Why do you think market segmentation is important and what impact could it have on a company? Does a successful company need to segment at all? Identify four different products that represent market segmentation based on demographic, geographic, psychological, and behavioral features and discuss how each product’s advertising reflects this segmentation.
The assignment is to answer the question provided above in essay form. This is to be in narrative form and should be as thorough as possible. Bullet points should not to be used. The paper should be at least 1.5 – 2 pages in length, Times New Roman 12-pt font, double-spaced, 1 inch margins and utilizing at least one outside scholarly or professional source related to marketing management. The textbook should also be utilized. Do not insert excess line spacing. APA formatting and citation should be used.
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Marketing Management, Fifth Edition
Dawn Iacobucci
Senior Vice President, General Manager,
Social Sciences, Humanities & Business:
Erin Joyner
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Preface x
About the author xii
Part 1 Marketing Strategy
1 Why is Marketing Management Important? 1
2 Customer Behavior 13
3 Segmentation 32
4 Targeting 51
5 Positioning 63
Part 2 Product Positioning
6 Products: Goods and Services 79
7 Brands 91
8 New Products and Innovation 109
Part 3 Positioning via Price, Place,
and Promotion
9 Pricing 131
10 Channels of Distribution 161
11 Advertising Messages and Marketing Communications 185
12 Integrated Marketing Communications and Media Choices 205
13 Social Media 224
Part 4 Positioning: Assessment Through
the Customer Lens
14 Customer Satisfaction and Customer Relationships 239
15 Marketing Research Tools 256
Part 5 Capstone
16 Marketing Strategy 275
17 Marketing Plans 293
Endnotes 312
Index 316
BRIEF CONTENTS
iii
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CONTENTS
Preface x
About the author xii
Part 1 Marketing Strategy
1 Why Is Marketing Management
Important? 1
1-1 Defining Marketing 1
1-2 Marketing Is an Exchange Relationship 1
1-2a Marketing is Everywhere 2
1-3 Why Is Marketing Management Important? 2
1-3a Marketing and Customer Satisfaction is
Everyone’s Responsibility 4
1-4 The “Marketing Framework”: 5Cs, STP, and the 4Ps 5
1-4a Book Layout 7
1-4b Learning from the Marketing Framework 8
1-4c The Flow in Each Chapter: What? Why? How? 9
2 Customer Behavior 13
2-1 Three Phases of the Purchase Process 13
2-2 Different Kinds of Purchases 15
2-3 The Marketing Science of Customer Behavior 18
2-3a Sensation and Perception 18
2-3b Learning, Memory, and Emotions 20
2-3c Motivation 22
2-3d Attitudes and Decision Making 25
2-3e How Do Cultural Differences Affect
Consumers’ Behavior? 27
3 Segmentation 32
3-1 Why Segment? 32
3-2 What Are Market Segments? 33
3-3 What Information Serves as Bases for Segmentation? 35
3-3a Demographic 35
3-3b Geographic 36
3-3c Psychological 37
3-3d Behavioral 39
3-3e B2B 40
3-3f Concept in Action: Segmentation Variables 41
iv
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vContents
3-4 How Do Marketers Segment
the Market? 42
3-4a How to Evaluate the
Segmentation Scheme 42
4 Targeting 51
4-1 What Is Targeting and Why
Do Marketers Do It? 51
4-2 How Do We Choose a Segment
to Target? 52
4-2a Profitability and Strategic Fit 52
4-2b Competitive Comparisons 54
4-3 Sizing Markets 56
4-3a Concept in Action: How Much of
My Consultative Advice Can I Sell? 58
5 Positioning 63
5-1 What Is Positioning and Why Is It Probably the Most Important
Aspect of Marketing? 63
5-1a Positioning via Perceptual Maps 64
5-1b The Positioning Matrix 66
5-2 Writing a Positioning Statement 74
Part 2 Product Positioning
6 Products: Goods and Services 79
6-1 What Do We mean by Product? 79
6-1a The Product in the Marketing Exchange 80
6-2 How Are Goods Different from Services? 81
6-2a Intangibility 81
6-2b Search, Experience, Credence 82
6-2c Perishability 83
6-2d Variability 83
6-2e To Infinity and Beyond Goods and Services 84
6-3 What Is the Firm’s Core Market Offering? 84
6-3a Dynamic Strategies 86
6-3b Product Lines: Breadth and Depth 87
7 Brands 91
7-1 What Is a Brand? 91
7-1a Brand Name 92
7-1b Logos and Color 92
7-2 Why Brand? 93
7-3 What Are Brand Associations? 95
7-3a Brand Personalities 97
7-3b Brand Communities 98
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vi Contents
7-4 What Are Branding Strategies? 98
7-4a Umbrella Brands vs. House of Brands 99
7-4b Brand-Extensions and Co-Branding 100
7-4c How are Brands Best Rolled Out Globally? 103
7-4d Store Brands 103
7-5 How Is Brand Equity Determined? 104
8 New Products and Innovation 109
8-1 Why Are New Products Important? 109
8-2 How Does Marketing Develop New Products for
Their Customers? 110
8-2a Philosophies of Product Development 110
8-2b Marketing 111
8-2c Idea Creation and Market Potential 112
8-2d Concept Testing and Design & Development 113
8-2e Beta-Testing 115
8-2f Launch 116
8-3 What Is the Product Life Cycle? 118
8-3a Diffusion of Innovation 120
8-4 How Do New Products and Brand Extensions Fit in
Marketing Strategy? 124
8-4a Strategic Thinking about Growth 125
8-5 What Trends Should I Watch? 126
Part 3 Positioning via Price, Place,
and Promotion
9 Pricing 131
9-1 Why Is Pricing so Important? 131
9-2 Background: Supply and Demand 131
9-3 Low Prices 136
9-3a Concept in Action: Break-Even for a Good 137
9-3b Concept in Action: Break-Even for a Service 139
9-4 High Prices 142
9-4a Using Scanner Data 142
9-4b Using Survey Data 144
9-4c Conjoint Analysis 144
9-5 Units or Revenue; Volume or Profits 145
9-6 Customers and the Psychology of Pricing 147
9-6a Price Discrimination, a.k.a. Segmentation Pricing 150
9-6b Quantity Discounts 151
9-6c Yield or Demand Management 152
9-7 Non-Linear Pricing 152
9-8 Changes in Cha-Ching 154
9-8a Pricing and the Product Life Cycle 154
9-8b Price Fluctuations 155
9-8c Coupons 155
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viiContents
9-8d Competitive Strategy and Game Theory 155
9-8e Auctions 156
10 Channels of Distribution 161
10-1 What Are Distribution Channels, Supply Chain Logistics, and
Why Do We Use Them? 162
10-2 How to Design Smart Distribution Systems: Intensive or
Selective? 165
10-2a Push and Pull 167
10-3 Power and Conflict in Channel Relationships 168
10-3a Revenue Sharing 170
10-3b Integration 173
10-3c Retailing 175
10-3d Franchising 178
10-3e E-Commerce 179
10-3f Catalog Sales 180
10-3g Sales Force 181
10-3h Integrated Marketing Channels 182
11 Advertising Messages and Marketing
Communications 185
11-1 What Is Advertising? 187
11-2 Why Is Advertising Important? 187
11-3 What Marketing Goals Are sought from Advertising
Campaigns? 188
11-4 Designing Advertising Messages to Meet
Marketing and Corporate Goals 190
11-4a Cognitive Ads 191
11-4b Emotional Ads 193
11-4c Image Ads 195
11-4d Endorsements 196
11-5 How Is Advertising Evaluated? 198
11-5a A
ad
and A
brand
201
12 Integrated Marketing Communications
and Media Choices 205
12-1 What Media Decisions Are Made in Advertising Promotional
Campaigns? 205
12-1a Reach and Frequency and GRPs 207
12-1b Media Planning and Scheduling 209
12-2 Integrated Marketing Communications Across Media 210
12-2a Media Comparisons 212
12-2b Beyond Advertising 214
12-2c Choice Between Advertising and a Sales Force 215
12-2d The IMC Choices Depend on
the Marketing Goals 218
12-3 How Is the Effectiveness of Advertising
Media Measured? 220
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viii Contents
13 Social Media 224
13-1 What Are Social Media? 224
13-1a Types of Social Media 225
13-1b Word-of-mouth 226
13-2 What Are Social Networks? 227
13-2a Identifying Influentials 227
13-2b Recommendation Systems 228
13-2c Social Media ROI, KPIs, and Web Analytics 230
13-2d Pre-purchase: Awareness 230
13-2e Pre-purchase: Brand Consideration 231
13-2f Purchase or Behavioral Engagement 232
13-2g Post-purchase 233
13-2h How to Proceed? 234
Part 4 Positioning: Assessment Through
the Customer Lens
14 Customer Satisfaction
and Customer Relationships 239
14-1 What Are Customer Evaluations, and Why Do We Care? 239
14-2 How Do Consumers Evaluate Products? 240
14-2a Sources of Expectations 241
14-2b Expectation and Experience 243
14-3 How Do Marketers Measure Quality and Customer
Satisfaction? 245
14-4 Loyalty and Customer Relationship Management (CRM) 248
14-4a Recency, Frequency, and
Monetary Value (RFM) 249
14-4b Customer Lifetime Value (CLV) 251
15 Marketing Research Tools 256
15-1 Why Is Marketing Research
so Important? 256
15-2 Cluster Analysis for Segmentation 258
15-3 Perceptual Mapping for Positioning 260
15-3a Attribute-Based 260
15-4 Focus Groups for Concept Testing 264
15-5 Conjoint for Testing Attributes 265
15-6 Scanner Data for Pricing and Coupon Experiments and Brand
Switching 268
15-7 Surveys for Assessing Customer Satisfaction 270
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ixContents
Part 4 Capstone
16 MARKETING STRATEGY 275
16-1 Types of Business and Marketing Goals 275
16-2 Marketing Strategy 278
16-2a Ansoff’s Product-Market Growth Matrix 278
16-2b The BCG Matrix 279
16-2c The General Electric Model 280
16-2d Porter and Strategies 281
16-2e Treacy and Wiersema Strategies 282
16-3 How to “Do” Strategy 283
16-3a SWOT’s S&W 284
16-3b SWOT’s O&T 285
16-4 Key Marketing Metrics to Facilitate Marketing Strategy 287
17 Marketing Plans 293
17-1 How Do We Put it All Together? 293
17-2 Situation Analysis: The 5Cs 294
17-3 STP 298
17-4 The 4Ps 300
17-5 Spending Time and Money 304
Endnotes 312
Index 316
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x
There are several really good marketing management texts, yet this text was created because
the Cengage sales force recognized an opportunity. Existing texts present numerous lists of
factors to consider in a marketing decision but offer little guidance on how the factors, lists
and multiple decisions all fit together.
In this book, an overarching Marketing Framework, used in every chapter, shows how
all the pieces fit together. So, for example, when facing a decision about pricing, readers
must consider how pricing will impact a strategic element like positioning or a customer
reaction like loyalty and word of mouth. This book is practical, no-nonsense, and relatively
short, to further heighten its utility. Everyone is busy these days, so it’s refreshing when a
writer gets to the point. After this relatively quick read, MBAs and EMBAs should be able
to speak sensibly about marketing issues and contribute to their organizations.
Chapter Organization
The form of each chapter is very straightforward: The chapter’s concept is introduced by
describing what it is and why marketers do it, and the rest of the chapter shows how to do
it well. This what-why-and-how structure is intended to be extremely useful to MBA and
EMBA students, who will quickly understand the basic concepts, e.g., what is segmenta-
tion and why is it useful in marketing and business? The details are in the execution, so the
how is the focus of the body of the chapter.
Key Features
Each chapter opens with a managerial checklist of questions that MBA and EMBA stu-
dents will be able to answer after reading the chapter. Throughout each chapter, boxes
present brief illustrations of concepts in action in the real world or elaborations on concepts
raised in the text, also drawing examples from the real business world. Chapters close with
a Managerial Recap that highlights the main points of the chapter and reviews the opening
checklist of questions. Chapters are also summarized in outline form, including the key
terms introduced throughout the chapter. There are discussion questions to ponder, as well
as video resources to serve as points for still further discussion. Each chapter contains a
Mini-Case that succinctly illustrates key concepts.
MindTap
The 5th edition of Marketing Management offers two exciting alternative teaching for-
mats. Instructors can choose between either a hybrid print and digital offering or a version
that provides completely integrated online delivery through a platform called MindTap.
MindTap is a fully online, highly personalized learning experience built upon authoritative
PREFACE
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xiPreface
content. By combining readings, multimedia, activities, and assessments into a singular
Learning Path, MindTap guides students through their course with ease while promoting
engagement. Instructors personalize the Learning Path by customizing Cengage Learning
resources and adding their own content via apps that integrate into the MindTap frame-
work seamlessly. Instructors are also able to incorporate the online component of Consumer
Behavior into a traditional Learning Management System (e.g. Blackboard, Canvas, D2L,
etc.) providing a way to manage assignments, quizzes and tests throughout the semester
Instructor Resources
Web resources for the book at www.cengagebrain.com provide the latest information in
marketing management. The Instructor’s Manual, Test Bank authored in Cognero, and
PowerPoint slides can be found there.
Acknowledgments
Cengage Learning’s people are the best! Special thanks to John Sarantakis (Content
Developer), Mike Roche (Senior Product Manager), Heather Mooney (Product Manager)
Jenny Ziegler (Senior Content Project Manager), Diane Garrity (Intellectual Property An-
alyst), Sarah Shainwald (Intellectual Property Project Manager) Laura Cheu (Copyeditor),
Ezhilsolai Periasamy (Project Manager), Manjula Devi Subramanian (Text Researcher),
Abdul Khader (Image Reasearcher), and Pushpa V. Giri (Proofreader).
As always, special thanks to the Cengage sales force. I will forever be grateful for your
notes of encouragement as we began this project. I hope you like Marketing Management 5.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
xii
ABOUT THE AUTHOR
DAWN IACOBUCCI is the Ingram Professor of Marketing at the Owen
Graduate School of Management, Vanderbilt University (since 2007). She has
been Senior Associate Dean at Vanderbilt (2008-2010), and a professor of marketing
at Kellogg (Northwestern University, 1987-2004), Arizona (2001-2002), and Wharton
(Pennsylvania, 2004 to 2007). She received her M.S. in Statistics, and M.A. and Ph.D.
in Quantitative Psychology from the University of Illinois at Urbana-Champaign. Her
research focuses on modeling social networks and geeky high-dimensional analyses. She
has published in Journal of Marketing, Journal of Marketing Research, Harvard Business
Review, Journal of Consumer Psychology, International Journal of Research in Marketing,
Marketing Science, Journal of Service Research, Psychometrika, Psychological Bulletin, and Social
Networks. Iacobucci teaches Marketing Management and Marketing Models to Executives,
MBA and undergraduate students and multivariate statistics and methodological topics to
Ph.D. students. She has been editor of both Journal of Consumer Research and Journal of
Consumer Psychology. She edited Kellogg on Marketing, she is author of Mediation Analysis,
and co-author on Gilbert Churchill’s leading text, Marketing Research.
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1
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
What are the three phases of the buying process?
What kinds of purchases are there?
How do consumers make purchase decisions—and how can marketers use this information?
Customer
Company
Context
Collaborators
Competitors
Managerial Checklist
WHY IS MARKETING
MANAGEMENT IMPORTANT?
1-1 DEFINING MARKETING
Ask the average person, “What is marketing?” and they might say:
• “Marketing is sales and advertising.”
• “Marketers make people buy stuff they don’t need and can’t afford.”
• “Marketers are the people who call you while you’re trying to eat dinner.”
Unfortunately those comments are probably all deserved. The marketing profession, like
any other, has its issues. But in this book we’ll take a more enlightened view.
This chapter begins with an overview of marketing concepts and terms. We’ll see the
importance of marketing in today’s corporation. We’ll then present the Marketing Frame-
work that structures the book and gives you a systematic way to think about marketing, and
we’ll define all the terms in the framework: 5Cs, STP, and 4Ps.
1-2 MARKETING IS AN EXCHANGE
RELATIONSHIP
Marketing is defined as an exchange between a firm and its customers.1 Figure 1.1 shows
the customer wants something from the firm, and the firm wants something from the
customer. Marketers try to figure out what customers want and how to provide it profitably.
1
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2 Part 1 Marketing Strategy
Ideally, this can be a nice, symbiotic relationship. Customers don’t mind paying for their
purchases—and sometimes they pay a lot—if they really want what they’re about to buy.
Companies like taking in profits, of course, but great companies really do care about their
customers. If we’re lucky, the exchange depicted in Figure 1.1 is an ongoing exchange be-
tween the customer and the company, strengthening the tie
between them.
As a lifelong customer, you are already somewhat famil-
iar with marketing from the consumer side. But on the job,
you’ll need to understand marketing from the firm’s point
of view. Throughout this book, you’ll see both perspectives.
In particular, you’ll see all the issues that marketers deal
with as they try to deliver something of value to their cus-
tomers, while trying to derive value from them.
Figure 1.1
Marketing is
an Exchange
C
U
S
T
O
M
E
R
C
O
M
P
A
N
Y
offers bene�ts
seeks pro�tsseeks bene�ts
expects to pay
Marketing oversees the
customer-brand exchange.
1-2a Marketing is Everywhere
Figure 1.2 illustrates that you can market just about anything. Marketing managers sell
simple, tangible goods such as soap or shampoo, as well as high-end luxury goods such as
Chanel handbags. Other marketing managers work in services, such as haircuts, airlines,
hotels, or department stores. Marketers oversee experiences like theme parks or events like
theater and concerts. Marketers help entertainers, athletes, politicians, and other celebrities
with their images in their respective “marketplaces” (fans, agents, intelligentsia, opinion).
Tourist bureaus have marketers who advertise the selling points of their city’s or country’s
unique features. Information providers use marketing because they want customers to think
they’re the best (and thereby maximize their ad revenue). Marketers at nonprofits and gov-
ernment agencies work on “causes” (e.g., encouraging organ donation or drinking respon-
sibly). Industries market themselves (think of the beef or milk ads). Naturally, companies
use marketing for their brands and themselves. And you can market yourself, e.g., to a job
interviewer or potential amour. These goals may look different, but marketing can be used
beneficially in all these situations.
1-3 WHY IS MARKETING MANAGEMENT
IMPORTANT?
Marketers have evolved beyond being merely product or production focused, where the
company mind-set is, “Let’s build a better mouse trap.” We know that approach doesn’t
work. There’s no point in just cranking out better gadgets unless the customers want them
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
3Chapter 1 Why is Marketing Management Important?
Figure 1.2
What Can We
“Market”?
Experiences Goods
Ideas Information Places
Companies Industries
Events People
Services
Ya
ro
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ir/
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te
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to
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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
4 Part 1 Marketing Strategy
because the gadgets won’t sell. However, there are still pockets of marketing
naïveté in a number of industries. For example, some museums believe they
don’t need marketing. They think people should appreciate their exhibits, and, if
they don’t, it’s because the public is ignorant. Perhaps the general public is in-
deed relatively unsophisticated culturally, but marketing can be used to educate
the public.
We’re also more advanced than the old sales-oriented days when the action
in the marketplace was, “Let’s make a deal.” This mentality still exists in plac-
es like drug companies, which push their sales forces to impress physicians. But
usually sales dynamics occur where the product is perceived to be a commodity.
In contrast, marketers should be good at communicating product distinctions.
As much as direct-to-consumer pharma ads annoy physicians, they attest to the
power of marketing. The ads result in patients asking their doctors for particular
brand names.
These days we live in a truly customer-oriented and customer-empowered
marketing world. Marketing is even said to be evidence of evolved markets—that
an industry or country has moved beyond production and sales and seeks true re-
lationships with its customers. Marketers seek to identify their customers’ needs
and wants, and they try to formulate attractive solutions. Marketing can make customers
happier, thereby making companies more profitable. Throughout the book, you’ll see how.
1-3a Marketing and Customer Satisfaction is
Everyone’s Responsibility
Many management gurus believe that marketing has succeeded so well that it isn’t just a
“function” in an organization anymore. Marketing is more of a philosophy—a way to think
about business. The marketing orientation should permeate the organization.
• Accounting and finance need to acknowledge the importance of marketing. Why?
Because their CEOs do. Thinking about customers is unimportant only if you’re a
monopoly, and even then, you won’t be one for long.
• Salespeople understand marketing immediately. They’re the front line, interfacing
with the customer. They want to push their firm’s stuff, but they’re thrilled when
their company actually makes stuff that customers want. Then their jobs are so
much easier.
• R&D people tend to understand the marketing spirit, too. They’re hired because
they’re technically sophisticated, but they get jazzed when their inventions become
popular. It doesn’t take much marketing research to test concepts or prototypes and
to veer an R&D path one way or another.
One of the factors stressing marketers these days is the pressure to show results. It’s fair
to hold any part of the corporation accountable, and results may be measured for a number
of marketing activities. The Chief Financial Officer (CFO) who wants to see that a recent
coupon promotion lifted sales can get reasonably good estimates from the Chief Marketing
Officer (CMO) about effectiveness, e.g., the percentage sales increase attributable to the
coupon introduction. The Chief Operating Officer (COO) can also get good estimates of
whether a recent direct mail campaign to target customers has been effective in encourag-
ing frequent buyers to go directly to the Web for purchasing.
However, it’s important not to go overboard in the effort to quantify. For example, how
does one assess the value of a good segmentation study? If segments are poorly defined, any
Marketing can seem intuitive
because we’re all consumers.
But we’re not always the target
customer for the brands we’re
building. As a Brand Manager or
CEO, don’t forget to put yourself
in the shoes of your customers
every once in a while, to see
your brand from their
perspective. When you do, you’ll
understand their wants and
needs better. That alone will
give you an advantage over your
competitors!
CUSTOMERS’
PERSPECTIVE
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5Chapter 1 Why is Marketing Management Important?
subsequent marketing efforts would be completely off, so a good segmentation scheme is
invaluable. Advertising is also a little tricky. Non-marketers have the misconception that
advertising is supposed to bump up sales. It can, and that bump is easily measured. But
really great advertising isn’t intended for a short-term effect on sales. Great advertising
is intended to enhance brand image, a goal that is relatively longer term and thus more
difficult to measure.
In addition to quantifying the effectiveness of marketing programs, marketers are
motivated to translate their efforts into dollars for another reason: to have a “seat at the
table.” Marketers want to make sure that the CMO carries as much weight in the firm
as the CEO or CFO or COO. They all speak finance, so the marketer is frequently mo-
tivated to translate progress into financial terms. Fortunately, technology and data are
increasingly enabling more opportunities for the marketer to make such assessments.
