styles are sold exclusively at Target through
partnerships with world-renowned designers, such as
Mossimo Giannulli, Jean Paul Gaultier, and Liz Lange in
clothes; Anya Hindmarch in handbags; Sigerson Morrison
in shoes; Michael Graves in home goods; and Pixi by
Petra Strand in beauty. They are either staples in Target
stores or part of the Go International line, a special design
collection available for only a few months. In 2006, Target
introduced U.S. consumers to the concept of “fast fash-
ion,” already popular in Europe, to help keep the product
selection fresh, which in turn led to more frequent shop-
per visits.
Target’s designer line collections are just one unique
part of its entire integrated marketing communications
mix. The company uses a variety of tactics to communi-
cate its “cheap chic” positioning, beginning with its slo-
gan, “Expect More, Pay Less.” In its stores, Target uses
strategically placed low shelves, halogen and track light-
ing, cleaner fixtures, and wider aisles to avoid visual
clutter. Signage features contemporary imagery but is
printed on less expensive materials. Target even catches
the eye of consumers in the air by painting its signature
red bull’s eye on the roof of stores located near busy
airports.
Target uses a wide range of traditional advertising
such as television ads, direct mailers, print ads, radio, and
circulars. Its messages feature hip young customers, a
variety of strong name-brand products, and a lighthearted
tone—all which have helped make Target’s bull’s eye logo
well recognized. Target also aligns itself with a variety of
events, sports, athletes, and museums through corporate
sponsorships. From Target Field, the home of the
Minnesota Twins in Minneapolis, to Target NASCAR and
Indy racing teams and contemporary athletes like Olympic
snowboarder Shaun White, sponsorships help Target
pinpoint specific consumers, interests, attitudes, and
demographics. Target also advertises on and sponsors
major awards shows such as the Oscars, Emmys,
Grammys, and the Golden Globes.
Target has a strong online presence and uses
Target.com as a critical component in its retail and
500 PART 7 COMMUNICATING VALUE
communications strategy. Target.com is able to gain in-
sight into consumers’ shopping preferences, which ulti-
mately allows for more targeted direct marketing efforts.
The site also features in-store items alongside Web-only
items in hopes of driving traffic into the stores. On social
Web sites such as Twitter and Facebook, Target builds
loyalty and encourages young consumers to share their
experiences, discounts, and great finds with each other.
Target reinforces its positive brand image by contribut-
ing significantly to surrounding communities. The com-
pany donates 5 percent of its annual income, or more than
$3 million a week, to programs that focus on education,
the arts, social service, and volunteerism. Target donated
more than 16 million pounds of food in 2008 to Feed
America, the nation’s food bank network. Target also
sponsors discounted or free days at art museums around
the country, including the Museum of Modern Art in New
York and the Museum of Contemporary Art in Chicago.
As a result of its integrated marketing plan, Target has
attracted many shoppers who would not otherwise shop
at a discount retailer. Its customers are younger, more
affluent, and more educated than its competitors attract.
The median age of Target shoppers is 41 and the median
household income is $63,000. Three-quarters of Target
consumers are female and 45 percent have children at
home. In addition, 97 percent of U.S. consumers recog-
nize the Target bull’s eye logo.
While Target’s marketing communication mix has
effectively communicated its “cheap chic” message over
the years, this strategy hurt sales during the recession in
2008–2009. During that time, consumers significantly cut
their spending and shopped mostly for necessities at low-
cost Walmart instead of for discretionary items, which
make up about three-fifths of sales at Target.
As a result, Target tweaked its marketing message
and merchandise profile. The company added perish-
ables to its inventory—a necessity in slow economic
times—and cut back on discretionary items such as
clothing and home accessories. Target’s marketing mes-
sage remains focused on offering consumers high style
and unique brand names but emphasizes value more,
using phrases such as “fresh for less” and “new way
to save.”
Today, Target is the second-largest discount retailer in
the United States, with $65.4 billion in sales in 2009, and
ranks number 28 on the Fortune 500 list. Its successful in-
tegrated marketing mix has worked so well that con-
sumers often jokingly pronounce the company’s name as
if it were an upscale boutique, “Tar-ZHAY.”
Questions
1. What has Target done well over the years in terms of
its integrated marketing communications strategy?
What should it do going forward?
2. How does Target compete against mammoth
Walmart? What are the distinct differences in their
IMC strategies?
3. Did Target do the right thing by tweaking its message
to focus more on value and less on trends? Why or
why not?
Sources: “Value for Money Is Back—Target Does Marketing Right,” The Marketing Doctor,
October 2, 2006; Ben Steverman, “Target vs. Wal-Mart: The Next Phase,” BusinessWeek, August
18, 2009; Ann Zimmerman, “Staying on Target,” Wall Street Journal, May 7, 2007; Mya Frazier,
“The Latest European Import: Fast Fashion,” Advertising Age, January 9, 2006, p. 6; Julie
Schlosser, “How Target Does It,” Fortune, October 18, 2004, p. 100; Michelle Conlin, “Look Who’s
Stalking Wal-Mart,” BusinessWeek, December 7, 2009, pp. 30–36; Wikinvest, www.wikinvest.com;
Target, www.target.com.