For example, a good customer relationship management (CRM) program allows mar-
keters to run a field study to assess the impact of a new promotion, and tracking Web
data allows marketers to determine the product combinations that are most attractive
to customers.
1-4 THE “MARKETING FRAMEWORK”:
5CS, STP, AND THE 4PS
Figure 1.3 provides the marketing management framework. Marketing is captured by
the 5Cs, STP, and the 4Ps. The 5Cs are customer, company, context, collaborators, and
competitors. The 5Cs force a businessperson to systematically frame the general analysis
of the entire business situation. Figure 1.1 shows that the customer and company are the
central players in the marketing exchange. The context includes the backdrop of macro-
environmental factors: How is our economy and that of our suppliers doing? What legal
constraints do we face, and are these changing? What cultural differences do our global
segments manifest? The collaborators and competitors are the companies and people we work
with vs. those we compete against (though drawing the line is sometimes difficult in to-
day’s interconnected world).
Marketing
speaks to
customers
wherever they
are.
TE
N
GK
U
BA
HA
R/
St
af
f/
AF
P/
Ge
tty
Im
ag
es
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6 Part 1 Marketing Strategy
STP stands for segmentation, targeting, and positioning. A company or a brand may
want to be all things to all people, but most are not. It’s best to identify groups, or segments,
of customers who share similar needs and wants. Once we understand the different seg-
ments’ preferences, we’re in a position to identify the segment we should target with our
marketing efforts. We then begin to develop a relationship with that target segment by
positioning our product to them in the marketplace, via the 4Ps.
The 4Ps are product, price, promotion, and place. A marketer is responsible for creating
a product (goods or services) that customers need or want, for setting the appropriate price
for the product, for promoting the product via advertising and sales promotions to help
customers understand the product’s benefits and value, and finally for making the product
available for purchase in easily accessed places.2
Marketing management oversees the 5Cs, STP, and 4Ps with the goal of enhancing
the marketing exchange (of goods, services, payment, ideas and information, etc.) between
a customer base and a firm. It all sounds easy! Group your customers, and figure out which
group to target. Then create a position in the marketplace by means of the features of the
product, its price, communications and promotions, and distribution choices. Ah, but
don’t dismiss marketing as only common sense; after all, consider how few companies do
it well!
If marketing is an exchange, then, just like an interaction between two people, a compa-
ny has its best chance at keeping its customers happy if it is in close communication with
them. The company that does its marketing research and really listens to its customers will
be able to deliver goods and services that delight those customers. The best marketers put
themselves in the place of their customers: What are they like? What do they want? How
can we play a role in their lives? In this book, we’ll elaborate on these themes. If you get
overloaded while reading this book, you can step back and remember this: You’ll always be
a step ahead of your competition if you simply think about your customers! All marketing
strategy derives from that.
To elaborate on marketing strategy and develop a particular marketing plan, start with a
situation analysis, and sketch answers to the following questions:
• Customers: Who are they? What are they like? Do we want to draw different
customers?
• Company: What are our strengths and weaknesses? What customer benefits can we
provide?
• Context: What is happening in our industry that might reshape our future business?
• Collaborators: Can we address our customers’ needs while strengthening our
business-to-business (B2B) partnerships?
• Competitors: Who are the competitors we must consider? What are their likely
actions and reactions?
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
Customer
Company
Context
Collaborators
Competitors
Figure 1.3
Marketing
Management
Framework:
5Cs, STP, 4Ps
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7Chapter 1 Why is Marketing Management Important?
With that background analysis, proceed to strategic marketing planning via STP:
• Segmentation: Customers aren’t all the same; find out their various preferences,
needs, and resources.
• Targeting: Pursue the group of customers that makes the most sense for our company.
• Positioning: Communicate our product’s benefits clearly to the intended target
customers.
Similarly, marketing tactics to execute the intended positioning derive from a customer
focus:
• Product: Will customers want what our company is prepared to produce?
• Price: Will customers pay what we’d like to charge?
• Place: Where and how will customers purchase our market offering?
• Promotion: What can we tell our customers or do for them to entice them to
purchase?
That doesn’t sound too difficult, right? But customers’
preferences change. And the competition is also dynamic;
who they are changes as well as what they offer your cus-
tomers. Factors that are out of your control change as well.
For example, as marketing manager or CMO, you won’t
have control over whether your company is merged with
another whose image seems inconsistent with your brand,
but you’ll have to deal with it. Further, the legal environ-
ment in this country is different from that in another’s, and
each is always in flux. Many such contingencies call for modifying marketing plans. So the
inputs keep changing. (But if marketing weren’t challenging, it wouldn’t be as fun!)
As Figure 1.3 indicates, if we keep an ongoing read on the 5Cs, it will make us better
informed as we approach the STP task. These background indicators will apprise us of which
qualities of a customer base are likely to be relevant as we identify segments. The P of po-
sitioning in STP is done via all 4Ps. Thus the 5Cs, STP, and 4Ps operate interdependently.
Optimal business solutions (in real life or in class case discussions) should reflect a working
knowledge of all of these elements, and their connections; as a contextual factor changes,
what is the predicted impact on distribution channels? As a collaborator shifts its demands,
what will that do to our pricing structure? As our company sells off a nonperforming func-
tion, what impact might that have on our positioning and customer satisfaction? The plot
thickens!
1-4a Book Layout
Marketing is involved in designing products that customers will enjoy, pricing them ap-
propriately, making them available for purchase at easy points of access in the marketplace,
and advertising the products’ benefits to customers. Throughout this book, we’ll assume
that we’re talking about customers all over the world. This internationalism is already true
for most big firms, and it will be true even for small entrepreneurs via the Internet or once
they succeed and grow. We’ll also assume the omnipresence of the Internet and always
consider it a factor in data intake or in customer channels of interactions with the company.
In addition to aiming for global citizenship and recognizing the Internet as essential as air,
we will offer fresh, fun examples throughout the book, such as Vegas and Ferrari, instead
of laundry detergent.
Good marketing makes any
company better!
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8 Part 1 Marketing Strategy
This book will train you to think like a marketer. You’ll see that great marketing is not a
soft discipline, it’s not an art, nor is it simply intuitive. Great marketing is based on sound,
logical—economic and psychological—laws of human and organizational behavior. You will
learn the scientific and rigorous way to think about marketing issues, so that, in the future,
when your situation looks nothing like the ones you’ve talked about in school, you’ll know
how to proceed in finding your optimal solution. (Hint: Keep the framework close at hand!)
1-4b Learning from the Marketing Framework
There are two key features to how the material is organized in this book. First, MBA
and executive students learning marketing management typically want to see a framework
depicting how all the marketing pieces come together to form the whole picture. To give
you the big picture as well as to provide you with the in-depth details, Figure 1.3 kicks
off every chapter with a Managerial Checklist of questions and issues that the reader can
expect to understand better at the close of the chapter. Those questions are revisited at the
end of the chapter in a list format called Managerial Recap. The chapters are mapped onto
the framework as depicted in Figure 1.4.
You’ll become very familiar with this marketing management framework. You will see
the 5Cs, STP, and 4Ps over and over again, so you’ll pick them up nearly by osmosis.
We want to make great marketing part of your DNA. You’ll know that any marketing
strategy and planning must begin with the 5Cs assessment and then a strategic look at STP,
before turning to the strategies and tactics of the 4Ps.
When you’re . . .
• Working on a case for class,
• Or trying to answer an interviewer intelligently,
• Or trying to impress your boss at work,
• Or trying to launch your own business.
Ethics: Have a Heart
It is a good thought exercise to consider any dilemma from 2 perspectives:
1) Outcomes
a) An outcome orientation is called consequentialism or teleological ethics (fancy words to impress an interviewer).
b) This perspective believes that “the end justifies the means.”
c) As a manager, you’d ask, “What should I do to produce the most good (or the least harm)?”
2) Processes
a) An orientation toward fair process is called deontological ethics.
b) The idea is that the process must be fair, regardless of the outcome that might results.
c) Managers suggest an action as the right one to take according to a principle, such as human rights (e.g.,
fair pay) or environmental sustenance (e.g., green packaging).
Throughout the book, we’ll encounter several classes of ethical issues: don’t price discriminate, don’t target
uninformed groups, don’t advertise deceptively, etc.
If you want an additional challenge, assess a scenario from multiple viewpoints. For example, deonto-
logically, we might say, “We never price discriminate!” Teleologically, we might say, “To maximize value to our
shareholders, we should charge different prices to different customer segments.” See? The plot thickens!
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9Chapter 1 Why is Marketing Management Important?
You’ll see the framework in your head. It will remind you of everything that needs to be
addressed and how all the pieces fit together. The framework will make you process these
marketing questions very thoughtfully and systematically.
1-4c The Flow in Each Chapter: What? Why? How?
The presentation scheme we’ve adopted in this book is that each chapter covers the What,
Why, and How. Specifically,
• What is the topic in this chapter?
• Why does it matter?
• How do I do this? Show me what to do so that I can be successful!
Between the marketing framework and the practical flow of the chapters, you’ll gain
a strong, clear knowledge of marketing both at the strategic, conceptual level and at the
tactical, hands-on level. Both levels of insight will help ensure your success throughout
your career, whether you’re a marketer, a brand manager, an advertising exec, a CMO, or a
well-informed financial analyst, CEO, or world guru.
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
Customer
Company
Context
Collaborators
Competitors
Ch. 4
Chs. 6,7,8
Ch. 3
Chs.15, 16 Chs.10,16
Chs.15,16
Chs.1, 2,14
Chs.11,12,13
Ch.10
Ch. 9
Chs.16,17
Ch. 5
Figure 1.4
Chapters
Mapped to
Marketing
Framework
MANAGERIAL RECAP
Marketing can make customers happier and therefore companies more profitable. Marketing will enhance your career, and marketing can
make the world a better place. Honest!
• Marketing is about trying to find out what customers would like, providing it to them, and doing so profitably.
• Ideally, marketing facilitates a relationship between customers and a company.
• Just about anything can be marketed.
• The overarching marketing management framework—5Cs, STP, 4Ps—will structure the book and help you to think methodically
about the big picture of marketing.
• Don’t forget! Stay focused on your customer! If you can remain customer-centric, you’ll be five steps ahead of the competition.
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10 Part 1 Marketing Strategy
Chapter Outline in Key Terms and Concepts
1. Defining marketing
2. Marketing is an exchange relationship
a. Marketing is everywhere
3. Why is marketing management important?
a. Marketing and customer satisfaction is everyone’s
responsibility
4. The marketing framework: 5Cs, STP, and the 4Ps
a. Book layout
b. Learning from the marketing framework
c. The flow in each chapter: What? Why? How?
5. Managerial recap
Chapter Discussion Questions
1. Before reading this chapter or beginning class,
what did you expect marketing to be? Ask a family
member, classmate, or coworker what they think
marketing is. See whether you can persuade them
that marketing enhances a mutually beneficial
exchange between a customer and a company.
2. What are examples of brands and companies you
like? Why do you think you like them? What is a
brand you can’t stand? Why not?
3. Think about a recent time when you bought some-
thing or tried to do so and you were treated poorly
as a customer. What was the essential problem?
If you ran the company, what would you do to
ensure happier and more loyal customers?
4. List three brands you’re loyal to. List three things
you tend to buy on sale. How are the product
categories represented on these two lists different
for you?
5. What social problem do you think is the world’s
biggest? Wars? Global warming? Resource imbal-
ances? How could you start to solve a big social
problem through marketing?
Video Exercise: Southwest Airlines (13:55)
The Southwest Airlines brand is that of a low-fare carrier with the highest level of customer
service—and with fun added into the flying experience. Southwest Airlines strives to provide
its customers with a total product experience that includes check-in, boarding, flying, and bag-
gage claim experiences. In providing this total product experience, the airline strives to fully meet
the needs, wants, and desires of its customers. Southwest regularly surveys its customers regarding all compo-
nents of the product experience in order to foster continuous improvement. Southwest also conducts exten-
sive quantitative and qualitative research to better understand customers’ needs, as well as to explore possible
product experiences that the company might offer in the future. Southwest operates on the premise that having
new products is what makes a company successful over time. Thus, while maintaining its commitment to low
fares, excellent customer service, and fun, Southwest seeks to identify product experiences that different market
segments would like to have. The company then builds those experiences into the ticket price structure rather
than charging customers with numerous add-ons. Taking this approach enables Southwest Airlines to better
tailor its total product experience to the wants, needs, and desires of its different market segments.
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11Chapter 1 Why is Marketing Management Important?
MINI-CASE
How to Design an Attractive Wearable
A large electronics manufacturer wishes to issue a new “wearable.” The company wants to design it such that it
will make money with the purchase of the unit, of course, but that it will also make money as its customers use
it. In addition, the company would like to capture data about the customers’ profiles, in terms of their activities,
spending patterns, etc.
Wearables vary in many ways, and initially, the brand management team proposed to issue a design that looked
like a small smartphone, to be worn on the user’s wrist. Given the still relative novelty of such units, they thought
they’d charge on the high end, about $100, maybe even instituting a small annual fee. To get supplementary data,
they thought they’d issue periodic surveys, about once a quarter, via the unit or via e-mail.
The youngest marketer, newest to the team asked, “Well, that’s good for us, but how is it attractive to our cus-
tomers? Why would they want this unit—when there are plenty of others out there?” One old manager shot out
a withering look. Well, that’ll teach the young person to speak up in the meeting. But the senior-most manager
spoke up and said, “Well, you’re right, we’re only looking at it from our point of view. What would this wearable look
like that our customers would want—and that can be profitable to us?”
What would help these marketers? What steps could they take to design a wearable that would be both opti-
mally appealing to its customers (and perhaps attract new customers), as well as optimally profitable?
A wearable could vary on many parameters, such as whether it would be worn on the wrist like a watch, or
as an earbud like music headphones or smartphone speakers, or as an add-on unit to glasses. Early prototypes
suggested that while earbuds or eyeglass designs were good at capturing GPS, they weren’t as versatile in sup-
porting multiple apps, and they weren’t as precise as exercise (step) counters (for example, the head didn’t move
as distinctly as the user’s wrist while walking). That is what led the brand managers to ask the designers to create
a wrist-wearable.
Even so, there were many possibilities: Should the unit look like a small smartphone or like a nice classic wrist-
watch in design? Should the apps be accessed by touch only or should the apps also be voice-activated? Should
there be an annual licensing fee? Should they allow co-branding with affiliations (e.g., a professional sports team
or one’s college alma mater)? Which features should be recommended as the unit is designed?
This electronics firm has little experience in marketing research as well, so the older managers were uncertain
as to how to proceed. One mentioned a focus group, another suggested an ethnography, and a third mentioned
surveys. The information that is sought, as well as the method by which the information would be obtained, are
both to be determined. Naturally, the company wants to roll out the new wearable as soon as possible, so while
the research project could be well-funded, they would face time pressure and would have to be judicious in their
choice of research avenues.
Video Discussion Questions
1. Describe the marketing exchange relationship between Southwest Airlines and its customers.
2. Describe the 5Cs of the marketing framework as they pertain to Southwest Airlines.
3. How does Southwest Airlines’ approach to providing a total product experience capture the marketing framework
elements of STP (segmentation, targeting, and positioning) and the 4Ps (product, price, place, and promotion)?
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12 Part 1 Marketing Strategy
Case Discussion Questions
1. Are the old managers right? A lot of other wearables focus on counting steps or enabling apps. Is that what
this group should design, so as to be seen as a legitimate competitor and not confuse customers, or should
they design something different to be seen as innovative?
2. Are the people in the room a good proxy for their customers? Are the young managers a better proxy than
the older managers?
3. What additional information would be helpful to strengthen a recommendation?
4. How would that information best be obtained?
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13
CUSTOMER BEHAVIOR
There is some subjectivity in marketing (and in business generally), but there are also many
known, reliable patterns that comprise the science of consumer behavior. Most of this
chapter talks about these effects and how managers can use this knowledge wisely. To pre-
pare, we first consider the three major phases that consumers go through when making any
purchase. Next, we’ll see the different kinds of purchases that consumers make. Then we’ll
drill down and see what makes consumers tick.
2-1 THREE PHASES OF THE PURCHASE
PROCESS
Customers go through predictable stages in making a purchase. In the pre-purchase phase, the
customer identifies that something is lacking—there is a need or a desire to be satisfied. Crit-
ics sometimes say that marketers create desires in people that they didn’t already have. There
is some truth in that (e.g., “Is your breath fresh?” “Do you own the coolest running shoes?”),
but even without marketers, people really do need and want all kinds of things. Then the hunt
begins. Buyers search for information about products and brands that may be suitable.
For example, a newly minted MBA student has multiple wants: new clothes, a car, a
condo and furnishings, a list of restaurants in a new city to take clients or visiting friends,
a new dentist, a drycleaner, etc. Such consumers might search for alternative solutions
by going online or asking friends. They might evaluate alternatives by reading Consumer
Reports or going to BizRate.com. By comparison, a newly promoted business executive
might want a corporate jet. Possible vendors would need to be investigated, and alternatives
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
What are the three phases of the buying process?
What kinds of purchases are there?
How do consumers make purchase decisions—and how can marketers use this information?
Customer
Company
Context
Collaborators
Competitors
Managerial Checklist
2
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14 Part 1 Marketing Strategy
could be evaluated by soliciting and entertaining bids. While the objects and details of
these two purchases may look different, they both entail a variety of pre-purchase activities.
During the purchase phase itself, the consumer is creating a consideration set that includes
all the brands that are deemed potential candidates for purchase and that excludes the brands
that have been rejected.1 The MBA student may limit the car search to include only hybrids.
The condos considered would be only those within a certain price range. The restaurants select-
ed might be only those with menus that can be previewed online. Analogous considerations
factor into the executive’s jet quandary: What attributes are important? What attributes must I
have or not have? What attributes don’t I care about and therefore will not pay high prices for?
The final stage is the customer evaluation post-purchase. Buyers assess their purchase
and the purchase process, posing such questions as: Am I satisfied as a customer? Will I buy
this brand again? Will I tell my friends what a great brand I’ve found? Figure 2.1 shows
the complete process, from seeing that there is a need, to choosing and buying something
expected to be a solution to the need, and finally, to assessing one’s satisfaction with that
purchase. For example, imagine running to an interview and the strap on your messenger
bag breaks. You’re able to grasp the bag before it hits the ground and possibly shakes up
your tablet. However, obviously you realize you need a new messenger bag. You go online
and order a new bag. When it arrives, you like the looks, the protective inner sleeve for your
tablet, it has a few new features you like, and you had thought the price was pretty reason-
able. You’re pleased that the bag achieved its mission.
B2B Buying Center Roles
In B2B, big, expensive, purchases can be complicated because it’s not just one person making the
decision. Each purchase involves a half dozen or so roles in a buying center:
The Initiator: An administrative assistant who notices that one of the printers in the office is
frequently breaking down.
The User: Every staff member who tries to use that printer.
The Influencer: The IT guy who says, “Well, Brand X is cheaper, but Brand Y is cooler.”
The Buyer: The head administrative person whose responsibilities are to facilitate supplies but
also to answer to . . .
The Gatekeeper: A conservative accountant type whose job it is to tighten purse strings.
A decision to buy a new printer is complicated by the fact that each of these roles seeks slightly different
attributes. Some care only about price, others want great features, and still others may appreciate
wiggle room in negotiating delivery dates or follow-up customer service.
Figure 2.1
The Purchase
Process
Pre-purchase Purchase Post-purchase
Identify need or want
Search possible solutions
Build consideration set
Narrow “consideration set”
Decide on retail channel
Customer satisfaction
Likelihood to repeat
Generate word of mouth
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15Chapter 2 Customer Behavior
The buying process is consistent whether the buyer is a consumer or a business. Con-
sumer buying is easy to relate to. It involves people buying something for themselves or
their households, and we are those people. A business customer is an agent buying some-
thing on behalf of an organization. The agent can be an administrative assistant deciding
to use UPS or FedEx, or the agent can be a group of people, representing different aspects
of the organization (accounting, operations, etc.), comprising a collective buying center.
All purchases, business-to-consumer (B2C) or business-to-business (B2B), go through the
three stages, but the amount of time spent in any stage depends in part on what is being
bought. For example, sometimes the pre-purchase phase is extensive, and sometimes it is
very quick. So let’s consider some classes of purchases.2
2-2 DIFFERENT KINDS OF PURCHASES
Marketers distinguish between types of purchases. For consumers, a convenience item is a
fairly mindless purchase of “staples” (standard, frequently-consumed goods, such as bread
or gas) or an impulse purchase (such as candy or magazines that are available near grocery
checkouts). There are also shopping purchases, which require some thought or planning, as
when using OpenTable to find a restaurant before heading out of town. Finally, there are
specialty purchases such as a car or new laptop. These purchases are occasional, they are of-
ten more expensive than other types of purchases, and as a result they require more thought.
For B2B customers, the terms are different from consumer buying, but the ideas are
analogous. A purchase can be a straight rebuy, such as when the office copier needs toner
and the office manager buys the usual brand. Another purchase may be a modified rebuy,
such as when the copier lease comes up and there is a desire to consider a different vendor.
Last, there is the new buy. For example, perhaps the company is considering buying tele-
conferencing equipment for the first time, and it is not yet well-understood what attributes
to consider.
As Figure 2.2 indicates, what differentiates these purchases is not the product itself. The
distinction is more in the minds of the customers and in their involvement with the brand
and product category. For example, the purchase of the same product—an energy drink—
can be convenience when shoppers mindlessly put their usual brand in their grocery cart; it
can be a shopping purchase when customers see a new offering that they consider trying;
and it can be a specialty purchase when customers see an expensive brand that promises
antioxidants, which they choose to read up on before making a purchase.
Figure 2.2
Types of
Purchases in
B2C & B2B Is a
Matter of
Customer
Involvement
B2C
B2B
Action
“Add to Cart”
or “Click to buy”
Convenience
Straight rebuy
Shopping
Modi�ed rebuy
Needs some
thought
Specialty
New buy
Needs research
and serious thought
HighMediumLow
Customer Involvement
Consumers purchase convenience items—or business customers a straight rebuy—in
a fairly mindless manner. It’s the proverbial no-brainer. Buyers won’t spend much time
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16 Part 1 Marketing Strategy
thinking about brands or attributes because they just don’t care enough to do so. The chal-
lenge for marketers is to break that thought pattern (not that it’s very thoughtful!)—to
shake up the consumer with news of their brand and break through that white noise clutter.
For items that customers care more about, they’ll expend some time and effort prior to
the purchase, seeking out more information to be a smart shopper and to obtain good value.
For even higher customer involvement, as in specialty purchases or new buys, the customers
are more engaged. A great deal of effort is put into researching the best brands, quality, and
price. The marketer’s challenge is to convince the buyer that their brand is the best choice.
Types of B2B Customers
B2B customers are often classified according to what they sell:
Installations (e.g., equipment for new factories)
Accessories (e.g., computers to help run the office)
Raw materials (e.g., lumber, plastics)
Components (processed items that are components in a later finished product)
Business services (e.g., insurance, legal, consulting)
Ultimately, the most important classification is how much the buying business cares about the
purchase. Then we’ll know whether they care primarily about quality or price.
The category that a brand and target segment is in will suggest the appropriate
marketing activities that we’ll select from in the chapters that follow. For example, for
lower- involvement purchases, we can expect customers to be somewhat more price sensitive.
They’ll pay more when they buy things they really like or want (e.g., a cool laptop) or that
they expect to be of high quality (e.g., a great restaurant) or that is important to them (e.g.,
health care for their parents).
Consider the implications for loyalty programs. The marketer can create such programs
regardless of the level of customer engagement, but they’d take different forms, e.g., price
discounts for low-involvement purchases vs. brand communities and events for high-in-
volvement products and brands. Customer satisfaction can be fine for low-involvement
purchases, but customers won’t generate word of mouth; they don’t care enough. In contrast,
for high-involvement purchases, strong followers and satisfied customers can be zealots and
brand ambassadors.
Consider the implications for channels of distribution. Low-involvement products need
to be widely available so that the customer can pick them up without thinking. High-
involvement products will be sought out by more customer
activity.
Finally, consider the implications for promotions. For
low-involvement products, the marketer just hopes to cut
through the noise and clutter—getting customers’ attention
only long enough to register the brand name in the mind of
the customer for sheer familiarity. With high-involvement
purchases, customers are hungry for information, and mar-
keters can provide much more.
Marketing satisfies (and creates)
consumers’ needs and wants.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
ervice
meat
Fresh
seafood
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service
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Frozen juice
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Frozen food
ATM
Photo
Layout is designed to
facilitate the shopper.
Upon entering, the shopper
has a choice of selecting
a traditional shopping
cart, a smaller basket, or
shopping carts designed
for shoppers with children.
For physically challenged
shoppers, motorized
shopping carts are often
provided.
In the produce
section similar items
are close together
(for example, fruits
and vegetables).
©
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on
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us
ki
rk
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la
m
y
Li
m
ite
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The dairy section contains milk, which
is the most commonly purchased item.
Because of this, it is located in an area
of the store that requires the customer
to travel through the store, increasing
the likelihood of impulse purchases.
©
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ic
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rd
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Complementary
items are close
(chips and dip).
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Checkout counters provide the store
the opportunity to capture customer
information through the use of loyalty cards,
and bar codes can provide a wealth of data
that can be mined to provide insights into
customer purchasing decisions.
©
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ia
The end of each aisle and the area at the checkout lanes are likely
to hold high-profit items or grouped items (such as marshmallows,
chocolate bars, and graham crackers for s’mores) designed to inspire
impulse buys. Sometimes those aisle-ends are used to promote sale
items. “People are 30% more likely to buy items on the end of the aisle
versus in the middle of the aisle—often because we think what’s at
the end is a better deal,” says Brian Wansink of Cornell University and
author of Mindless Eating. ©
Da
vi
d
R.
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ra
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r/
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ni
ta
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In grocery stores,
consumers form
consideration
sets (and then
choose brands)
as a function of
brand recognition
(brand recall
helps when searching online). Retailers also
place specific brands where they can be seen
by specific customers, such as brands aimed at
children shelved at eye level to toddlers seated
in shopping carts.
©
R
ic
ha
rd
B
. L
ev
in
e/
N
ew
sc
om
© Cengage Learnin
g 2013
Anatomy of a Grocery Store
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
18 Part 1 Marketing Strategy
So how do customers learn about brands and make choices? In the rest of the chapter,
we’ll look at how customers think and how marketing can have an impact on their deci-
sions and choices.
2-3 THE MARKETING SCIENCE OF CUSTOMER
BEHAVIOR
Consumers are human beings and, as such, are sometimes simple and predictable, but often
rather complex. In this section, we’ll delve into consumer psychology, examining sensation
and perception, learning and memory, motivation, attitudes, and decision making.
2-3a Sensation and Perception
When marketers formulate positioning statements or produce perceptual maps, they
presuppose a complicated system through which consumers sense and perceive their
environment. An enormous wave of sensory stimulation washes over and through us every
day. We are selective in our attention, choosing to consider certain stimuli and effectively
screening out others. For example, if we are in the market for a car, we’ll watch TV ads for
cars. If we’re not in the market for a car, we barely “see” the TV ads for cars. We know that
consumer involvement creates a state of heightened motivation to learn more about a pur-
chase or to pay attention to advertisement. The human organism is very efficient at adapting
to the multitude of stimuli, helping us focus and block out what we deem to be irrelevant.
Let’s consider how marketers can use information through each of the senses. Visual
stimuli are obviously important to marketers. Ads show products, product design, print
information, imagery visualization to facilitate desirable lifestyles, etc. Even simple colors
imbue brand associations and can be integral to some brand identities:
• Toothpaste packaging is dominated by whites and blues, implying freshness, clean-
liness, water, etc.
• Tiffany’s aqua blue boxes have saved many a marriage.
• Dell’s blue is deeper and darker than Tiffany’s, and also trademarked.
Marketers frequently use color to convey information. There are color wheels to guide
the brand manager considering a new logo or packaging. For example, blue seems to con-
note dependability and is used widely (American Express, Ford, Intel). Red tends to imply
passion, as in the excitement of breaking news (CNN) or sporting events (ESPN). Green
often implies environmental sustainability (although judge for yourself whether that ap-
plies to the green in BP, or whether it’s relevant to H&R Block).
The symbolism of colors also varies across cultures, so it is important for a brand manager
responsible for a global multinational brand to test the color’s meaning in its major mar-
kets. In the U.S., brides wear white because it symbolizes purity (like newly fallen snow).
In India, red conveys purity. In the U.S., red conveys danger and passion; a bride in red
would be . . . unusual. In Western civilizations, purple has traditionally denoted royalty; but
in Thailand, it’s the color of mourning. Mourners in Egypt wear yellow, yet yellow implies
courage in Japan and the opposite, cowardice, in the U.S. There are a zillion colors and many
cultures. Imagine the challenge for a brand manager in selecting packaging or logo designs
for global multinational brands.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
19Chapter 2 Customer Behavior
Hearing is also important to marketers. Research shows that when retailers play back-
ground music that is energetic, with a quick tempo, customers spend more. There are other
aural brand associations:
• iPhone vs. Samsung vs. T-Mobile vs. AT&T ringtones
• United Airlines’ frequent use of Gershwin’s Rhapsody in Blue in their ads
• Fancy Feast television commercials feature a high-pitched “ding, ding” (a fork
clinking against fine crystal) implying that the food is special, and therefore worth
its higher price.
Car and motorcycle enthusiasts know that manufacturers are meticulous in deliver-
ing distinctive sounds, and, as a result, consumers have come to learn the sounds, expect
them, and pay for them. A high-end Honda motorcycle runs about mid-$20k, whereas a
Harley-Davidson runs in the high $30k. Obviously, the sound is not the only difference
between the two bikes, but if the Harley didn’t sound like a Harley, a biker won’t fork over
the extra $15k. Similarly, a Porsche 911 turbo at $150k is no clunker, but Ferrari’s engi-
neers create a symphony of car sounds and charge $250k. Again, even acknowledging other
differences, sound is nevertheless a part of the purchase decision.
A third sense is smell. Think of how many times you’ve walked through a shopping mall
and felt carried away on the wafting scent of a Cinnabon store or an Auntie Anne’s pretzel
store in the food court. Strong perfume scents are a large part of the Bath & Body Works
or The Body Shop stores’ ambience. Scent can also be alluded to, drawing on the consumer’s
memory, as when Folger’s coffee commercials depict a person being awakened by the aroma
of brewing coffee.
A fourth sense is taste. A classic marketing exercise is to run blind taste tests in order to
declare that one’s own product is superior to the market leader, or that a “me-too” brand is
liked as well as a market leader. These tests can be dramatic and compelling. They are also
interesting to marketers because they clearly distinguish the power of the brand from the
product itself. For example, most people swear they can identify a Pepsi vs. a Coke, and yet
many people actually cannot. Try it on your friends.
Brand Colors
White Apple, Wikipedia, Honda
Yellow Hertz, Shell, National Geographic
Orange Crush, Fanta, Harley-Davidson
Red Coca-Cola, CNN, Kellogg’s, Target
Purple Hallmark, Yahoo
Blue AT&T, Dell, HP, IBM, Tiffany’s
Green BP, John Deere, Starbucks
Brown M&M’s, UPS
Black Channel, Gucci, Prada
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
20 Part 1 Marketing Strategy
A fifth sense is touch. The predominant means of conveying brand imagery through
touch is when marketers create well designed products, compared to products intended to
be positioned for value. For example, design can mean good ergonomics, as in good kitchen
knives, wrist-friendly mice or keyboards, good office chairs, etc. Design can also mean clean
lines, simplicity, and beauty, such as the products that Apple creates. Finally, design can also
certainly mean a sensual experience, like leather interior options in cars, compared to their
less expensive, less touchable alternatives.
Finally, a discussion about sensation and perception wouldn’t be complete without men-
tion of so-called subliminal advertising. The idea is that an ad can be shown very quickly,
on TV, online, or in the movies, so that it doesn’t quite meet the threshold of liminal
recognition and consciousness, and therefore it is said to be subliminal. Yet somehow the
vision is captured subconsciously, and marketers hope the message will compel action (e.g.,
buy more popcorn). Print ads depend not on brief time exposure but on ambiguity. If you
think companies don’t do this anymore, take a look at the logo for the Chicago White Sox
baseball team (at whitesox.com) in Figure 2.3. What does it spell?
While marketers have debunked the notion that subliminal advertising works, they
nevertheless conduct a great deal of research in areas called “mere exposure” and “per-
ceptual fluency.” Neither of these effects is subliminal, per se, but they share a certain
subtlety. For example, mere exposure, as its
name suggests, says that, though you might
not think the billboard you drive past every
day is having a persuasive effect on you, it is.
Marketers know that repeated exposures to
a brand name brings familiarity, and with fa-
miliarity comes a comfortable, positive feel-
ing. Thus, brands advertised on billboards or
that keep appearing in sidebar ads online
are familiar and would probably rate fairly
positively.
Perceptual fluency is also a subtle phe-
nomenon. When consumers thumb through
a magazine or click through websites, they
are probably paying most of their attention
to the content of the message. However, oth-
er information is being expressed. Colors and
fonts can make a message seem more profes-
sional, more emotional, more contemporary,
more gothic. Those cues make an impression
as well. The cues are liminal but subtle, and
they are part of the brand.
2-3b Learning, Memory, and Emotions
All those sensory and perceptual impressions can become brand associations. To say that
consumers have brand associations means that, in their memory, they have stored certain
attributes attached to the brand. When the brand is mentioned, those associations are
brought to mind. Learning is the process by which associations get past the sensory and
perception stages into short-term memory and then, with repetition and elaboration, into
long-term memory. There are several theories about learning, but two are so fundamental
and pervasive that every marketer should know them.
Figure 2.3
Subliminal Ad
St
af
f/
M
CT
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ew
sc
om
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
21Chapter 2 Customer Behavior
The first way that people learn is through classical conditioning. This type of learning is
so well known and integrated into our culture that most people have heard of the demon-
strations by Ivan Pavlov of his salivating dogs. The learning goes through stages:
• Stage 1: A food bowl placed in front of a dog naturally elicits its drool.
• Stage 2: A bell rung in front of the dog initially elicits no response.
• Stage 3: A bell rung while a food bowl is simultaneously placed in front of the dog
elicits drool.
• Stage 4: With time, bell rung in front of the dog elicits drool. The dog has come to
learn that the bell is associated with food.
Perhaps you’re thinking, “But that’s just a dog.” Indeed. However, consider Figure 2.4.
It’s common to hear that “sex sells,” but why or how does it work? The process is this:
• Stage 1: A babe (male or female) elicits drool.
• Stage 2: Some brand or product initially elicits no response.
• Stage 3: That brand or product in a picture with aforementioned babe elicits drool.
• Stage 4: With time, the brand itself elicits drool.
That might sound a little far-fetched,
but that’s the learning process. Consider
more neutral stimuli, such as the logos in
Figure 2.5. At their introduction, these
abstract symbols convey no information
and function much like the bell in Pav-
lov’s lab. With time, while logos might
not elicit drool, consumers come to learn
and associate these fairly similar looking
symbols with their unique brands.
It’s also worth noting, in this ever
changing world, that sometimes compa-
nies want to shed negative associations, and
they change their names and logos to do
so. For example, in recent years, Blackwater
became Xe, Philip Morris became Altria,
ValuJet became AirTran, and Andersen
Consulting became Accenture. The hope is
that the slate has been wiped clean, so that
fresh associations might become attached
to the new company names and logos.
Figure 2.4
Sex Sells Due
to Classical
Conditioning
Figure 2.5
Logos Gain
Meaning
Through
Classical
Conditioning
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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
22 Part 1 Marketing Strategy
A fun use of classical conditioning is jingles. It takes only a few exposures before people
learn the catchy lyrics. Consider these jingles; it’s hard to resist finishing them, and it’s hard
to stop thinking about them:
• M’mm m’mm good . . .
• Gimme a break, gimme a break, break me off a piece of that . . .
• Plop, plop, fizz, fizz . . .
• Oh, I wish I were an Oscar . . .
• I’d like to buy the world a . . .
• Sometimes you feel like a nut; . . .
And the master of all jingles:
• Two all-beef patties . . .
The second way that people learn is through operant conditioning. This type of learning
is also so well known that most people have heard of Skinner boxes. B. F. Skinner studied
pigeons pecking at a target, or rats pressing a bar, to receive food pellets. The pigeon learns
the desired behavior by being rewarded. The behavior is said to be positively reinforced.
Skinner boxes are programmed to reward the pigeon every time it pecks, or only after
every fourth peck, or only at 20 after the hour, etc. When the bird is rewarded every time
or every fourth time, the reinforcement schedule is said to be on a fixed ratio reinforcement
schedule. When the bird is rewarded on average every fourth time (so perhaps after two
pecks, then after six pecks, then after four, etc.), the reinforcement schedule is said to be on
a variable ratio. This difference matters because the unpredictability of the variability drives
the birds (and humans) a little nuts. In the same amount of time, say 30 minutes, the bird
will peck a lot more on the variable, rather than on the fixed, ratio schedule.
So what? Well, consider loyalty programs. Marketers reward consumers who carry their
loyalty cards by giving them every 10th coffee free, for example. If marketers want their
consumers to purchase even more frequently and ring up more sales, they would design a
variable ratio reinforcement program. Each coffee card could have a scratch-off number
indicating that the customer would receive a free coffee after, say, seven coffees. The next
card might say five or 15, etc.
With current programs, the customer’s behavior is very predictable. With a variable pro-
gram, the customer would be excited about the seven because it means a free coffee is com-
ing much faster than after 10. Even when they scratch off and get a higher number, like 15,
they’ll still recall that they have had smaller numbers in the past. So the sooner they get to
15 and redeem this card, the sooner they’ll get another card, perhaps with a smaller number.
There are also reinforcement schedules based on duration lapses, but these are not
implemented in marketing as frequently. One famous exception, however, is the policy
by Southwest Airlines that allows passengers to obtain their boarding pass classification
24 hours prior to the flight, but no sooner. Passengers who wait too long get less desirable
status, so many fliers find themselves poised over their keyboard to press the right letters at
just the right time. Keyboard pressing is not that different from pigeons pecking.
As any student knows, a big factor in learning and memory is motivation. Thus, we
consider it next.
2-3c Motivation
Figure 2.6 depicts psychologist Abraham Maslow’s hierarchy of needs. We have to meet
basic needs—have food on the table and a roof overhead—before we think about buying
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
23Chapter 2 Customer Behavior
nice clothes. Once we have met our basic needs, we are driven by more abstract motiva-
tions, such as love and esteem, qualities that begin to define humanity. At the peak of this
pyramid is the phrase, self-actualization, an achievement of our ideal self, with no needs, no
excessive wants, no jealousies, etc.
One way that marketers use this hierarchy is by identifying their product with a certain
level of needs. They use imagery to appeal to those motivations. For example, the VW crash
ads appeal to our need for safety. Similarly, the entire Volvo brand is positioned for safety.
Beyond cars, other examples involve different kinds of security. For example, in B2B, they
used to say, “You won’t get fired for buying IBM.” Even though IBM was often the most
expensive choice, buyers knew that the quality would be good, so any risk-averse buyer
would feel security in having chosen a good brand.
Many of us are fortunate enough that our simpler needs are met, so a great number
of brands are positioned to heighten a consumer’s sense of belonging or, at the next level,
social acceptance and respect. Belonging can be signaled by explicitly affiliative products,
such as team logos, or by conspicuously branded products, as in certain men’s athletic shoes
or women’s handbags. Belonging can also be more subtle; many ads appeal to a person’s
concern with fitting in with the norm. For example, when you start a new job, are you
wearing the right clothing? If all your friends drive a hybrid, will they accept you and your
SUV? And so on.
At the higher level, the acceptance, by self (esteem) and others (respect) is often signaled
by marketers by pointing a consumer to an aspiration group. You might be a business school
student right now, but ads will show you the clothes, restaurants, and cars that the most
successful CEOs wear, dine in, and drive. The implication is that you should begin to shape
your preferences accordingly so that, when you achieve that CEO status, your purchases
will exhibit good taste.
Another way that marketers have used this hierarchy is to offer an extended brand line
that encourages a customer to reach ever higher in the pyramid. For example, Mercedes
makes their entry-level C-Class for the driver who wants the brand but cannot afford
much. Mercedes hopes that drivers will like the C-Class and, when they’re ready, trade it in
Figure 2.6
Maslow’s
Hierarchy of
Needs
Self-
Actualization
Self-Esteem, Respect
Friendship, Love, Belonging
Safety, Security
Food, Water, Sleep, Sex
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
24 Part 1 Marketing Strategy
for an E-, then S-, then CL-Class. This product range is a simple manifestation of customer
relationship management.
Yet another way that the hierarchy is used is when brand managers think about posi-
tioning their brands as high in the pyramid as possible. Walmart makes basic sneakers that
satisfy simple needs at the bottom of the hierarchy. However, stronger brands like New Bal-
ance can charge more, not just because the product may be somewhat better but because the
consumer wants to believe that the shoes will make them better—better athletes, more fit,
more attractive, better people. The basic Walmart sneaker probably can’t be positioned too
high in the pyramid, but it would behoove any other sneaker maker to strive for imagery as
high in the hierarchy as possible.
Beyond the Maslow pyramid, there are other ways to distinguish needs and motivations.
Many consumer psychologists speak of utilitarian vs. hedonic products in fulfilling needs
and wants. A consumer might need a new interviewing suit but want the Armani threads.
Consumer psychologists also point to the motives that co-exist in all of us, for confor-
mity vs. individuality. One need may be more salient than another throughout a person’s
life, or over an array of situations. If conformity is winning, the consumer buys a popular
brand; if individuality is more important, then the consumer finds an atypical, quirky brand.
Luckily, in most product categories, there are large brand assortments; hence, either need
may usually be satisfied.
A final means of distinguishing consumer motivations is whether they are risk seeking
or risk averse. In some product categories, consumers may be very knowledgeable, opinion
leaders, and ready to try the newest that the market has to offer (the latest music, fashion,
etc.). In other product categories, those same persons may be more risk averse for a variety
of reasons, including caring less about the category or not having the expertise to make
choices confidently. For these purchases, the consumers would be more conservative, trying
to prevent a bad purchase, rather than striving for a good purchase.
Predicting the Weather and Brand Choice
We can’t even predict the weather very well, so why would we expect to be able to predict consumer
purchasing?
Weather is simple compared to human decision making and purchasing. It’s comprised of
very few components: wind, water, dirt particles, gravity, and temperature. Yet the best we tend
to say is, “Tomorrow’s weather will look something like today’s.” Similarly, we make the fewest
marketing forecast mistakes if we say, “You’ll buy the same brand of toothpaste this time as you
did last time.”
Consider the factors that enter into a toothpaste purchase: What did mom buy? What’s on sale?
What flavor do I like? Do I need a small tube for travel or a big tube for home? Do I want a whitener?
Are my teeth sensitive? Do I want to try something new? Do I have a coupon? Am I buying this for
myself or someone else? Do I need floss because that brand is bundled with a container of floss? It’s
complicated!
Yet marketers have sophisticated research techniques to enhance predictions and answers to
questions such as whether this customer is likely to be a brand switcher, sensitive to a price discount,
affected by recent advertising, etc. Methods to gather information from customers are discussed
throughout this book and in particular are concentrated in Ch. 15 on marketing research.
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25Chapter 2 Customer Behavior
2-3d Attitudes and Decision Making
Marketers want to understand how consumers think and what motivates them so that
they might persuade the consumers to have positive regard for a particular brand and see
it as superior to all others, at least for their needs. Attitudes and decision making affect
the extent to which consumers will buy a brand, repeatedly purchase it, become loyal, and
recommend it to others. If we’re really lucky, our brand fans will prefer our brand so much
that they’d even be price insensitive if we had to, or wished to, raise prices. So if we seek to
enhance attitudes about brands and encourage particular brand choices, let’s begin with two
questions: What are attitudes? What does the decision making process look like?
Attitudes are conceptualized as a mix of beliefs and importance weights. Beliefs are
opinions, such as BMWs are fast, they’re nice to look at, they’re expensive, etc. Importance
weights are things like, “I don’t care much about whether my car is fast, but I would like
it to be attractive” or “I care about the cost.” People can differ on both their beliefs and
importance weights. Some people might say that BMWs aren’t that attractive or expensive
relative to other cars. Some people might not care how much a car costs but care very much
about speed.
Importance weights are like the concept of customer involvement. It is an important
truism in marketing, with its natural implications, that, in any purchase category, customers
can be classified according to how much they care about the given purchase. For the things
consumers care about, they spend more time learning about the options and brands, and
they’re usually willing to pay more for excellence. For the things consumers care less about,
they spend less time investigating, and it’s likely that they won’t want to pay much.
The job of marketers is to play with both components of attitudes—beliefs and impor-
tance weights. Marketers seek to make the beliefs in an attribute or benefit more positive
and to make the attributes on which the brand dominates other brands seem even more im-
portant. The beliefs and importance weights are modified or strengthened through learning
and memory and by appealing to consumer motivations that the brand purportedly satisfies.
Attitudes contribute to decision making and brand choice. In some product categories,
there aren’t that many choices, so brands can be compared fairly readily. In categories with
a lot of choices, consumers usually proceed through two stages. In the first, quick stage,
they decide which brands should be considered in more detail vs. those that don’t make the
Eenie, Meanie, Jelly Beanie
In their article, “Active Choice: A Method to Motivate Behavior Change,” Professors Punam Keller and
Bari Harlam studied different kinds of so-called opting behaviors:
1. Opt-in: Check this box if you wish a reminder to . . .
2. Opt-out: Check this box if you do not wish a reminder to . . .
Options 1 and 2 did okay, but the setup that was much more effective was:
3. Check one: I will remind myself to . . . vs.
Yes, please send me a reminder to . . .
Getting reminders is very important to engaging in a variety of behaviors, such as getting flu shots,
signing an organ donation card, or enrolling in a company’s 401k program.
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26 Part 1 Marketing Strategy
cut to be in the consideration set. The second stage is relatively prolonged, during which
consumers compare the brands in the set to make a purchase choice.
The first stage is thought to be conducted quickly by non-compensatory mechanisms.
“Non-compensatory” means that some attributes are very important. If the brand has them,
then it may be considered further; otherwise, the brand is precluded. Even if the brand
excels at something else, that other excellent attribute does not compensate for the lack of
the first, important quality. For example, if a consumer is set on buying a hybrid car, then
that’s the first attribute that reduces the set—cars that are not hybrids are cut from further
consideration. Whichever brands make the cut on this first dimension continue to be con-
sidered. The consumer proceeds lexicographically, selecting the attribute or dimension that
is next most important, etc. That subset of brands is compared on the next most important
attribute and so on until the set is reduced to only a few brands.
Once the consideration set has been reduced to a manageable number, consumers switch
gears and use a compensatory model. This model uses a costs and benefits logic, whereby
excellence on one attribute can make up for the fact that the brand is not so great in some
other ways. One such model is that of averages, e.g., if a brand is strong on attribute A and
only so-so on B, it may dominate a brand that is average on both attributes A and B.
A lot of online sites allow consumers to select from a number of brands or models to en-
able side-by-side comparisons. This information sorting helps consumers see which brands
are best on the attributes they care most about. The algorithms request that consumers first
select the brands to be compared. This stage mimics the non-compensatory stage in reduc-
ing the number of possible brands to a more manageable number for further consideration.
The online comparators facilitate the second, compensatory stage, in that the attributes are
lined up for easy viewing. A brand choice is made, and the decision process is completed.
Cross-Cultural Consumer Behavior
When multi-national companies launch brands internationally, they face the global-local decision.
Should the brand be a unitary, global entity, the same in every market, or should it be tailored for the
tastes and preferences for local customers. Those who argue for a single global brand say that there
needs to be brand consistency across markets to keep a brand strong and its image clear, and to allow
some financial and operational efficiencies. Those who argue for tailored offerings say that customers
will be more favorably inclined to build a connection to a product that is more meaningful to them.
The essence of this strategic decision will be revisited throughout the book, but in this chapter, the
main concern is an understanding of consumers.
There may be ways to leverage some similarities across some countries and cultures so that a
company can enjoy some efficiencies and not have to reinvent a truly unique brand for every
marketplace. Many researchers have studied the similarities and differences among many countries,
but perhaps the best-known framework is that of Geert Hofstede. He uses 5 dimensions to
differentiate countries:
1. “Power distance”: clear delineation between those who have power and those who do not. High
power distance cultures are typically very hierarchical, such as Brazil, England, Japan, Portugal,
and many Latin, Asian, and African countries. Low power distance cultures are more egalitarian,
such as Israel, New Zealand, Norway, and the U.S.
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27Chapter 2 Customer Behavior
2. Cultures also vary along the continuum from “individualism,” in which people mostly look out for
themselves, to “collectivism,” in which people’s identities and esteem are rooted in the groups
to which they belong—their families, their companies, their country, etc. Does a person tend
to think in terms of “I” or “we”? Individualistic countries include the U.S. and Canada, Australia
and New Zealand, England, France, and Germany. Collectivistic cultures dominate Asia, Latin
America, and Africa.
3. Countries and cultures differ on whether they are characterized as “masculine,” focused on
achievement, success, and assertiveness or “feminine,” and more focused on modesty, caring
for others, and enhancing the quality of life. Masculine countries include China, Hungary,
Italy, Mexico, the U.K., and the U.S. Feminine countries include Chile, Denmark, Finland, the
Netherlands, Portugal, and Sweden.
4. “Uncertainty avoidance” is the extent to which people are uncomfortable by ambiguity and
therefore try to resolve such situations, usually by imposing rules and structure. Countries with
high uncertainty avoidance are: Belgium, France, Germany, Greece, Italy, Portugal, and Spain.
Countries with relatively more tolerance for ambiguity are: Denmark, Ireland, Poland, Sweden,
the U.K., and the U.S.
5. “Long-term orientation” is the extent to which people of the culture look to long-term traditions
and look to and save for the future compared to short-term orientation which is a focus on
achieving quick results. Countries that are longer-term oriented are China, Hong Kong, Japan,
compared to shorter-term oriented U.K., U.S., and Latin American countries.
These differences have clear marketing implications. For example:
The marketer can expect more conspicuous consumption, in masculine countries, in which
achievement is celebrated, thus helping Cartier, Rolex, and Philippe Patek be judicious in the
marketing dollars they allocate across countries.
Similarly, in high power distance countries, such as Brazil or Japan, people tend to dress up, a bit
formally, to show respect and to reflect their own position. By comparison, people in low power
distance countries will dress more casually. It’s no accident that “casual Friday” was invented in
the U.S.
2-3e How Do Cultural Differences Affect Consumers’
Behavior?
In addition to individual differences in how consumers respond to ads and brands, there
are also predictable sociocultural effects. We’ll consider two examples: social class and age.
Some societies have clearer class distinctions than others, but gradations in socioeco-
nomic standing are discernible even in relatively classless societies. People tend to be more
comfortable with others in comparable standing.
Social class is a construct that is more complicated than just economic access to resources.
Income is important, but so is family background (e.g., old money vs. nouveau riche) and
career paths (e.g., some allowance for social mobility). Old-monied people seek exclusivity
in their brands, to affirm their special standing in society. They are alarmed by the mass-
class movement, in which designers of high-end luxury goods produce far less expensive
lines (albeit not of the same quality) to allow access by us peasants.
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28 Part 1 Marketing Strategy
In contrast, nouveaus try to make purchases to attain their status, the purchases being
the so-called status symbols. They indulge in conspicuous consumption, e.g., buying goods
with garish, loud branding that shows the world they’ve made it. Obviously, designing
products, brands, and marketing communications for these two different groups calls for
different approaches.
Age cohorts also produce reliable, predictable shopping patterns. Some patterns are ob-
vious, following the household composition and income availability. Young people first buy
furniture and kitchenware, entertainment and travel, and large screen TVs. They proceed
to the stage of buying diapers and toys and minivans. Soon there is college to pay for, then
maybe travel, and, soon, health care. All highly predictable.
Age groups are particularly important when they are large in size. The infamous baby
boomer group is beginning to retire. Older people are traditionally ignored by advertisers
who like to feature youth, but the deep wallets of baby boomers will soon force companies
to pay attention. Cruises will sell, whereas sophomoric movie comedies might decline.
The baby boomer generation was always societal minded, so we might expect to see
large-scale altruism and record levels of infusions of resources into nonprofits. In an odd
contradiction, this generation was also dubbed “the me generation,” and indeed sales of
Viagra and cosmetic surgeries have also begun inching upward.
Social class and age cohort are among the various sociocultural factors that impinge
on how buyers form impressions and preferences, collect information, form opinions, and
make brand choices. Gender matters: Men and women are socialized differently, they think
about products differently, and they shop differently.
Finally, ethnicity and country culture provide different perspectives, and they can be very
interesting (and complicated). We’ll see examples throughout the book. Be forewarned: It
is difficult to provide generalizations without devolving into stereotypes, so note there are
always exceptions. To foreshadow a few observations now:
• Wealthy Chinese like their consumption conspicuous. Due to their purchases,
Louis Vuitton has found its busy season has moved to late-January and early-Feb-
ruary, just before Chinese New Year (from traditional 4th quarter peaks, attributable
to Christmas shopping).
• Danes are fond of luxury goods, and their society is so egalitarian that they believe
luxury goods should be accessible to all.
• European brands tend to dominate the high end, due not just to a perception or
cultural heritage but also to structural industry differences, such as:
� Fine craftsmanship in watches built in Switzerland,
� Fashion or exotic cars designed in Italy, or
� Supply chains such as extensive fields of flowers or vineyards for perfumeries or
vintners in France.
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29Chapter 2 Customer Behavior
MANAGERIAL RECAP
Keep the buyer in mind, whether you deal with consumers or business customers. Marketing managers can
be nimble and adaptive to industry changes if they have a basic understanding of consumer behavior:3
• There are three major phases of consumption: pre-purchase, purchase, and post-purchase.
• There are three major classes of purchases: For B2C, these are called convenience, shopping, specialty;
for B2B, these are called straight rebuy, modified rebuy, and new buy. The difference among the three
has to do with customer involvement.
• How do consumers think?
� They begin with sensing and perceiving information, which may be learned and stored in memory.
� Motivations help marketers understand what consumers are seeking to satisfy with their purchases.
� Attitudes and decision making are subject to influence by good information as well as biases.
� Finally, social norms, such as generational preferences or choices based on wealth, define us as well.
Chapter Outline in Key Terms and Concepts
1. The three phases of the purchase process
2. There are different kinds of purchases
3. The psychological science of customer behavior
a. Sensation and perception
b. Learning, memory, and emotions
c. Motivation
d. Attitudes and decision making
4. Managerial recap
Chapter Discussion Questions
1. If consumers are being deluged by sensory
overstimulation, what can a marketer do to cut
through the clutter?
2. Using the principles of classical conditioning or
operant conditioning, design a marketing program
for a nonprofit or for a political candidate.
3. What should ads say to help brands make the first
(non-compensatory) cut in decision making and
be included in a consumer’s consideration set?
What should ads say to help a brand be chosen,
once in the set?
4. Run a taste test. Compare Pepsi vs. Coke, or
bottled water vs. tap, or an expensive bottle of
wine vs. the boxed stuff. Note participants’ level of
knowledge and surprise.
5. New businesses are frequently launched as a
means to address a current glitch in the industry.
Pick an industry and identify a typical customer
problem. What changes could you make to enter
that industry and enhance customer satisfaction
(and be profitable)?
6. Go online and find the average length of a “life-
time” for purchases in the categories of: houses,
cars, gym memberships, baby diapers, birth con-
trol pills, and Viagra prescriptions.
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30 Part 1 Marketing Strategy
Video Exercise: Scholfield Honda (5:48)
The video features Roger Scholfield, owner and general manager of Scholfield Honda in Wichita,
Kansas, and several of his employees describing the characteristics and profiles of the dealership’s
customers. With respect to purchases of both new and used vehicles, customers tend to be very
interested in vehicles that are fuel-efficient and environmentally friendly. The video focuses on de-
scribing the key characteristics of customers who are interested in and knowledgeable about hybrid or alternative
fuel vehicles. Factors such as the customer’s age, level of education, attitudes, and needs are explored. Scholfield
acknowledges that prospective customers often comparison-shop at other dealerships—and he says that he wel-
comes such buyer behavior. He believes that his dealership has a competitive advantage over other dealerships
because of the friendly atmosphere and exceptional service people receiveat Scholfield Honda. Appealing to cus-
tomer’s needs, desires, attitudes, and beliefs enables Scholfield Honda to attract and retain customers.
Video Discussion Questions
1. Using the purchase process (i.e., pre-purchase, purchase, and post-purchase), analyze the customer informa-
tion provided by the owner and employees of Scholfield Honda.
2. Chapter 2 identifies three types of purchase decisions for consumers. Describe the type of purchase decision
that characterizes the buying behavior of the customers of Scholfield Honda.
3. What attitudes and needs seem to be influential in people deciding to patronize Scholfield Honda?
MINI-CASE
Insight into Consumer Decision Making for 3-D TV
Various media equip consumers to make side-by-side comparisons of brands’ relative strengths (e.g., Consumer Re-
ports, bizrate.com, etc.). These comparisons are not acclaimed from the manufacturer, but a third party, so they’re
perceived as objective and neutral. The table below (based on reviews at cnet.com) compares 3-D televisions on a
number of criteria. The attribute of “crosstalk” (in the table) is not a good thing—it’s the ghost-like double images
that shadow some 3-D objects, depending on the technology; hence, less is better. All the TVs are about 65” cur-
rently. The 3-D glasses must be purchased with each TV (the technology is proprietary within firm and TV, so the
Panasonic glasses won’t work with the LG TV, for example). The glasses run about $150 a pair.
Sometimes customers know just what they want: a particular brand, or a particular feature. Sometimes their
thought processes are little more meandering. Some consumers are rather systematic decision makers, such as
when they follow a procedure that will eliminate some alternatives by some criteria. Use the table below to simu-
late the thought processes of a consumer.
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31Chapter 2 Customer Behavior
Case Discussion Questions
Imagine you were a consumer thinking about buying a 3-D TV.
1. First, quickly at a glance, what TV do you think you would buy?
2. On what criteria do you think you based that decision?
Try these decision making processes, see what brand results for each, and see how confident you feel about the
resulting brand suggested from each approach:
3. What attribute do you find least informative? Eliminate that row. Continue to do so until a clear brand winner
emerges.
4. Which brand of TV would seem to be riskiest to buy? Eliminate it. Continue until an obvious choice results.
5. If you made a price-based decision, would you be happy?
6. How would your final brand choice define you?
Which of these criteria wouldn’t have concerned you? How similar was this thought process to your natural
analysis? How can you find out if your consumers think along these lines?
Brand
Model
Panasonic LG Sony Samsung
TC-PVT25 PX950 XBR-HX909 UNC8000
Technology Plasma Plasma LCD LCD
Price
Least crosstalk
Clear color
Clear, deep black
3-D from angle
Flicker
3-D glasses
$2,479 $1,850 $2,497 $2,999
Ugly and
uncomfortable
Rechargeable via
USB
Comfortable,
good peripheral
Light to wear
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32
SEGMENTATION
3-1 WHY SEGMENT?
Think about the last time you went to a movie with a couple of your friends.1 Afterward,
when you talked about the movie, how did people respond? Was everyone in complete
agreement about whether they liked the movie? Did everyone agree on the acting or special
effects or music? Probably not. Even among our friends, who tend to be similar to us, tastes
and opinions vary. No one is right or wrong (well, okay, you were right, and your friends
were wrong); it’s just a matter of differences in preferences and attitudes.
Psychologists would say that people have different motivations. Recall from Chapter 2
Maslow’s hierarchy from biological needs to more abstract ones. Consumers purchase
products to fulfill their needs. For example, consumers who are price conscious make pur-
chase decisions using value as a primary attribute, whereas consumers with high needs for
social approval purchase brands with much less of a concern for price.
Economists talk about this differently. They call it
“imperfect competition”; that is, consumers have unique
needs and desires, so collectively a marketplace of con-
sumers is heterogeneous. Differences in perceptions and
preferences require that different products be provid-
ed to satisfy the different segments’ needs. When a large,
heterogeneous market is segmented into smaller, ho-
mogeneous markets, a company can focus on meeting
the demands of one or two of these groups and create
something that is closer to what the customers want.
3
5Cs STP 4Ps
Product
Price
Place
Promotion
Customer
Company
Context
Collaborators
Competitors
Why do marketers think about segmentation?
What are segments?
What kinds of customer knowledge can be used to identify segments?
How do you know a good “marketing segmentation” when you see one?
Managerial Checklist
Segmentation
Targeting
Positioning
A company can’t be all things
to all customers. It must choose
a segment to serve.
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33Chapter 3 Segmentation
In marketing, we deal with all these customer differences through segmentation.
An entrepreneur might create a new gadget, or a brand manager a new line extension, or a
consultant a new piece of software, and each might hope that the whole world will like and
buy their market offerings. But it won’t happen. And it’s not smart marketing to go after
the whole market. Why not?
• How could you provide a product that has high enough quality to satisfy premium
customers and yet is priced low enough for price-sensitive customers?
• How could you afford to place your advertisement in the disparate media that
different customers enjoy, (e.g., online, in teen or car or cooking magazines, on
network television, etc.)? How many versions of the ad could you afford to create to
communicate effectively to those different audiences?
• How could you develop a brand image that appeals to the masses seeking comfort in
conformity and simultaneously appeal to fashion setters mavericks or other custom-
ers who seek to express their individualism? The goals are incompatible.
Instead of trying to appeal to the entire marketplace, the smart marketer and smart
company will try to find out what different kinds of customers might like, and decide which
groups they can serve best. That strategy begins with market segmentation.
3-2 WHAT ARE MARKET SEGMENTS?
A market segment is a group of customers who share similar inclinations toward a brand.
On a continuum from mass marketing to one-to-one marketing, market segmentation is
in the middle (see Figure 3.1).
Mass Marketing
(low customer
satisfaction)
Marketing
Segmentation
(just right!!)
Company
One-to-one
Marketing
(not profitable)
Product
Figure 3.1
Marketing
Segmentation:
Groups of
Customers
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34 Part 1 Marketing Strategy
Mass marketing means that all customers are treated the same. This approach might
sound attractive because it simplifies the business (i.e., only one product needs to be of-
fered), but it is usually unrealistic (because customers differ). Think of a simple commodity
product like flour. We should be able to mass market flour; flour’s flour, right? Au contraire,
Pierre. There is all purpose flour, unbleached flour, wheat flour, brown rice flour, buckwheat
flour, organic soy flour, whole grain oat flour, self-rising flour, flower power, etc. Different
types of flour are available to meet the distinct needs of the flour-using segments.
At the other extreme, one-to-one marketing means that each customer serves as his or
her own segment. This approach sounds appealing from the customer’s point of view be-
cause the product would be tailored specially for each person’s idiosyncratic desires. Some
manufacturers of computers and cars are experimenting with letting customers design their
own models. Are these companies truly offering one-to-one tailored products? Not really.
Dell’s website may seem to do so, but users are allowed to choose only from short lists of
features. Nevertheless, even those variations result in a large number of combinations, such
that one person’s computer seems rather different from another’s. The result approaches
one-to-one marketing.
Some companies tried mass customization but rolled it back because it was not cost-
effective or because it was difficult to exert quality control. Yet increasingly technology
offers the benefits of scales of economy. Financial services don’t need to have set rates;
instead, they can vary depending on a customer’s portfolio. Coupons that are printed at
grocery checkouts are a function of items the customer just purchased. Ads that pop up on
many websites are eerily responsive to what the surfer has been typing.
Potayto, Potahto
Identical products can be positioned differently to different segments. For example, the same baby
diaper can appeal to parents:
thinking about their baby’s comfort.
who want to avoid messes.
who want to be green.
Yet it’s the same product.
Or, in another product category, consider the razors that men and women use. Gillette produces
“Venus Divine” for women and “Fusion ProGlide” for men. The razors have the same number of blades,
but the XX version is pink, and the XY version is black. Are these products the same or different?
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35Chapter 3 Segmentation
Between these two extremes is the typical concept of segmentation. The marketplace
is thought of as being comprised of several segments, each of which is more (or less)
favorable to your brand. The segments that like your brand might not be the customers you
want, but that is a marketing issue of targeting and (re)positioning, topics to be addressed
in subsequent chapters.
As the contrasts of mass and one-to-one marketing illustrate, segments become more
heterogeneous as they increase in size. As a result, they are more difficult to satisfy with the
same product (the problem with mass). The goal of homogeneity in customers’ likes or dis-
likes is more likely to be achieved as the segment size gets smaller, but if the segment is too
small, it might not be profitable (the problem with one-to-one).2 So we need to understand
how to find optimal, serviceable segmentation schemes.
Niche marketing is a type of segmentation in which the company strategically focuses,
targeting a smaller market, with particular needs that the company can serve well.
In Figure 3.1, niches would fall between the one-to-one and segment strategies. Niches
might be small segments, but they can be very profitable.
3-3 WHAT INFORMATION SERVES AS BASES
FOR SEGMENTATION?
3-3a Demographic
All kinds of information about customers have been used in segmenting markets
(see Figure 3.2). Some customer attributes are easily identified. For example, in many
product categories, a company produces two varieties, one for men and one for women,
Demographic Age, gender, income and education, number of kids,
marital status, household life cycle
Geographic
Country, area (e.g., northeast vs. Southern CA),
climate, market size, cultural sensitivities
Attitudes
Behavior
Awareness, involvement, attributes sought
(e.g., quality, value), price sensitivity, risk tolerance,
traits (e.g., extraversion),
Media (online, cable, movies, magazines), loyalty,
frequency, co-purchases, af�liations (e.g., political
party, alma mater)
Figure 3.2
Bases for
Segmenting
in B2C
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36 Part 1 Marketing Strategy
such as razors, vitamins, running shoes, and television channels. Sometimes the products
are constructed differently, e.g., four blades on razors for shaving those he-man whiskers
vs. a razor shaped to fit in the palm of a woman’s hand to facilitate shaving sensitive
areas. Sometimes the product formulations are identical, but the perceptual factors differ in
the marketing appeals. Alternatively, a company might focus on serving only the men’s or
the women’s market.
Other easily identified demographic qualities of customers include their age, household
composition, and stage in the life cycle. Spending is quite predictable:
• Young adults are interested in music and entertainment technologies.
• Young couples buy furniture and vacations together.
• Families start financial planning to support their kids’ college educations.
• Older couples that are empty nesters start dreaming of spending their greater
discretionary income on travel and hobbies.
• Still older people investigate health care options and charitable giving.
We constantly hear so much about the baby boomers (in the U.S. and worldwide) be-
cause this group of customers is so huge that it affects the sales of nearly every product
category. A note to the budding entrepreneur: Make something that older people like or
need because boomers are heading in that direction.
Two additional demographic characteristics frequently used in segmentation studies are
education, which helps shape consumer preferences (e.g., opera vs. opry), and income, which
facilitates certain consumer choices (e.g., Four Seasons vs. Motel 6). You’ve heard it said
that time is money, but, in fact, time seems to be negatively correlated with money. Families
with higher household incomes hire more service workers (e.g., lawn care, nannies) to help
with their daily needs because of their time drought.
Ethnicity is clearly important. In the U.S., the African-American and Hispanic-American
populations each number more than 40 million, and Asian-Americans are at about 12 million.
Any one of these groups is sizable enough to influence a market.
Many more demographic variables have been used in segmenting consumer markets.
Any variable has potential depending on its relevance to the product category. While de-
mographics have an advantage of being clear and easy to recognize, they sometimes bor-
der on being simplistic stereotypes. Think of your male friends: Are they all alike in the
clothes they wear, the cars they drive, the foods they eat? No. Ditto for your female friends.
Analogously, some older people are uncomfortable with technologies like the Internet, but,
counter to the stereotype, others are online and very savvy. So what sense would it make to
segment the market into men and women or into older and younger people if there are at
least as many differences within the groups as between the groups? The marketer seeks the
men who like their product and the women who like their product. So some quality other
than gender is driving whether men or women like the product, and that’s the quality that
we need to find and use as the segmenting variable.
3-3b Geographic
Geographic distinctions among customers have also been used to segment markets.
For example, given societal differences, international tourist destinations can wreak hav-
oc with logistics, e.g., while Brits and Germans tend to be orderly in queuing, customers
from many other countries and cultures are less so. There can be cultural differences within
a country, e.g., a spicy salsa in the U.S. Southwest is very hot, whereas it is formulated
milder for wimpier customer palates in the Northeast. Urban living affords certain elements
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37Chapter 3 Segmentation
of entertainment, and smaller town living is different. Climate offers still another consider-
ation; snow-blowers tend to sell better in the North than in the South, whereas the reverse
is true for chlorine.
When geographic and demographic information are combined, the segmentation
schemes can be even smarter. A service called Prizm posits that MBAs who live in
New York have a lot more in common with their counterparts in London, São Paulo, and
Tokyo, for example, than they do with their neighbors in New York who are relatively
less educated or wealthy. Figure 3.3 shows several segments, with their distinctive labels
and profiles.
3-3c Psychological
It would be ideal to get inside the heads and hearts of our customers: What do they want?
Do they know? Could they be persuaded to like our brand? Could we change our brand to
match their interests better?
Psychological traits vary in terms of how much insight they lend to issues of marketing
and brands:
• For example, while men and women show many consumption differences, they can
be quite similar in consuming certain product categories, such as cereals or cell
phones.
• Or, for example, do extraverts and introverts differ in their purchases? Perhaps some
purchases may vary, e.g., vibrant colors of clothing or tendencies to throw dinner
parties vs. attend book club readings. But do they differ in the pets they own, in the
restaurants they frequent, or in the investments they buy?
It would be more useful to the marketer to understand the psychological and lifestyle
choices that are relevant to the brands the marketer is pitching. For example, if we know
consumers are avid readers, sports nuts, or wine aficionados, we know something more
about what they enjoy, their social orientation, and the categories of purchases they’d be
easily enticed to make. We can cross-sell Kindles or iPads to the reader, season ticket pack-
ages and large-screen TVs to the athlete, and expensive refrigerators and trips to Argentina
to the wine connoisseur.
Affluent
Less so
25–44 years old 45–64 years old
“Kids & Cul-de-sacs”
• Kids
• Suburban
• Upper middle income
• Home owners
• College grads
“Money & Brains”
• Maybe kids
• Urban
• Upper income
• Home owners
• Graduate plus
“Family Thrifts”
• Kids
• Urban, small city
• Lower middle income
• Renters
• Some college
“Mobility Blues”
• No kids
• Urban, small city
• Lower income
• Renters
• Some college
Figure 3.3
Prizm Segment
Samples
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38 Part 1 Marketing Strategy
A popular tool for segmenting using psychographic data is called VALS. The idea is
that the attitudes people hold and their value systems determine their orientations to-
ward certain product categories and brands. For example, so-called strivers are people who
are trendy and fashionable in order to impress others, and they are often impulsive buy-
ers. Marketing managers would study their customers to understand what they value, and
then the managers would be able to communicate more persuasively to those customers.
For example, VALS has been used to identify potential customers for cosmetic surgery:
Who would be interested? Who could afford it? Why would they want it? All of this shapes
the advertising.
Naturally, customers vary in their marketing-oriented attitudes. Hobbies are examples
of purchase categories in which customers vary in their level of expertise (some newbies,
others experienced and sophisticated). Customers vary in their levels of involvement with
the purchase category (how near and dear it is to their hearts). If customers are known for
their expertise and involvement in a category, and if they’ve demonstrated a willingness
to share information and give advice, they will be perceived by others as opinion leaders,
innovators, or market mavens and would be ideal persons for the marketer to identify as
people likely to generate word of mouth. Some customers are early adopters, caring about
new developments in their category, seeking out new products. Other customers either care
less about that category, or they are more risk averse, and they wait for someone else to try
the new gadget or get the kinks out of the beta testing before they purchase the item for
themselves.
All the qualities that marketers care about may be mapped onto segments in any product
category. For any purchase, a segment of customers will seek premium purchases, another
will be brand conscious, and another will be price sensitive. And, of course, just to provide
us with a challenge, a customer who seeks quality benefits in one category (e.g., clothing)
might be price sensitive in another (e.g., travel).
In addition to understanding who customers are and what kinds of activities they enjoy,
it is also important to gauge who customers wish to become. These aspirations help us
predict the new categories they will enter. For example, when a person picks up a how-to
book (e.g., remodeling), they will likely buy more such books before moving on to learn
a new skill. Someone enrolling in beginner’s tennis lessons will start noticing brands and
attributes of tennis equipment and start gearing up. One reason celebrity spokespeople are
thought to be effective is that ordinary people aspire to be like the celebrity, in whatever
VALS
VALS segments people based on three motivations: ideals, achievement, and self-expression
(www.strategicbusinessinsights.com/vals):
Ideals people are guided by knowledge and principles. These consumers buy the newest laptop
technology, were first to adopt e-readers, do extensive information searches comparing all the
brands before they buy just about anything.
Achievement consumers buy products and services that demonstrate success to others. They
drive sexy, expensive cars, and they carry, wear, and drink high-end brands.
Self-expression people desire social or physical activity, variety, and risk. These consumers are
the first to go bungee jumping, heli-skiing, or any other extreme sport (and accompanying gear),
and they can be brand-fickle.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
39Chapter 3 Segmentation
manner that is achievable—if not in the celebrity’s full lifestyle, then perhaps in the hair-
style or brand of sunglasses.
3-3d Behavioral
Beyond attitudes, psychographics, and lifestyles, marketers would like to know what cus-
tomers purchase, not just what they report they intend to purchase. Grocery scanner data
are an example of compiled behaviors. A customer might report to be eating healthy foods,
but evidence of their M&M purchases would belie their good intentions.
Behaviors are important in and of themselves (e.g., to help us make predictions
regarding future purchasing). In addition, watching what consumers do tells us something
about who they are. Attitudes are not directly observable, but we can use behaviors to
infer attitudes and psychological states. For example, people have preferences for movie
genres, and marketers know it. Thus, when we go to an action movie, we’ll see previews
for other action movies, and when we go to a romantic comedy, the previews are a
different batch.
One behavioral segment of great importance to the marketer is the current user of the
focal brand. It is relatively easy to communicate to this group, as messages on soup packag-
ing or direct marketing on a favorite website. The type depends on the level of relationship
the company has with its customers. Current users have already shown an affinity for the
brand. Some current users may be high maintenance, but most will be worth trying to keep
satisfied.
In contrast, it is more challenging to identify, obtain information on, and woo customers
who are currently using a competitor’s brand or who aren’t even purchasers in the category
altogether. The first group asks: Why should I switch, why is your brand better than what
I’m familiar with and relatively happy with? The second groups asks: Why do I want to buy
this at all? In addition, when given the choice, customers vary in their preferred means of
contact and access—shopping online or through catalogs or at the malls.
Within the current or competitor’s user groups, there also exist variations on the ex-
tent of loyalty or of the ease with which customers may be lost and gained, as well as
frequency of usage, which can have impact not only on revenues but also on logistics costs.
You’ve heard of 80:20, meaning 80% (or so) of your sales come from 20% (or so) of your
customers. You’ve also heard the rules of thumb about how “It costs six times more to
Social Media Segments
Forrester has found 7 segments of social media users:
1. Creators produce lots of media for everyone to see—posting blogs, or uploading videos, sharing
lots of online content.
2. Conversationalists update their status on social networking sites and are heavy users of Twitter.
3. Critics respond to others’ postings, write product reviews, may contribute to wikis.
4. Collectors gather and organize info for themselves and ship it out to others, e.g., via RSS feeds.
5. Joiners are active members of multiple social networking websites.
6. Spectators read blogs, watch others’ videos, read others’ product reviews and ratings.
7. Inactives are just not into it.
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40 Part 1 Marketing Strategy
acquire a new customer, compared with retaining a loyal customer.” Thus, these behavioral
tendencies—frequency, loyalty, etc.—are worth knowing, so we’d like to be able to identify
frequent users.
Marketers also study patterns of co-purchasing; skis, for example, are purchased or rent-
ed with boots, snowsuits, lift tickets, hotel rooms, and spiked cocoa. An increasingly popular
means of using co-purchasing patterns to generate cross-selling suggestions are Internet
recommendation agents. Providers like Amazon examine what you’ve bought (and clicked
on to view), and they make suggestions by comparing your data with what other custom-
ers have bought. For example, given that many customers buy mysteries by two writers,
Whodunnit and Thebutler, then, when you buy a book by one, you’ll be recommended
a book by the other.
3-3e B2B
While we have been focusing on categories of segmentation data that are particularly useful
for consumers, marketers segmenting their business clients most frequently use size. Size
can be defined in a number of ways: company sales, market share, number of employees,
client’s share of provider’s business, etc. Businesses plan for, and interact differently with,
their larger clients than with their smaller ones. They assign more client service personnel
and extend more relationship management efforts be-
cause the big customers are worth it; larger clients tend
to be profitable ones.
However, size does not always correlate with
future growth potential or with costs associated with
high-maintenance clients, who might not be worth retain-
ing regardless of the size of their orders. So, as shown in
Figure 3.4, there are other bases for segmenting business
customers. Note the close analogies with the consumer
concepts.
The primary distinction between segmenting businesses and consumers is that the data
sources tend to be different. There aren’t scanner data prevalent for businesses, for example.
On the other hand, the number of businesses who comprise one’s customer base will be far
fewer than the potentially millions of consumers. In addition, there tends to be good corpo-
rate knowledge about business customers, in part because such transactions typically rely on
a sales force, so there is a knowledgeable front-line interacting with the business customer.
Segments can be formed from any
kind of data, from age to Zip code.
Segmenting Consumers Segmenting Businesses
Demographic (e.g., age, gender,
income and education, household life
cycle, #kids, marital status)
Geographic bases (e.g., country, area
(e.g., northeast, vs. Southern CA)
climate, market size)
Behavior (e.g., media (magazines,
cable, online, movies), loyalty
programs, purchase frequency)
Attitudes (e.g., awareness,
involvement, price sensitivity, risk
tolerance, convenience, prestige)
Demographic (e.g., company size,
NAICS industry, account size)
Geographic bases (e.g., country,
sales force coverage)
Type of firm (e.g., architects bidding
for government (conservative projects,
slow to pay, but big), retailer (aesthetics
important, manufacturers (efficiency is
important), etc.
Attitudes (e.g., price sensitivity, risk
tolerance, corporate culture, profitability,
high vs. low “maintenance” accounts)
Figure 3.4
Segmenting
Consumers &
Business
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41Chapter 3 Segmentation
Of course, companies could do a better job of systematizing the sales force knowledge,
which would provide a clearer database for segmentation studies and other purposes.
3-3f Concept in Action: Segmentation Variables
Chapter 15 describes cluster analysis, the technique used to form segments once the mar-
keter has these demographic, geographic, psychographic or behavioral variables. Here is an
example from the automobile insurance industry. The industry is huge and competitive, so
it’s not surprising that companies turn to segmentation to get an edge.
This particular company began with survey data on its customers. The first analytical
question is to find survey questions that can detect variability in how respondents think
about an issue. If there is none, that would say that the customers are homogeneous in
their perceptions, which in turn would indicate that that variable would not be useful in
the segmentation. Remember, splitting customers into segments requires some differences
across groups.
For example, Figure 3.5 shows simple results on two survey items. The question at the
left indicates that most customers like the convenience of consolidating with a single com-
pany as their source of insurance for their home and car. While that information is interest-
ing, it is not useful for segmenting because most of the customers are in agreement.
1
Definitely
would not
Definitely
would not
Definitely
would
Definitely
would
2 3 4 5
35
30
25
20
15
10
5
0
Prefer auto/home with same company
1 2 3 4 5
40
35
30
25
20
15
10
5
0
Would switch to save 10%
% % Figure 3.5
Insurance:
Looking for
Segmentation
Variables
Geek Alert! Cluster Analysis
How do I find segments? Marketers and consultants use cluster analysis. Clustering models identify
groups of customers who are similar to each other, and customers in one cluster are different from
those in another cluster, or segment.
B2B customers are usually segmented by volume, price sensitivity, and geography.
B2C customers are segmented using data on demographics, attitudes, and transactions.
E.g., Pepsi offers Pepsi, Diet Pepsi, Caffeine Free Pepsi, Mountain Dew, and Aquafina, all for
different consumer needs.
E.g., cruise ship operators offer different trips to satisfy different customer segments looking
for uniqueness, low price, or a lot of programming for children.
Marketers label their segments (e.g., “green” or “price sensitive”) to help personify the segments, to
facilitate the choice of whom to target, and to develop ad content.
Marketers also verify that clusters that appear to be different on attributes such as age, income,
price sensitivity, etc. truly (statistically) are different; if not, the groups are combined.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
42 Part 1 Marketing Strategy
In contrast, the survey question about the discount (on the right) shows much greater
promise as a variable that would help distinguish segments. These data indicate that there
are two groups: one who would switch to save a mere 10% (the price sensitives) and
one who would not (the brand loyals or the inertias). This variable would be included in the
company’s segmentation analysis.
3-4 HOW DO MARKETERS SEGMENT
THE MARKET?
Marketers identify segments best when iterating between two approaches—a managerial,
top-down ideation and a customer-based, bottom-up customer needs assessment. Marketers
begin with some knowledge base about the marketplace: the customers, competitors, and
the company’s own strengths. Then they can gather information to understand the custom-
er perspective.
Knowledge of the marketplace will clearly also enter into the decision as to which of
the segments the company should eventually target. A market segment may look desirable
in terms of its size and even future growth potential, but it may already be saturated with
offerings by other competitors. There may be richer potential opportunities in other seg-
ments. The managerial perspective is also clearly important in terms of assessing the extent
to which the servicing of a segment is consistent with corporate goals.
As an example of the required integration between the managerial and customer per-
spectives in formulating segments, consider the service industry of personal investment
advisors. These professionals know that their client base may be divided by certain demo-
graphic variables such as income level, as well as psychological traits such as risk aversion.
They can obtain geographic data as a proxy for income, which would help them conduct a
cost-effective direct mailing to ZIP Codes that are known to be proportionally wealthier.
Upon identifying sales prospects, the financial advisor can send the potential client surveys
to measure their comfort level with risk. The advisor is using extant knowledge and data
(e.g., about income and ZIP Codes) in a manner to prime more favorable responses, also
complementing this knowledge with personal evaluations (e.g., comfort with risk) to know
which financial products might seem most appealing to the client.
The iteration between the managerial and customer perspectives is also important be-
cause sometimes a marketing manager might hold beliefs that are not consistent with the
customer data. For example, say a marketer for a London theater production company be-
lieves that some customer behavior such as income is predictive of the behavior of interest,
i.e., the purchase of theater subscriptions. That belief might be based on years of anecdotal
data (listening to friends, overhearing transit conversations, etc.). But those anecdotes are
not systematically gathered data and probably do not represent an unbiased selection of
customers. Thus, the marketer’s beliefs would need to be reconsidered when confronted
with real, better data that in fact the correlation between income and theatergoing isn’t that
strong. Empirically, arts-related behaviors (such as the frequency of museum attendance)
are better predictors of who belongs to the theatergoer segment.
3-4a How to Evaluate the
Segmentation Scheme
The iteration between marketing managers’ good sense and the customer-based data con-
tinues when evaluating potential segmentation scenarios. A set of segments may be very
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
43Chapter 3 Segmentation
clear from a statistical perspective, but they need to be useful from the managerial point
of view. So the question is: How do you know a good marketing segmentation when you
see one?
Data to Identify Segments. If one element of an iterative segmentation is a smart marketer,
the other element is good customer data. Are data available of the sort you’d like to iden-
tify the customer segments? For example, census data are always available, but they might
not be stored in refined categories, and so they prove too rough to be useful. Commercial
data, such as Prizm or VALS data, are available, at a cost, and if you have a large budget,
you’re fine. But if you’re an entrepreneur, you might need to approximate their results on
your shoestring budget. If you’re seeking surveys of very specific topics, such as consumer
reactions to electronics, the data may be trickier to locate.
Databases to Access Segments. A related question is whether databases are available that
identify potential customers because, after you identify segments, you’ll want to access the
customers in the target segments. For example, if you want to communicate to people who
own homes in New York and Palm Beach, how will you do so? Are there listings of such
people? Will you have access? Could you find indirect access, by advertising in the in-flight
magazines for airliners carrying passengers between those cities or by sponsoring promo-
tions with the two cities’ rental car, limo, and taxi agencies?
Profitability Matters. Most marketers are curious about the relative sizes of the iden-
tified segments, but it’s not size that matters so much as how profitable the segment is
or is likely to be. Segment size is just numbers of customers, but profitability is smarter
information: How frequently do the customers purchase? How large (in terms of money)
is their purchase? How price (in)sensitive are they? How stable is the segment? What is its
growth potential? Together, the numbers and profits information can be used to project the
value of approaching any of the segments. Sometimes small segments can be highly prof-
itable if the marketer pays attention and satisfies those customers’ needs—the essence of
niche marketing.
Sometimes segments appear small only because the clustering was done too finely.
If you’re working with too many segments, you’ll know it because, when you try to describe
Wholefoods,
grocery
shopping for
the upscale,
discerning
segment.
ak
at
z/
Sh
ut
te
rs
to
ck
.c
om
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Anatomy of a Market Segment
Tesla might want to advertise to all U.S. consumers, but it would be wiser
(and result in better ROI) to focus on the segment of customers who would
be interested in an EV and who could afford to buy one of theirs.
Starting point:
U.S. population is 320
million
Cut #1: Of the U.S. driving-age
population (16 years old &
up), 210 million have a driver’s
license (i.e., 66%).
Ar
te
ns
/S
hu
tte
rs
to
ck
.c
om
Cut #3:
Most EVs are priced around 26-32k. Teslas’s at 125.
%population with incomes > $100k is 20%, thus
now at 2.1 million (again, still could make a buck!)
Cut #2: To date, there is still little interest in EVs
(electric vehicles), due to price, concerns of
range, reliability, performance and power. Only
about 5% of consumers are interested. Now,
down to 10.5 million (still could make a buck!)
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45Chapter 3 Segmentation
each segment, their descriptions are blurred. For example, suppose Segment A is a young
guy, who cares about video games and cars but not about fashion. Say Segment B is all
that but he cares marginally more about clothes. Are you working with distinct segments
or with minor variants on a theme? If you’re Saks Fifth Avenue, you’d keep the groups
distinct; if you’re Nintendo, you’d assume the groups were similar for your purposes and
you’d combine the segments into one.
Fit with Corporate Goals. An upscale customer segment always seems attractive, but if
your marketplace image is that of a store with EDLP (everyday low prices), you’d con-
fuse existing customers if you tried to appeal to a them with new high-end products.
Further, new high-end customers might not pay attention to your ads because, to date, your
offerings hadn’t been relevant to them.
Another strategic question regarding segment selection has to do with the strength of
competition devoted to that same segment. The ideal goal for the marketer is to find an
untapped (or underserved) group of customers whose needs can be met easily and profit-
ably. But if other companies have beaten you to that group, or if they could easily redirect
their efforts after watching your success, the market share for that segment gets divided,
effectively reducing its size and profitability.
Actionable. Lots of segmentation schemes fail because marketers focus on the wrong
criteria. Specifically, the statistics and clusters might be crystal clear (e.g., four clear clus-
ters of customers), and even the interpretation and managerial meaning might be clear
(e.g., one segment in particular seems to be a great fit). However, the segmentation is use-
less if the marketer is at a loss as to how to put it into action.
For example, customers’ psychological profiles are extremely important to understand-
ing their basic needs, wants, and motives in order to shape an appealing market offering.
While attitudes help the marketer understand the why of the customer, the marketer needs
demographic information also to understand the “who” and “where” of the customer. The
“who” information helps advertising creatives depict the target in ads (e.g., matching gen-
der, age, income level), and the “where” helps inform the design of the channel structure
(e.g., where the customers live and shop and where we can advertise). A good segmentation
scheme should come alive—you should be able to imagine a customer in your target seg-
ment, know what they look like, and know what they’d like to talk about.
It’s not unusual to see a segmentation study comprised of some usage variable (e.g.,
heavy vs. light users) or some attitudinal variable (e.g., positively inclined toward our brand
vs. being loyal to a competitor) in a cross-tab with some demographic variable (e.g., gender
or age in some breakdowns like the census: 18–25, 26–45, 46–65, etc.). While the behavior
usage or attitude information is the most relevant information, the demographics help
marketers take action (e.g., select media for ads). The hope is to find relationships among
these variables—that men tend to like our brand, or the middle-agers tend to be loyal to
a competitor, etc. Then the variables of gender or age become our workable proxies for the
attitudinal variables that we really want.
We’ll close with a preview of what marketers do with segments. Figure 3.6 depicts
several segments identified in a marketplace. Figure 3.7 illustrates a company that is trying
to reach more than one segment with its product. Figure 3.8 illustrates a strategy whereby
a company has decided they want to be everything to a particular segment, serving those
customers very well. Figure 3.9 depicts a strategy of customizing the market offerings,
creating different products for different segments. Any of these strategies can be smart
and sustainable, depending on the company’s strengths and the marketplace environment
(e.g., competitors).
Finally, consider the topic of business expansion (see Figure 3.10). If you currently mar-
ket primarily to women between roughly 25 and 55 years of age by placing ads in women’s
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46 Part 1 Marketing Strategy
magazines, but sales are flat, in which direction would you expand your business? Would
you advertise via multiple media outlets to the same segment of women? Would you try to
shape the product and imagery to be compatible with men’s goals? Would you try to ex-
tend your market base by age, appealing to consumers who are younger or older than your
current purchasers? Clearly, profitability analyses and questions of corporate fit must be
addressed, and these issues are clarified by a good, basic understanding of the segmentation
structure of the marketplace.
Segment C
Segment B
Segment A
Figure 3.6
Segments in the
Marketplace
Segment C
Segment B
Segment A
Product
α Computer companies make
monitors ultra-compatible so
they can be sold in desk top
packages or as a second
monitor for laptop users.
Figure 3.7
Breadth Strategy:
Reaching Multi-
ple Segments
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47Chapter 3 Segmentation
Segment C
Segment B
Segment A
High-end grocers know
their shoppers will want
organic produce AND
fair trade coffees AND
cosmetics that have not
been animal tested.
α
β
γ
Figure 3.8
Depth Strategy:
Serving One
Segment Well
Segment C
Segment B
Segment A
Lots of beverage companies
follow this tailored strategy,
e.g., targeting Coca-Cola to
youth and Diet Coke to their
parentals, or macho beer to
men and lite beers to women.
α β
Figure 3.9
Tailored Strategy:
Customizing for
Segments
Ads before movie trailers
?
?
?
Search engine ads
<1
8
19
–2
4
25
–3
4
35
–4
4
45
–5
4
55
–6
4
65
+
Print ads
MenWomen ?
Figure 3.10
Serving a Segment
and Branching Out
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48 Part 1 Marketing Strategy
MANAGERIAL RECAP
Unlike the claim by Gordon Gecko, the Michael Douglas character in the movie Wall Street, greed is not
good. It’s not just a value judgment; it’s not good business.3 Rather than trying to capture the entire market,
the smart marketer—the smart company—will segment the market and selectively target groups.
Segments don’t have to be huge, but they must be profitable. Otherwise, we would just fold the group in
with another segment and offer the same product to both groups. The marketer must be able to identify the
segment; hence the reliance on demographic and behavioral data in addition to data on attitudes and pur-
chase intentions. Segments must also be accessible, that is, there must be some media that will reach them,
hopefully in a cost-efficient manner. Last but not least, the segments selected for targeting must match the
soul of the company—its position in the marketplace and its marketing and production capabilities.
• Marketers create segments because customers vary in their preferences, and it is usually impossible to
please all customers with one product.
• Market segments are groups of customers with similar reactions to the company’s brand.
• Segments can be formed on nearly any kind of differentiating information, e.g., demographics,
geographics, psychological attitudes, and marketplace behaviors.
• Segments are best created iterating between the managerial understanding of the marketplace
and good data that may be processed (e.g., via cluster analysis) to identify similarities in purchasing
propensities.
• The resulting segmentation scheme should be one based on data, sustained by a database to help
access the customers, profitable enough to serve, sensible with respect to the larger corporate goals
and planning, and finally implementable.
Chapter Discussion Questions
1. Say you’ve got a friend who is an entrepreneur.
She’s making the best software, wine, or whatever,
that the world has ever seen. She is certain that
everyone will like her new product, so she thinks
your idea about segmentation is not necessary.
How can you convince her and help her with her
business?
2. What variables would be useful to segment visitors
to your city’s public aquarium?
3. How might you obtain data to segment visitors to
your city’s public parks, by day of week and time of
day? What would you expect to find?
4. Who do you suppose is the ideal customer
segment to target for donations to:
a. American Cancer Society?
b. Your university?
c. World Relief Fund?
Chapter Outline in Key Terms and Concepts
1. Why segment?
2. What are market segments?
3. What information serves as bases for segmentation?
4. How do marketers segment the market?
a. How to evaluate the segmentation scheme
5. Managerial recap
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49Chapter 3 Segmentation
Video Exercise: Raleigh Wheels (5:14)
Founded in 1887 in Nottingham, England, Raleigh Wheels became known as the original all-steel
bicycle manufacturer. Eventually, ownership of a Raleigh bike became a status symbol. Raleigh’s
product development has been significantly influenced by trends in the European market where
biking had long been a lifestyle choice. Then, in the past 10 to 15 years, technological advances
have fueled bikers’ desires for equipment that is lighter, faster, and better. All companies in the industry, including
Raleigh, began incorporating these technological advances into their products. Sensing that it was getting lost as
a company, Raleigh returned to what customers really expected. It returned to its roots as a steel bike producer
for customers who are committed to bikes and biking as a lifestyle choice. Part of this impetus for returning to the
all-steel bike came from the desire for messenger-style bikes by customers of Raleigh America. Customers who
pursue biking as a lifestyle choice want durable equipment and a quality ride, both of which are provided by the
all-steel bike. To ensure that Raleigh continues to satisfy its customers’ wants and needs, Raleigh America’s market-
ing manager constantly uses various venues to gather input from bike enthusiasts.
Video Discussion Questions
1. How can market segmentation be useful for producers of bicycles?
2. On what factors does Raleigh Wheels base its market segmentation?
3. How can Raleigh Wheels benefit from the market segment that it pursues?
MINI-CASE
Health Care Tourism
In the face of ever-rising health care costs, more people than ever before are looking for the best medical treat-
ment at the best price, and they’re willing to go anywhere in the world. Most of the businesses in this space are
the health care providers themselves—hospitals, globally connected networks of specialty centers, etc. However,
increasingly the hospitality industry is waking up to the opportunities that this type of travel may afford them.
Several large hotel chains that already have an international presence are seeking medical business partners and
airline partners to create packages that offer seamless service for health care tourists. The airline partnerships are
nearly in place—these classes of entities have been cooperating together for decades. The medical alliances are
trickier, because ultimately the medical service providers still care most about health care provision, and concerns
regarding business are still relatively novel; e.g., they find it somewhat distasteful to be approached by a hotel
chain to talk business.
Secondary data shed a clear light on the segments of customer-patients in this burgeoning world. There are
essentially three groups of customers (not necessarily exclusive or exhaustive).
First, some people seek primarily relaxation and stress reduction. They travel to health spas, enjoy aromathera-
py massages, and herbal and homeopathic treatments. They engage in yoga classes and they expect the resort’s
menu to be detoxifying.
A second group of health care travelers are getting elective surgery done and they want to recover away from
their friends and family. These people are having face lifts, liposuction, breasts implants, etc.
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50 Part 1 Marketing Strategy
The final class of traveler has relatively serious medical conditions that are fairly essential to their health.
The procedures these folks are looking for range from joint replacements to cancer treatments to heart surgeries.
The operations will require more extended hospitalization, and the primary motive of this segment of traveler is
price reduction compared to home, even for those patient-customers with insurance.
Most of the hotel chains have access to this segmentation information. Some have not sought it out. Others
have seen it but are not considering it, because they figure that their service, beginning with the hotel room itself,
would be welcome by any of these travelers.
There’s a hotelier based out of London that is considering using this segmentation information. Their compet-
itors think they’re nuts, and will be depriving themselves, by definition, of access to the other segments’ business.
The London firm, however, thinks the segmentation-based approach may be a good way to begin. The informa-
tion would allow them to be more selective in their appeals, both to the end users (the patient-customers), but
also in these still early stages of finding medical partners. They reason that as they gain access, experience, and
credibility, the doors to other medical partners may open later.
Case Discussion Questions
1. Which kind of hotel manager do you agree with—the ones that do not wish to limit themselves given their
business is good for all three segments of travelers, or the London firm and its approach? Why?
2. If you wish to follow the first strategy (all customers could benefit), what would your marketing communica-
tions be to the end-user patient-customer? If you followed the second strategy, what would your marketing
communications look like?
3. If you were based in London, which countries would be the first you would approach to develop such rela-
tionships? If you were based in Paris, which countries would you approach for your network inclusion? If you
were in Houston? Rio? Why?
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51
TARGETING
4-1 WHAT IS TARGETING AND WHY
DO MARKETERS DO IT?
At this point, the segmentation scheme is based on customer variables that are both
important (e.g., they’re tied to psychological profiles of attitudes and brand preferences)
and useful (e.g., demographics or media choices). We now proceed to targeting.1
The term “target” is drawn from a shooting or archery range metaphor, and it says,
“We’ve got our customers in our sights. Now let’s get them!” For readers who don’t care for
that metaphor, imagine instead that we have a set of binoculars, and when we get our target
segment in our sights, we use a slingshot to softly lob cool products and great deals at the
target.
The idea of targeting is selection. We have analyzed the marketplace, our competitors,
and our internal strengths, and we can see that they align better with some segments than
with others. So we will try to serve the segments whose
needs match our abilities to deliver, and, in doing so,
we hope to make very happy, very loyal customers who will
be very profitable for us.
We target for the same reasons that we segment: It’s
foolhardy to try to be all things to all people. Most markets
are not comprised of customers with identical tastes, there-
by facilitating the identification of segments. The targeting
question is this: Which of those segments do we want to
be our customers?
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
How to choose the segments to target?
How to “size” the market?
Customer
Company
Context
Collaborators
Competitors
Managerial Checklist
Targeting: the selection of ideal
customer segment(s).
4
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52 Part 1 Marketing Strategy
4-2 HOW DO WE CHOOSE A SEGMENT
TO TARGET?
There are two perspectives in assessing the attractiveness of each segment in terms of its
potential for our targeting, and it is extremely important to consider both. We will iter-
ate between our top-down vision of corporate strategy and a bottom-up, data-informed
approach on segment size and profitability.
4-2a Profitability and Strategic Fit
The first perspective in assessing segments to target is a view of the segments them-
selves, and the primary question is: How likely is it that the segment will be profitable
(and just how profitable)? Potential profitability is a function of the current market
size, its anticipated growth, current and anticipated levels of competition, and customer
behavior and expectations (e.g., some customer segments are high maintenance and not
worth serving).
The second perspective requires that we take a long, hard look at our own business
capabilities: Does this market segment fit with who we are? Are we going to be able to
satisfy this segment—can we pull it off? What are our strengths? What resources do we
have? What is our experience? What is our corporate culture? What is our current brand
personality? According to all these indicators, which segment(s) could we serve best?
Figure 4.1 captures the possibilities. In the upper left, if a market segment looks attrac-
tive and if serving that segment fits our corporate abilities, the pronouncement is a simple,
“Go for it!” For example, suppose we manufacture athletic clothing. We learn that corpo-
rate volleyball teams are growing in popularity, and they need team shirts with their logos.
We can do that and likely be successful.
Market is
attractive
Corporate
strengths
Less
capable
Market doesn’t
look so hot
Go for it! Hmm...
Hmm... Avoid
Figure 4.1
Strategic
Criteria for
Targeting
Segments
In the lower right, if a segment doesn’t look promising and it doesn’t fit naturally with
us anyway, we let the “opportunity” go. For example, e-books are taking off, but with varied
platforms. There are still uncertainties ahead. Furthermore, even if our company manufac-
tures PCs, we may not have any particular advantage with e-book technology or distribu-
tion. So let’s not bother.
Those two cells in the matrix are the no-brainer choices (go/no-go). Now things get
more complicated.
In the lower left quadrant, the scenario is that the market looks sweet, but we’re not
particularly capable (e.g., video games are profitable and growing like crazy, but we produce
thumb drives). A key question would be whether we can develop sufficient capabilities
(e.g., hire teenage boys to do programming and pay them in thumb drives). Depending on
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53Chapter 4 Targeting
SWOTs are useful in clarifying just about any marketing question.
In such an analysis, we can declare our strengths and weaknesses rel-
ative to our competitors, but our opinion doesn’t matter as much as
that of the customer base. Hence, we’d obtain some marketing research
data, such as the perceptual maps described in the following section.
If our brands, product lines, and company have perceived weaknesses in
areas that customers care about, we should be motivated to make chang-
es to address those shortcomings. If our brands and products have per-
ceived strengths, we will consider what we can do to ensure that these
will be sustainable competitive advantages, and we’ll advertise them like
crazy.
Opportunities and threats are usually driven by changes in one of
the 5Cs: The economic or environmental context might be changing, a supplier might
be morphing into a competitor, a competitor might be offering extended services that
are desired by our customers, etc. Whether any of these shifts is perceived as a threat or
opportunity depends a bit on corporate philosophy: Is the glass half empty or half full?
Are we nimble enough to respond and react, thus seeing the changes on the horizon as
opportunities? Or are we bureaucratic or not very creative, reacting pessimistically to the
changes as threats?
how far the newly-required capabilities are from our current in-house expertise, taking this
path could mean a huge investment of time and money. Maybe that’s an investment we
wish to make. If we’re private or have patient shareholders, we may have the time to develop
new skills (e.g., hire new people, create new channels, do whatever it takes). Or maybe it’s
an investment we’ll have to make if some trend suggests that the segment is growing.
Finally, in the upper right quadrant, there is another dilemma scenario: What if the
market doesn’t look so great, but we are awesome at creating products of this sort? The
key question in this case is whether we can develop a market. Can we get a segment to
understand the benefits of what we provide? This strategy would also require investing, but
in different things: in marketing research to understand the customer’s level of knowledge
and points of resistance, in possible product modifications to make it more appealing, and
in advertising to educate the customer about our stupendous products.
We will have more to say about corporate fit in Chapter 16 on marketing strategy. For
the moment, a simple, popular framework for trying to objectively assess one’s own corpo-
rate strengths is the SWOT analysis, depicted in Figure 4.2. SWOT stands for strengths,
weaknesses, opportunities, and threats. With the S and W, we’re characterizing the com-
pany: What are our strengths and weaknesses? With the O and T, we’re characterizing the
broader environment (e.g., industry, suppliers, government, etc.): What are the opportu-
nities and threats? S and W are considerations internal to the organization; O and T are
external.
Strengths
Weaknesses
Opportunities
Threats
Favorable
Internal
(corporate)
External
(environment)
Unfavorable
Strengths Weaknesses
Opportunities Threats
Figure 4.2
SWOT:
Strengths,
Weaknesses,
Opportunities,
and Threats
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54 Part 1 Marketing Strategy
We will return to SWOTs, particularly when considering marketing strategy. In the
following section, we begin to see how the relative strengths and weaknesses may be deter-
mined, as seen through the customer lens.
4-2b Competitive Comparisons
A company can try to assess its corporate strengths in terms of absolute measures. However,
relative comparisons to its competitors may be more relevant. After all, customers make
purchase choices based on comparing brands.
Figure 4.3 is an example of such a comparative analysis, called a “perceptual map.”
This map shows customers’ perceptions of our strengths (and weaknesses) vis-à-vis our
competitors’. The two dimensions of quality and price might look generic or abstract, but
indeed most attributes and benefits in many product categories can be whittled down to
these two. Price is self-explanatory. The important thing to remember about quality is that
the defining dimensions vary with the industry: For sporting goods stores, quality might
mean huge variety at big box stores, or it could mean depth of category at stores that spe-
cialize in, say, camping equipment. For campus restaurants and bars, quality might be not
only the food and drink but also the ambience—whether they draw the right crowds (i.e.,
others like oneself ). For a suit for interviewing, quality could mean whether one feels like
“a million bucks” wearing it. And so forth.
Low
High
Q
ua
lit
y
Low
High
Competitor 2
Competitor 1
Competitor 4
Competitor 3
Us
Price
Figure 4.3
Competitive
Analysis
The market depicted in Figure 4.3 has good news and bad news. Our firm isn’t seen as
the worst provider or the most expensive. But neither are we seen as terrific in either aspect.
Indeed, we are seen as relatively average on quality and on price. We dominate competitor
3 on quality and 4 on price. However, we too are dominated by competitor 1 on quality and
by 2 on price.
What does this information gain us, with respect to targeting? If a segment we are
considering as a target is price sensitive, we have to be especially wary that competitor 2
will react. They will be attuned to such a move in the marketplace because they own that
price point identity. Given that price is their strength, they could and probably would re-
act swiftly, and in all likelihood they would kick our, er, win that fight. Similarly, if we are
considering targeting a segment that values quality, we would be more concerned with
competitor 1 than with any other.
Figure 4.4 offers a different perspective to consider when selecting a segment to target. It
compares segment profiles along various business parameters. These simple profiles enable
us to assess the likely attractiveness of each segment. Segment 1 is not the largest existing
market; segments 2 and 4 are bigger. But segment 1 growing the fastest, which makes the
market exciting. Of course, growth can be a double-edged sword. Although few competi-
tors exist at the moment, should the market grow big enough, it will attract more. Yet the fit
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55Chapter 4 Targeting
is the best with who we are. So even if more competitors enter the marketplace, we should
be able to take them on because we know we can serve this segment well.
Segment 2 has possibilities. It looks attractive because it is a big market, and it’s grow-
ing reasonably quickly. Yet two issues give us pause: The one dominant competitor may be
daunting, and it’s not our best corporate fit.
Segment 3 has its strengths. It has few competitors, and those that exist, we could likely
dominate. But it has its weaknesses too: It’s not a huge market, it’s not growing the fastest,
and ultimately it’s also not a great fit with our corporate abilities.
Segment 4 is one we can pass on with few regrets. It’s the smallest and slowest growing.
Regardless of competition, we wouldn’t know what to do in that market anyway.
In sum, segment 1 should be our priority. If segment 1 is sufficient in size for our goals,
we’re good. But if segment 1 is too small, we might consider expanding our targeting of
segment 1 to include either or both of segments 2 and 3 down the road. We could roll out
and target the segments sequentially, after we’ve spent the resources to reach and penetrate
segment 1 and if we can produce a consistent market offering and communication to addi-
tional segments without putting off customers in segment 1.
We began this section by saying that the choice of a target segment involves information
about both the size of the market and the fit with corporate goals. In many ways, the second
is the more challenging; i.e., it’s easy to get swept away by a big segment, making us think
Size
Characteristics:
Growth Competitors Fit Priority?
Segment 1
Segment 2
Segment 3
Segment 4
$1 mm Yes
$2 mm OK
$1 mm OK
$2 mm
5%
3%
3%
1%
Few
1 big
Few, weak
Few, weak No
?
?
Figure 4.4
Strategic
Segment
Comparison
Have a Heart
Unfortunately, there’s a rotten form of targeting that unethical marketers have used … The
accusations are that marketers have pitched:
sugary cereals and junk food to kids,
cigarettes and alcohol to ethnic minorities,
confusing and exploitative financial instruments to the elderly, and
marked-up goods and services to socioeconomically disadvantaged groups,
while not marketing certain services (e.g., in health care) to segments that would likely be
unprofitable (e.g., the elderly, people with certain chronic conditions).
Ethical marketers are supposed to consider whether any harm is likely to a particular at-risk or
vulnerable segment, and if so, the segment should not be targeted. The good news is that while some
people and companies are indeed icky, most are pretty amazing.
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56 Part 1 Marketing Strategy
we should serve it, when in fact we may have no particular strengths to guarantee we can
serve it well. So we need to say no. Ultimately that assessment is conceptual: Who are we
as a firm? Who do we want to be? The other piece of information, however—the size of a
market segment—is something we can estimate, as we’ll do next.
4-3 SIZING MARKETS
In Figure 4.4, segments were described in terms of market size and likely growth rate.
The inquiring marketer is no doubt wondering how to derive such characterizations.
We turn now to consider sizing markets, and then we’ll discuss projecting growth rates.
We’ll walk through a couple of scenarios of creating estimates so that you get the logic.
You’ll see that some of the inputs into these estimates will be numbers you’re confident
about. For the numbers you’re less confident about, you’ll want to have a rough interval and
probably do some what-if scenarios, varying those numbers, seeing how sensitive the ulti-
mate projections are, and what are the likely upper and lower bounds on your predictions.
A lot of estimates go into the final calculation, so each component needs to be as precise as
possible. Otherwise, the errors in the estimation just get compounded. One helpful factor
to consider is that the more precisely defined the target market is, the easier the numbers
are to estimate.
We’ll look at an example of estimating the size of a market in the context of selling
Personal Brander services to busy professionals. These people offer a variety of
consultative skills, depending on the professional careerist’s needs, from help with
public speaking, to crafting a self-brand statement, overseeing social media for tasteful
self-promotion, even use as sounding boards to reflect on various actions and comments
observed and received in the workplace. After this example, we’ll consider more generally
the kinds of factors that you’d include for estimating your particular product-segment
market size.
Targeting Yogis
A cataloger known for its environmentally friendly goods and body-soul philosophy was considering
adding yoga clothes to its line. Data on the fitness lines in the apparel industry suggest customers
may be segmented into the following categories. The relative size of the segments follows:
30% college students
20% stay-at-home moms
20% introverts
15% post-cardiac men
10% women 20-30
5% men 20-30
A consultant told them to “follow the money,” meaning, go after the three biggest segments to capture
the majority of the market: college students, stay-at-home moms, and introverts. The cataloger’s
CMO agreed in spirit with “follow the money,” but supplemented information on segment size with
profitability estimates and likely segment growth rates. They went after the post-cardiac men: small
in number but easy to find, devoted in following, and plenty of cash. The cataloger hasn’t looked back.
Cha-ching!
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Infiniti sedan (parked in lot),
has a Chevy Silverado
or Ford F-350 at home,
wants a Corvette
US population is
309,000,000, men 35–55 is
approximately 43,000,000
(~13.9% pop.)
Growing and peak earning
years (35–55 years old)
Suit by Ralph Lauren,
Diesel, Calvin Klein,
or Gucci
Watch by TAG Heuer,
Citizen, or Omega
Subscriptions to Sports
Illustrated; picks up Esquire, GQ,
Men’s Health at the airport or
online
DVRs and relaxes with
Mythbusters, Handyman,
Dexter, The Simpsons,
Deadliest Catch, and
Stuff my Dad Says
We know our target customer:
• What he’s like
• What he likes
• And media we can use
to reach him
Shoes (below) by
Hugo Boss, Kenneth
Cole, or Nike
American male
~60% married
Anatomy of a Market Segment
ra
co
rn
/S
hu
tte
rs
to
ck
.c
om
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58 Part 1 Marketing Strategy
4-3a Concept in Action: How Much of
My Consultative Advice Can I Sell?
Consider the market of B-school grads making, and hoping to make, zillions. You have a
friend who has served both as an eminently successful and respected CEO and who, sub-
sequent to his early retirement, has been serving as a mentor to many others still active in
the marketplace. His name is Boone, and he believes there’s a mint to be made by selling
such consultative services, especially as they help to promote and launch a young person’s
professional career, i.e., services of a “Personal Brander.” So you are trying to help him de-
termine, “What’s a mint?” You’re going to help him size this market by estimating potential
demand. Here’s how.
A terrific online source of U.S. demographic data is Census.gov; there we can find the
numbers or percentages of people (or businesses) in a variety of categories (e.g., by age, by
income, by residence, etc.; see Factfinder.census.gov). Figure 4.5 captures the basic statis-
tics; the U.S. census is currently estimated at about 309 mm, and the age brackets that your
friend Boone believes to be most relevant (25 to 44 years old). The segment size by age is
26.6% of the population. The census data contain a number of further descriptors, some
information might be relevant, some might not be (e.g., percentages by gender, marital
status, home ownership, etc.).
U.S. population = 309,000,000
By age:
• 25-29: 6.8%
• 30-34: 6.5%
• 35-39: 6.5%
• 40-44: 6.8%
Sum: 26.6%
So, market potential is:
309,000,000 people
× 26.6% age relevant
= 82,194,000
× 18% professionals
= 14,794,920
Vegas focus = 580,000 × 26.6% × 18% = 27,770
~ 28k potential customers
Figure 4.5
Market Sizing
An initial cut on the data is to construe a chain of probabilities: 309 million citizens,
26.6% of whom begin to define the target market. That result is 82,194,000 people, but
that number still includes people who don’t have the education or likely career trajecto-
ries to find a Personal Brander useful (and of course, pay for the services). Together you
and Boone decide to target the 18% of those age brackets whose employment is classified
(at Census.gov) as “professional,” high-end and potential managers and such. So, take the
82.2 mm figure, condition it on 18% professional career status, and call that the potential
market. Crunch, crunch, crunch, and Boone’s eyes pop—a market of almost 15 million
Personal Brander buyers.
At first this obviously appears to be a huge cha-ching opportunity, but you take a deep
breath and explain that the 15 mm figure is obviously a ceiling estimate (as if everyone
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59Chapter 4 Targeting
would buy the services). Furthermore, as yet, nothing has been determined regarding costs,
prices, or margins of such service provision. For example, presumably a menu of services
would be offered from basic and minimal to deeper and more extensive, thus varying
the service along quality and price dimensions to the customers, affecting profitability
estimates.
As a next step, Boone considers that it might be best to start the service locally, in his
hometown of Las Vegas. Given the attractiveness of Vegas as a destination, he is confident
that he’ll be able to draw people to him, once the program gets established. For now, he
expects to draw on his network to find leads of potential customers as well as other mentors
who can help fulfill the role of a Personal Brander. The last adjustment in Figure 4.5 is to
focus on the Vegas market which yields a smaller local target estimate of almost 28 thou-
sand potential customers.
Is this market potential big enough to be attractive? That’s a subjective call, but the esti-
mation process demonstrated the basic steps: Get all the data you can, make your assump-
tions clear, and think hard about segment differences. Some of the data inputs will seem
like pretty good estimates (e.g., population size from Census.gov). For other data inputs, we
may have less confidence in the numbers. If that’s the case, it is worth doing some sensitiv-
ity analyses; take each numeric input, drive it up and redo the analysis, then drive it down
and do the same. Doing these thought experiments provides two great results: First, it will
help to identify the elements in the estimation that are important (because the outcomes
change a lot when the elements are changed). As a result, these pieces should be estimated
the most precisely. It may be worth it to pay for additional data to obtain greater accuracy
on these values. Second, it will illuminate the upper and lower bounds of the overall market
sizing, thus helping with planning.
Additional Factors We began this chapter by discussing a number of criteria that
together make a market more or less attractive. This analysis is so far only about market
size. We should also consider growth, and we could easily lift more data from Census.gov
regarding the size of additional age cohorts, or job classifications, and obviously geographic
expansion.
It’s always a little risky to extrapolate and predict growth, but a smart technique would
be to obtain sales data in this industry for the past three or four or 10 years and extrapolate
through a moving average. A three-year moving average would take the data from years
one, two, and three and compute a mean, take the data from years two, three, and four and
compute a mean, take the data from years three, four, and five and compute a mean, etc.
Then you’d fit a curve to these data (e.g., via regression). The idea is that including data
on the surrounding years helps stabilize the estimates. If there’s a weird year in the series
somewhere, it doesn’t unduly influence the prediction of the future.
A second issue is that we don’t yet know the likely profitability of this market. We haven’t
addressed issues of pricing (we’ll do so in Chapter 9), so we can put this discussion off for
now. We can probably assume that the profitability, per customer, depends on their segment
membership, but we don’t know yet how to translate the numbers into $.
A factor that will enter into those profitability estimates derives from the quality of peo-
ple hired to offer the consultation. Services are usually associated with more variable costs
than goods. Fixed costs for selling goods as varied as cereals and laptops include a plant,
some machines, a few employees, and so forth; the variable costs would include things like
our suppliers’ raw materials. In services such as retail, a fixed cost would be the shop, some
equipment, and so forth, but many materials and the employees themselves would be vari-
able costs because, as the retail service takes off, it would need a bigger staff.
A third issue that we’d be naïve not to consider is that, as yet, we have no information
regarding competitors. One quick “analysis” would be to take a look at Yellowpages.com
for Vegas or any other cities under consideration. If there are many comparable service
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60 Part 1 Marketing Strategy
providers, in a sense that’s good news since obviously others think there’s gold to be had; at
that point, the question is whether a new business could break into such a mature market.
Back to market sizing. B2B sellers sometimes have it a little easier. The Census.gov site
cross-classifies businesses by sector (e.g., NAICS codes) and by size (e.g., by sales or num-
ber of employees). If, say, you produced vans or small recreational vehicles, the industries to
which you could sell would be limited only by your imagination: not just retirees or rental
agencies, but mobile blood collections, mobile pet services, mobile haircuts, dentistry, piano
lessons, whatever.
In any event, regardless of whether you’re working B2B or B2C, the logic in market
sizing estimation is always the same. We start with the total population and break it down
into the proportions that are relevant.
A very general way marketers have approached this analysis is by estimating the pur-
chase decision-making process: the elements of awareness, trial, repeat, etc. For example,
the first cut would be to take the total population, multiply it by the percentage of the
customers who are aware of our brand, and compute:
Population × %aware
Next, ask what proportion of customers have tried our brand? Then ask how are we doing with
regard to repeat purchasers? So far, this logic looks like the following string of proportions:
Population × %aware × %trial × %repeat
We could drill down further by asking: How much does each customer tend to buy and
when do they buy? Then our analysis resembles the following equation:
(population × %aware × %trial × %repeat) × Per annum purchase
Get That Perpetual Surprised Look Now!
A U.S. medical group with a specialty in plastic surgery made the decision to focus on facelifts,
reasoning that this particular service would be increasingly desired as baby-boomers aged.
The professionals were excellent in their medical service, but not surprisingly less informed about
business and marketing. They also didn’t want to spend much money on any kind of advertising.
Looking at the medical group’s records covering their last two years of service, these are the
number of patients in each gender and age group.
Men Women
21-40: 1 15
41-60: 9 31
61-80: 1 3
The center avoids patients over 80, for health reasons (any surgery is riskier), and those under 21, for
what they consider to be moral and ethical reasons.
The center chose to target the men, 41-60, arguing their profitability (greatest discretionary
funds) and women, 61-80, arguing theirs was the growing boomer segment. Do you agree with their
strategic choice of target segments?
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61Chapter 4 Targeting
Translating this per customer annual consumption
into dollars is easy; just multiply the number by the
average retail price paid.
Market sizing isn’t difficult. Good demographic
data exist for consumers and businesses, for the U.S.
and increasingly for international markets. The final
probability estimates in these examples indeed re-
quire additional information, e.g., industry knowl-
edge or data that may be obtained from surveying
customers for their opinions.
Determining which segments to target depends
on an interplay of two factors: (1) quantitative is-
sues, such as size of segment, profitability, and
growth, and (2) strategic issues, primarily having to
do with the fit of the segment’s needs to corporate
philosophy and intended positioning. We have fo-
cused on target sizing in this chapter. Profitability
is a topic covered in Chapter 14 (on customer satis-
faction and loyalty).
MANAGERIAL RECAP
Targeting is important but not difficult.
• Choosing the market segment(s) to serve involves iterating between understanding corporate fit and having information about
segment size and likely profitability.
• To help clarify corporate fit, marketers find SWOT analyses helpful. Ask of your company: What are our strengths and weaknesses?
Ask of of the industry in general: What are the opportunities and threats?
• Segment sizing is relatively straightforward. Many secondary data help get the probabilities started (e.g., demographics at the
B2B or B2C levels). Customer survey data on attitudes and preferences and behavioral data (past purchasing) can smooth out the
remainder of the estimation.
So
ur
ce
: M
ol
so
n
Ca
na
da
Who is the target market?
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62 Part 1 Marketing Strategy
Chapter Outline in Key Terms and Concepts
1. What is targeting, and why do marketers do it?
2. How do we choose a segment to target?
a. Profitability and strategic fit
b. Competitive comparisons
3. Sizing markets
a. Concept in action: How many can I sell?
4. Managerial recap
MINI-CASE
GoodBite
GoodBite is interested in selling a new form of teeth-whitening strips. They dissolve in your mouth, and leave less
of a gunky residue feeling than current competitors.
Whitening strips seem to appeal to people 20-29 years old. Competitors’ data on existing strips suggest they
appeal to women slightly more than men, but for the moment, GoodBite is not planning on differentiating on
gender in the advertising. So, let’s ignore gender and just consider that 20-29 year old age category.
Say the U.S. population is 301,000,000, with 41.1 million in the target age bracket. About 7.5 million people
have tried competitors’ whitening strips (GoodBite’s aren’t on the market yet), and roughly 3 million of them are
semi-serious, frequent users.
GoodBite is trying to guesstimate the size of its target market, and its likely profitability. The GoodBite product
is sold in packages of 14 sets of strips (each set is an upper and lower pair) in each box.
GoodBite isn’t sure of the frequency with which a typical purchaser will buy a set yet, as the prod-
uct category is still relatively new. However, they reason that an upper bound would be about 26 boxes
bought by a consumer a year (52 weeks in the year, divided by the 2 weeks supply that is sold in each box).
A more conservative estimate would halve that (13 boxes; roughly 1 bought each month). A more conservative
estimate still would be that a customer buys “a few” (2 or 3) boxes a year.
GoodBite expects to charge $25 per box.
Case Discussion Questions
1. Should they launch GoodBites?
2. What assumptions were made that might be revisited?
Chapter Discussion Questions
1. This question gives you more market sizing prac-
tice (it’s a skill you’ll need). Using the logic from the
chapter, try to estimate the possible market for the
number of pairs of football pants a manufacturer
could sell in your city. Hints:
a. Go online and find the number of high schools in
your city’s school districts. If you live in a large city,
focus on only the largest school district.
b. Assume that 90% of those high schools have
both a varsity football team (with 40 players) and
a junior varsity team (35).
c. Assume also that each player gets 2 pairs of game
pants (one in the dark school colors, and one in
the light), and on average, 1.5 pairs of white pants
for practice.
2. Go to your b-school’s home page. In the general
information somewhere will be basic descriptive
statistics on your student body demographics. Use
that data to size the market for vending machines
that dispense thumb drives, flavored coffees, and
packets of no-doze. What other data would be
helpful to increase the accuracy of your estimate?
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
63
5Cs STP 4Ps
Product
Price
Place
Promotion
Customer
Company
Context
Collaborators
Competitors
Positioning via perceptual maps
The positioning matrix
Write a positioning statement
Managerial Checklist
Segmentation
Targeting
Positioning
POSITIONING
5-1 WHAT IS POSITIONING AND WHY IS
IT PROBABLY THE MOST IMPORTANT
ASPECT OF MARKETING?
We know how important it is to segment the market and decide on a target; we’ve seen the
S and T in STP.1 In this chapter, we turn to positioning.
Positioning has many physical elements, but even more perceptual ones. It’s about identity:
who your brand or company is in the marketplace vis-à-vis the competition and in the eyes of
the customer. Once you see who you are, you can determine who you want to be.
Positioning comprises much of a marketer’s responsibilities. It requires:
• Designing a product with benefits that the target segment will value. How do you
want your customers to think about your brand?
• Pricing your product so it’s profitable, yet seen as valuable. How high a price can you
command for your brand?
• Building distributor relationships to make the market offering available. Where do
customers go to find your brand?
• Communicating all of this to the customer through an array of promotional
activities—what do you say about your brand?
5
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
64 Part 1 Marketing Strategy
In other words, positioning involves all the marketing mix variables. This chapter kicks
off the rest of the book. We’ll discuss the concept of positioning in this chapter, and we’ll
see the details of the marketing mix activities in the chapters that follow.
We begin by discussing the concept of positioning via perceptual maps. We then see the
positioning matrix, which will give us a framework in which to understand the marketing
mix 4Ps (covered in subsequent chapters). We close with guidelines for writing a position-
ing statement.
5-1a Positioning via Perceptual Maps
They say a picture is worth a gigabyte of words. Marketers and senior managers like to
see graphical depictions of where their brands are and where their competitors are, in the
minds of their customers. These pictures help us envision how customers think about our
brand and give us initial answers to many questions: What are our strengths and weakness-
es? What are those of our competitors? Even though we think of certain companies and
brands as our competitors, do customers view things the same way? Who do they think
are our closest substitutes for the benefits they seek when they’re buying in this product
category? Perceptual maps provide these pictures.2
Figure 5.1 depicts a perceptual map of brands of watches. Brands depicted as points
in the map close together are those perceived as similar (e.g., Seiko and Timex), whereas
brands farther apart are seen as more different (e.g., Rolex and Swatch). The north-south,
east-west directions are perceptual, and in this map they may be interpreted as the quality
of the watch and the relative expense.
Figure 5.1
Competition
in Perceptual
Maps
Basic Luxury
Rolex
$
Consumer
segment 1
Consumer
segment 2
Seiko
Timex
Swatch
The brand managers and corporate headquarters of all of these firms would probably
not be surprised by these results, in that they indicate that customers view a Seiko and a
Timex as the most interchangeable, at least among this set of brands. In comparison, the
Rolex and Swatch watches are not competing with each other. We also see information
on customer segments. Segment 1 is situated near the Seiko-Timex group of brands, and
these models would predict that one of these two brands would be the segment’s first
choice. The segment might not be loyal to one or the other, but either is preferred over the
Rolex or Swatch.
Customer segment 2 is at the lower right, where there are few brands. Holes in percep-
tual maps offer intriguing possibilities for new market opportunities. In this case, we might
not wish to pursue the opportunity: These customers seek luxury at inexpensive prices.
Many companies would not find this position profitable or the image desirable. (It’s hard
to be convincing that one provides luxury at base prices.)
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
65Chapter 5 Positioning
Figure 5.2 is a perceptual map of cities in which a large, global hotel company has
resorts.3 The company wants to know more about its customers’ travel needs because they’re
trying to redesign some of their vacation packages. The dimensions equivalent to north-
south/east-west are perceptions of whether the city is a relatively expensive or inexpensive
place to visit, and whether the destinations allow investigations of cultural tourism and
related activities, or serve primarily as a place to soak up sun and decompress.
This perceptual map tells us about the positioning of these cities vis-à-vis the dimen-
sions of expense and activity. Paris and Rome are seen as places that have lots to see and
do, but they’re relatively expensive. Nassau and Tampa are perceived as beach trips that are
relatively affordable.
Given that these maps capture perceptions, one question in the mind of a marketer is
always: Is my brand optimally positioned? Or, is my intended position the one that custom-
ers perceive? For example, this hotel company had spent a lot of money on an advertising
campaign trying to make potential travelers aware of the many cultural offerings of Nassau.
That is, the company was trying to move the Nassau position farther to the right. It doesn’t
look like they were too persuasive.
The map also identifies two customer segments. This survey was conducted on the com-
pany’s typical traveler, and the sample was obtained from visitors to all its hotels. That is,
the perceptions are those of their current customers, not of their potential customers, who
might belong to a different segment. The hotel is known for being “reasonable” in its rates,
and so it tends to attract younger crowds who don’t have quite the deep pockets of older
travelers. As you might imagine, the hotel likes having a youthful appeal (or position!) but
realizes that it’s somewhat unfortunate that it’s also drawing people with less money. Prob-
ably older, wealthier travelers would agree that Paris is more expensive than Tampa, but
they could afford it and would travel there nevertheless. The hotel’s repositioning might also
consider an ad campaign that emphasized its reasonable rates even in destinations known
to be more expensive.
The customer segments on the perceptual map offer another diagnostic to the company
about what’s going on in the marketplace. The first customer segment is very well served:
They are looking for beaches and cheap trips, and the company has hotels in both Nassau
and Tampa to cater to those tourists. The second customer segment, however, is seeking
more to do on their holiday, yet still hoping for reasonable rates. The company has less to
offer them, although perhaps they can play up Washington, D.C.
Figure 5.3 offers a different kind of perceptual map. It contains descriptors for a single
service provider, a yoga studio. Patrons have rated the studio on a number of qualities:
the convenience of the location, the variety of the morning classes it offers, and whether
the staff is helpful, friendly, and trained to give helpful instructions. Customers have also
Beaches
Points
of interest
Paris
Rome
Vegas
Cancun
Maui
Consumer
segment 1
Consumer
segment 2
D.C.
Nassau
Tampa
$ Figure 5.2
Positioning
via Perceptual
Maps
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
66 Part 1 Marketing Strategy
given their judgments on the importance of each of the qualities when choosing a yoga
studio.
The figure tells us that the studio is not very conveniently located, but people don’t seem
to care about that attribute (so we won’t get hurt too much for that). The staff is seen as a
strength, but here, too, people don’t seem to care (so we won’t get bonus points for that).
More problematic is that the number and variety of morning classes isn’t huge (time and
space are constrained of course), and that’s rather important to the yogis.
This type of perceptual map may be modified for a competitive analysis, as in
Figure 5.4. This figure allows us to determine the perceived strengths and weaknesses of
our yoga studio (studio 1) compared with our competition (studios 2 and 3). This map is
not great news. Studio 1 (that’s us) is seen as relatively expensive or at least no better than
studio 3, where studio 2 provides better value. Then, on the attribute of morning classes,
both our competitors dominate us. Something’s got to give, unless customers value some
other attribute at which we excel and that’s not represented in this plot. Part of the problem
with the plot in Figure 5.4 is that we can only look at two attributes at a time, so we’d have
to look at many plots.
Figure 5.3
Perceptual
Map: Strengths
and Weak-
nesses of a
Yoga Studio
a.m.
classes
Location Staff
Not
great
Really
great
9
8
7
6
5
4
3
2
Very important
1
1 2 3 4 5 6 7 8 9Not important
Figure 5.4
Perceptual
Map:
Competition
Yoga
studio 2
Yoga studio 3
Yoga
studio 1
Low
price
High
price
9
8
7
6
5
4
3
2
Satisfaction with
number of morning
classes
1
1 2 3 4 5 6 7 8 9
Figure 5.5 doesn’t look like a map per se, but it’s definitely still expressing the compet-
itors’ profiles of perceptual data. Here, more attributes may be presented with these three
(or more) studios for comparative purposes.
5-1b The Positioning Matrix
Just as consumers are quite demanding, wanting the very best of everything (fast car, good
mileage, great looks, and—oh by the way—low prices), companies can be equally irrational.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
67Chapter 5 Positioning
When you read their propaganda—er—mission statements on their websites or in their
annual reports, most companies say that they are the very best at everything, that their
customers are their sole reason for existence, that their employees are the very best in the
workforce, and all that. Well, customers can’t have it all, and companies can’t be great at
everything.
So the question is: What do you want your position in the marketplace to be? The cool-
est brand? The brand that offers the best value? Either of these goals is achievable. But, at
the same time, both are probably not. Let’s look at the marketing 4Ps and see what makes
sense.
In Figure 5.6, we see the juxtaposition of two marketing Ps: product and price. As a
warning, we’re going to make some simplifying assumptions for a while. First, let’s say that
we could choose a low vs. high pricing strategy. That’s already a simplification, allowing
no shades of gradation in between. Let’s also say that the product may be characterized as
having low vs. high quality, again with no compromise intermediate brand and no specific
attributes of the product represented, just general quality levels.
Figure 5.5
Competitor
Analysis
Yoga studio 1 Yoga studio 2 Yoga studio 3
1
2
3
4
5
6
7
8
9
Price Good location Staff Morning classes
Figure 5.6
Marketing
Management
Framework
Product Quali-
ty by Price
Low quality
Low price
High price
High quality
Basics
Good
value
Over-
priced
Hi-End
In the basic 2×2 matrix in Figure 5.6, we can see already that a match of low-low and
high-high—that is, low or modest quality stuff but cheap vs. high-quality stuff at a higher
price—makes sense.4 Occasionally brands come along that offer high quality at low prices,
and we would refer to these as good values. But with time, it’s hard for a company to resist
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
68 Part 1 Marketing Strategy
raising prices or letting quality settle a little lower due to cost-cutting measures. Converse-
ly, occasionally brands come along that are priced high but are kind of junky. However,
customers are no fools, and these kinds of brands don’t last. The company needs to either
adjust the price downward to be more competitive, improve the quality to be in sync with
the price charged, or, even more frequently, just leave the marketplace.5
In Figure 5.7, we see an analogous 2×2 matrix for the other two marketing Ps: pro-
motion and place (i.e., distribution). Here too, to keep things simple, let’s say the most
important decision on promotion is whether to spend a lot or only a little (i.e., heavy vs.
light promotion), and the decision on channels is whether to distribute widely or more
selectively. (We’ll talk about all these Ps in detail in the chapters to come.)
Figure 5.7
Marketing
Management
Framework
Promotion by
Distribution
Wide
Heavy
Light
Exclusive
Mass
Hard
to get
Underadvertised Niche
Distribution
P
ro
m
o
ti
o
n
Position 1 of 2
High price
High quality
Exclusive availability
Light promotions
Figure 5.7 also has a natural match. If a company promotes broadly and heavily, they’re
probably looking to move a lot of merchandise, and so it would be smart to make the
goods widely available. It would seem counterproductive if they made their goods available
only through selective channels. Similarly, if a brand has a relatively exclusive image and
distribution chain, it would make better sense not to overly promote it as if it were com-
mon, available to the masses. So, the heavy promotions and wide distribution pairing and
the lighter promotions and exclusive distribution pairing make more sense than the other
options.6
In Figure 5.8, we have all 16 combinations of our 4Ps. At this point, we can acknowl-
edge that, sure, theoretically any combination is possible. You could provide high quality in
exclusive channels and promote lightly and still charge cheap rates, but why would you? So
let’s see whether some other combinations are more or less sensible.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
69Chapter 5 Positioning
Figure 5.9 suggests eliminating the low price and exclusive distribution combinations.
Presumably, if a brand is priced low, the company needs to sell a lot of volume to make
money. This characterization is an assumption, of course, because the company really needs
to look at the profitability or margins. However, low prices indeed frequently go with low
profitability; after all, you can eke out more profits from higher prices. There are exceptions,
of course, but, as the old expression goes, the exceptions just prove the rule.
Figure 5.8
Marketing
Management
Framework:
All 4 P’s: Prod-
uct by Price
by Promotion
by Place
11
9
12
10
3
1
4
2
15
13
16
14
7
5
8
6
Low price
High price
Distribution: Wide Distribution: Exclusive
Low quality High quality Low quality High quality
Low price
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
L
ig
ht
High price
Figure 5.9
Some
Strategies
Don’t Make
SenseIf low price,
need volume
sales, thus
eliminate
“low price” &
“exclusive
distribution.”
11
9
12
10
3
1
4
2
15
13
16
14
7
5
8
6
X X
X XLow price
High price
Distribution: Wide Distribution: Exclusive
Low quality High quality Low quality High quality
Low price
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
L
ig
ht
High price
Figure 5.10 indicates the elimination of the combinations that involve the high price
and low quality strategies. It’s disrespectful to your customers to overcharge them. For
example, when Consumer Reports says of laptops that they’re “stylish but expensive” with
“undistinguished tech support and reliability,” won’t customers veer to other brands until
that company feels the pressure to get its prices more in line?
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
70 Part 1 Marketing Strategy
Figure 5.11 suggests that we eliminate the heavy-promotions and exclusive-distribution
combinations. It would be exceedingly frustrating for customers to be tantalized constantly
with messages to “Go buy our stuff!” and then not be able to find that stuff.
Figure 5.10
Some Strat-
egies Don’t
Make Sense
Not nice to overcharge customers,
thus, eliminate “high price”
& “low quality” approaches.
Low price
High price
Distribution: Wide Distribution: Exclusive
Low quality High quality Low quality High quality
Low price
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
L
ig
ht
High price
11
9
12
10
3
1
4
2
15
13
16
14
7
5
8
6
X
X
X
X
Figure 5.11
Some Strat-
egies Don’t
Make Sense
11
9
12
10
3
1
4
2
15
13
16
14
7
5
8
6
X X
X X
Low price
High price
Distribution: Wide Distribution: Exclusive
Low quality High quality Low quality High quality
Low price
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
L
ig
ht
High price
Don’t frustrate
customers,
thus, eliminate
“heavy promo”
& “exclusive
distribution.”
Figure 5.12 shows the good-value purchases: high quality at relatively low prices, a po-
sition that is hard to sustain. A company will be tempted to raise prices or let quality slip,
settling back into an equilibrium on quality and price.
Similarly, Figure 5.13, shows wide distribution and light promotion, combinations that
are rather inactive strategies. The brand is available, but, with light promotion, the company
is paying the brand little attention. This strategy can be characteristic of mature brands that
customers buy habitually—a cash cow being milked for money. However, with no attention
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
71Chapter 5 Positioning
by the marketer and no investment to assure the brand’s future existence, the brand will
probably collapse eventually.
Figures 5.14 and 5.15 show how we can represent some of what we’ve learned so far.
We don’t often see overpriced or good value products. We more often see basics (low price,
Figure 5.12
Some Strate-
gies Are Hard
to Sustain
“Value” positions are admirable, but
rare—it’s hard to resist raising prices
or lowering quality, thus eliminate
“low price” & “high quality.”
11
9
12
10
3
1
4
2
15
13
16
14
7
5
8
6
X
X
X
XLow price
High price
Distribution: Wide Distribution: Exclusive
Low quality High quality Low quality High quality
Low price
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
L
ig
ht
High price
Figure 5.13
Some Strate-
gies Are Hard
to Sustain
These are inactive non-strategies,
thus eliminate “light promo” &
“wide distribution.”
11
9
12
10
3
1
4
2
15
13
16
14
7
5
8
6
XX
XX
Low price
High price
Distribution: Wide Distribution: Exclusive
Low quality High quality Low quality High quality
Low price
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
L
ig
ht
High price
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
72 Part 1 Marketing Strategy
low quality) or high-end products (high price, high quality). Similarly, we usually see a
match of the heaviness of promotion with greater availability in the marketplace.
At this point, even though we began with 16 combinations, we’ve simplified this posi-
tioning matrix to essentially the two strategies depicted in Figure 5.16:
• Low price, low quality, widely available, heavy promotions
• And high price, high quality, exclusive availability, light promotions
The advantage of these simplifying assumptions is that these two extremes give us very
clear goals to work toward. We can position our brand either as low price, low quality, etc. or
as high quality with high prices, etc. If we have reason to modify one of the Ps—say, go with
low price, low quality, widely available—but we want to lighten up on promotions, then
that is our strategic and tactical choice. It might not be wise, but we can try it. These two
extremes clarify the goals of a brand’s position in the marketplace and can help us align the
many decisions that need to be made, all the way from product design to choice of channel
for delivery to the marketplace.
In Figure 5.17, we see that many brands may be classified in those extreme
upper-left and lower-right cells; the combinations that we’re claiming are optimal and the
Figure 5.14
Quality and
Price Tend to
Re-Align
Low price
High price
Low quality High quality
Basics Good value
Over-
priced
Hi-End
Basics Good
value
Over-
priced Hi-End
Figure 5.15
Promotion
and Distribu-
tion Tend to
Re-Align
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
Li
g
ht
Distribution: Wide Distribution: Exclusive
Mass Hard to get
Underadvertised Niche
Mass Hard
to get
Underadvertised
Niche
Position 2 of 2
Low price
Low quality
Widely available
Heavy promotions
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73Chapter 5 Positioning
Figure 5.16
Two Strategies
Make Perfect
Sense
Low
High
Distribution: Wide Distribution: Exclusive
11
9
12
10
P
ro
m
o
ti
o
n:
H
ea
vy
P
ro
m
o
ti
o
n:
L
ig
ht
High
3 4
2
15
13 14
7
5
8
6
Quality: Low High Low High
Mass:
Lower quality product
Lower price
Heavy promo
Wide distribution
High end:
High quality product
High price
Light promo
Exclusive channels
Price: Low
1 $
Mass
16
$
Hi-End
Figure 5.17
Example
Brands in the
Framework
Low
High
Distribution: Wide Distribution: Exclusive
High Basic High
P
ro
m
o
ti
o
n:
L
ig
ht
High
Quality: Basic
Price: Low
Starbucks Six Flags Parks Four SeasonsMicrosoft
Sharpie pens IKEA MoMACostco
Lexus Curves gyms ViagraAbsolut
GoogleVisa OnStar Gold’s Gym
P
ro
m
o
ti
o
n:
H
ea
vy
most common. Nevertheless, let’s back up and briefly acknowledge that while we’ve been
making simplifying generalizations (ones that hold up frequently in the real world),
there can be exceptions. That is, some brands appear in all the other suboptimal combina-
tions. We might question how long a company or brand can be sustained in a suboptimal
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
74 Part 1 Marketing Strategy
position, but, at any given point in time, there could be market offerings spanning
the matrix.
Note also that the positioning matrix is consistent with many management strategy
gurus who observe common themes underlying market leaders. For example, Michael
Treacy and Fred Wiersema, in The Discipline of Market Leaders, describe three basic corpo-
rate strategies to creating value and achieving market stature:
1. Operational excellence: These companies are good at production, delivery, price, and
convenience, such as FedEx, McDonald’s, Southwest Airlines.
2. Product leadership: These companies pride themselves on quality and innovation,
such as Apple, BMW, Mont Blanc.
3. Customer intimacy: These companies are willing to tailor their products to their
particular customer needs, which can be expensive but is expected to pay off in
long-term loyalty and enhanced customer lifetime value, such as Amazon,
IBM, Verizon.
In the matrix, operations and products would map roughly onto the low-cost and
high-quality cells, respectively. Customer intimacy is simply good service, so we could clas-
sify that in the high quality cell as well.
Similarly, Michael Porter, in his books on Competitive Strategy, discusses generic strat-
egies driven by keeping costs down and prices competitive, by leading by differentiation
(e.g., excellence in quality or innovation), or, when appropriate, by niche positioning.
The latter is merely a matter of exclusivity and size, and the first two can be mapped onto
our basic combinations of low price vs. high quality. (We’ll see more of Porter and Treacy
and Wiersema in Chapter 16 on strategy.)
Thus, the assumptions we made in the positioning matrix may not be unduly restric-
tive. In particular, the positioning matrix is useful. The focus helps us make decisions
in many marketing scenarios: Very simply, do we go basic (low price, low quality, wide
availability, and heavy promotion), or do we go upscale (higher price, high quality, exclu-
sive availability, and lighter promotion)? You can move off these two extreme positions
in the matrix, but you better have a reason. Is that what your customers want? Can you
make money there?
5-2 WRITING A POSITIONING STATEMENT
Once a company has decided on its positioning, either for the corporation as a whole
or for one of its brands, it must be able to communicate succinctly the parameters of
that position to a number of different audiences (to customers, employees, shareholders,
general public, etc.). A positioning statement is that communication, and it takes a pretty
standard form.
Just as marketing itself begins with the segmentation part of STP (segmentation, target-
ing, and positioning), a positioning statement also includes the specification of the target
segment(s). As we have tried to illustrate in the chapter on segmentation, you don’t want
to strive to be all things to all people. So your positioning statement should address your
target segment. Anything else you say in the positioning statement will have no meaning
to customers who are not in that segment. For example, take the positioning statement,
“We at Alphatronics are the gym for the serious body builder.” The target segment is the
“serious body builder,” implying that the weekend weight lifter or the soccer mom need not
apply. Indeed, customers not in the target segment will probably be intimidated because the
positioning statement implies a collection of steroid-pumped dudes; you wouldn’t want to
compete with or hang out with them.
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75Chapter 5 Positioning
The next element of a positioning statement is what has been called the unique selling
proposition (USP). The idea is to express your brand’s competitive advantage clearly and
succinctly. The USP concept captures two things: First, what is the product category (the
SP)? Second, how does your market offering dominate these other providers (the U)? Why
should a customer buy from you and not one of your competitors? How are you better?
If you cannot answer this question—much less put it into a positioning statement—
either your position is not clear, or your product has little differentiation. There is no
excuse for this situation, given that your position can be based on real attribute differ-
ences or on perceived differences based on images you’ve built. If you don’t have real
differences and cannot see a way to create them, then create an image-based difference.
It’s also important that these statements be succinct. A simple statement facilitates com-
munication and an understanding of the marketplace. Thus, while you might think your
brand rocks on a zillion attributes, try to think of a word that captures the essence of
those words and use that. Or make a list of your brand’s benefits and prioritize them. Then
take the most important, most compelling difference, and insert that difference into the
positioning statement. You can cycle through some of the other qualities in some of your
communications, but they should all be consistent with the basic message in the positioning
statement itself. This goal is more easily achieved if you can abstract from the level of the
brand’s attributes to the more general intangible benefits to the customer. All you have to
do is ask why a customer would care?
Positioning
Red Lobster as
fresh—a
fisherman near
the source.
The Alphatronics positioning statement compares itself directly to other gyms, so gyms
comprise the product category or the competitive frame. However, its point of differentia-
tion is implied more than stated explicitly. For example, the “tronics” part of the gym’s name
suggests the presence of high-tech gym equipment.
So a positioning statement captures the qualities of how you wish to be perceived.
To compose a positioning statement, answer the following questions:
1. Who are you trying to persuade? Who is your target segment?
2. Who are you competing with? What is your major product category? What frame
of reference will customers use in making choices?
3. How are you better? What is your uniqueness, your competitive advantage, your
point of difference? Do you have any attribute or benefit that dominates competitors?
So
ur
ce
: R
ed
L
ob
st
er
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76 Part 1 Marketing Strategy
Put these elements together, and the result is your positioning statement:
For customers who want [segment], our brand is the best at [unique selling
proposition—competitors and competitive advantage].
Some positioning statements are a bit surprising. For example, Volvo is known for safety,
yet at Volvo.com you’ll see: “We offer transport solutions to demanding customers around the
world.” Perhaps Volvo’s dominance on safety is so well known that the benefit doesn’t need
stating.
Some positioning statements are straightforward, such as Sam’s Club’s “Savings Made
Simple” or Walmart’s “Save money. Live better.” Others are more abstract and inspiring,
such as Lowe’s “Let’s Build Something Together,” Porsche’s “Engineered for magic. Every
day,” or American Cancer Society’s “The Official Sponsor of Birthdays.”
The positioning statement can serve as an internal memorandum, keeping all managers
aligned as a basic guiding principle in all their collective decisions, so as to enhance the
likelihood of consistencies in the results of those decisions. Positioning statements can also
serve as the foundation of the communications offered to external audiences, including
customers, shareholders, and others as advertising taglines or as more extensive messages.
Given these audiences, positioning statements should be succinct in order to communicate
efficiently and positive and passionate in order to be noteworthy and to spur attention and
affection.
MANAGERIAL RECAP
As you can see, positioning is central to the marketing manager’s activities:
• Seen through the eyes of the customer, perceptual maps facilitate an understanding of a company’s or brand’s position in the
marketplace.
• Positioning is achieved via a manipulation of the marketing mix 4Ps, and the positioning matrix demonstrates that certain combina-
tions make more sense than others.
• Positioning statements help guide marketing strategies and tactical actions. They include an indication of the target segment,
a competitive frame of reference, and a competitive advantage or the brand’s unique selling proposition.
Chapter Outline in Key Terms and Concepts
1. What is positioning, and why is it probably the
most important aspect of marketing?
a. Positioning via perceptual maps
b. The positioning matrix
2. Writing a positioning statement
3. Managerial recap
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77Chapter 5 Positioning
Chapter Discussion Questions
1. If you were to create a perceptual map for the
product category of watches, what attributes
should you include to illustrate both the similari-
ties and differences among the brands?
2. Find a company that is struggling. Where is it in
the positioning matrix? Could the company be
more successful if it changed any of its Ps
(e.g., to head to the lo-lo-lo-lo or hi-hi-hi-hi
cells)?
3. Write a position statement for yourself to
convince your favorite company to hire you.
Video Exercise: Numi Organic Tea (6:50)
Consumers frequently become acquainted with Numi’s organic teas through sampling promo-
tions in upscale venues or in partnership with other companies that are promoting organic and
fair-trade products. Numi’s product line is positioned in the marketplace as a premium-tasting,
premium-quality tea that uses premium ingredients. Because Numi’s raw ingredients are more
expensive than those used by many of its competitors, the Numi product line is not positioned as
loss leader or as a commodity tea. Rather, Numi is positioned as an upscale product that appeals to customers of
natural and health food stores, fine dining restaurants and hotels, universities, and coffee shops. There has been
surprising growth in the mass marketing of the Numi products in the United States at grocery stores, club stores,
and on numerous websites. Customers in the mass market are attracted by the high quality, organic, sustainable
product line that Numi provides. This mass market distribution can create conflicts in positioning the brand as
an upscale product. According to Numi’s managers, the key to dealing with this conflict lies in knowing who the
company’s customers are and where they are shopping.
Video Discussion Questions
1. Describe Numi’s product line in terms of the four Ps of marketing: product, price, place, and promotion.
2. Incorporating product, price, place, and promotion into the strategic marketing management framework,
describe the strategic positioning of Numi’s product line.
3. Does this strategic positioning make good marketing management sense or not? Explain your answer.
MINI-CASE
Positioning Fast Food
Compare two fast food restaurant chains—Chipotle and McDonald’s (who no longer owns Chipotle). Chipotle has
locations throughout the U.S., but that presence is obviously dominated by McDonald’s vast network. Chipotle is
positioned as offering fresh food, made to the customer’s requests, that is relatively healthy. The company rarely
advertises. In contrast, McDonald’s brand associations revolve more around convenience, inexpensive food, and
given their advertising, family outings.
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78 Part 1 Marketing Strategy
These brands appeal to their customers with very different philosophies. Indeed, on the surface, they appear to
have little in common, other than their sector.
Case Discussion Questions
1. Characterize these companies’ positions in the marketplace from your best estimates as to the customers’
perceptions. In which cell does each exist in the positioning matrix?
2. Would the two chains see each other as competitive threats?
3. What could either do to make its business (profitability) even stronger?
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79
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
What is a product?
How are goods different from services, and why do these differences matter to the
marketer?
What are the core elements of the �rm’s market offering, and how does the product
de�nition help us identify competition?
Managerial Checklist
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
PRODUCTS: GOODS
AND SERVICES
6-1 WHAT DO WE MEAN BY PRODUCT?
“Product” is the general term we’ll use for both goods (e.g., skis) and services (e.g., ski
lessons).1 We’ll talk about how these classes of purchases differ and build on the differences
when necessary, but remember that, in either case, the fundamental objectives of marketing
are the same. Marketing managers want to understand and please their customers whether
they’re the brand manager for Body Solid’s weight machines or for the health clubs they’re
in, like Gold’s Gyms.
Sometimes the term “product” is also used as a more general term, referring to the full
product profile, that is, the entire market offering, inclu ding
the product along with its price, the image of the brand, etc.
We discuss product, price, place, and promotion separately
because there are so many details to consider for each ele-
ment. But the execution of the 4Ps is integral. Each piece
needs to send a consistent message for the overall “product”
to be attractive to the customer.
The product is the most central of the 4Ps, the ulti-
mate customer purchase. Drivers who purchase Volvos are
buying safety, yes, but they’re buying a safe car. Safety is a
6
Marketing is useful for goods,
services, experiences, . . .
anything!
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80 Part 2 Product Positioning
modifier; the essential product is a car. Volvo worked to create good product features to
distinguish the product into a brand that’s become sine qua non for safety.
In this chapter, we’ll distinguish the qualities of goods and services, and we’ll acknowl-
edge that most purchases are a combination of the two. In the next two chapters, we’ll
continue with the P of product, but focus on brands and new products.
6-1a The Product in the Marketing Exchange
The product is something that the company believes will benefit its customers. We think
of marketing as an exchange, so the company offers something (e.g., a hotel room), and
the customer offers something in return (e.g., payment). Each party—the customer and
company—seeks something of value, and each offers a trade. The company can make the
package more attractive (e.g., concierge service, tickets to local events), and the customer
can, too (e.g., by being more loyal, purchasing more often, generating positive buzz online).
Of course, the company can also make the package less attractive, intentionally or not (e.g.,
downsizing employees so that customer service suffers), and so can customers (e.g., by be-
ing “high maintenance” and demanding customized attention from a system designed for
high-volume, quick, and standardized service).
Several questions arise in the marketing exchange. First, what do customers want? Some
segments of customers will seek value and low prices, whereas others will seek premium
quality. But what do “value” and “quality” mean for a particular product and industry? Still
other customers seek specific attributes, sometimes quite idiosyncratic features and bene-
fits. These questions about insights into customers’ needs and wants are addressed through
the techniques of marketing research (see Chapter 15).
The question from the other side of the exchange is: What is it that the company is well
suited to offer to its customers? What will the company’s value proposition be? Given the
company’s position in the marketplace (who they are) and the vision of what the company
would like to evolve toward (who they’d like to be), is there an optimal, profitable intersec-
tion of what the company can do for the customer and what certain segments of customers
would like? It would be most desirable if the market provision had a clear point of differ-
entiation because commodities cannot be sustained as competitively advantageous. These
issues are questions of corporate and marketing strategy (see Chapter 16).
Marketers have long realized the benefits of morphing short-term-oriented purchase-
transaction exchanges into longer-term relationship marketing. This notion is reflected in
such sayings as, “It costs six times more to get a new customer compared to retaining
The Word “Product” Is:
A broad term that refers to goods: “C’mon down to our dealership, where we sell only the best
product!”
A general term that includes services: “We sell only safe financial investment products!”
A term that can be used to refer to the entire portfolio of 4Ps, such as when “product” implies a car
purchased along with its price and financing, dealership service, and promotion and image.
Part of the customer-company exchange.
A mathematical term for multiplication.
Yes, all of the above!
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81Chapter 6 Products: Goods and Services
a current customer.” The repeated nature of a relational exchange begins with customer
satisfaction and loyalty. Such interactions strengthen and come to fruition in customer rela-
tionship management (CRM) and in database marketing systems (discussed in Chapter 14).
Marketers put together combinations of goods and services to try to strengthen those
customer relationships.
6-2 HOW ARE GOODS DIFFERENT FROM
SERVICES?
Some marketers make a big deal of the differences between goods and services. Others say
marketing is marketing—that it’s the same whether you’re marketing pretzels or medical
checkups. We’re going to play it both ways. We’ll emphasize the similarities to facilitate
your learning, but there are many tactical differences in the marketing of goods and services,
as well as some conceptual and strategic differences. So throughout the book, if there are
marketing implications, we’ll consider how goods differ from services, and why those dif-
ferences matter to marketers.
6-2a Intangibility
Marketers have always talked about goods and services being on a continuum. As depicted
in Figure 6.1, some products seem like pure goods (e.g., a bike, or shoes), and some services
seem like pure services (e.g., consulting, realtors). Other purchases seem like a mix of both
a good and a service (e.g., car leasing). The key seems to be the extent to which the purchase
is tangible. When you purchase clothing, you have something concrete to take home from
the store. When you go to a concert, it’s a fun time, and you might come out a changed
person, but the changes aren’t necessarily visible to someone else. Or with consulting, you’re
getting advice, and maybe a white paper to show for it, but mostly with consulting you’ve
paid to have someone talk at you. It’s intangible.
The concert is an example of “experience marketing,” where the experience is the main
part of the service. For example, themed retail outlets, such as Crayola Café, Build-a-Bear,
ESPN Zone, and Lego stores are as much about providing a shopping and playing
experience as they are about moving merchandise. Cirque du Soleil promises a circus and
Figure 6.1
Goods to
Services
Continuum of
ProductsB
icy
cle
Sh
oe
s
Ce
ll p
ho
ne
&
p
lan
Ca
r l
ea
sin
g
Re
alt
or
Co
ns
ult
ing
Tangible Intangible
Search Experience Credence
Manufactured
& inventoried
Perishable
(produced & consumed @same time)
Standardized Variable
Goods Services
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82 Part 2 Product Positioning
acrobatic performance and a one-of-a-kind experience. MotorTrend.com offers car enthu-
siasts an opportunity to try out their favorite cars through virtual road tests and simulations.
The user gets to see the performance of the car in action.
6-2b Search, Experience, Credence
The goods-to-services continuum is related to the concepts of search, experience, and cre-
dence. Search qualities are the attributes that may be evaluated prior to purchase, as the
customer learns about the competitive offerings. For example, when you go to a department
store to purchase socks, you can just look at a pair and know before buying them whether
you’ll like them. You can see the color, the price, the material they’re made of, and you can
imagine immediately what they’ll feel like on your toes.
Experience attributes are those that need some trial or consumption before evaluation. If
friends recommend a new restaurant, you might trust your friends, and you might expect
to like the restaurant. But it’s not until you personally go there, experience the ambience
and service, try the food, pay the bill, etc., that you can judge the purchase as satisfactory
or not for you.
Finally, credence qualities are those that are difficult to judge even post-consumption,
hence the term “credence.” You just have to trust or believe that the quality is good. When
you leave your psychotherapist’s office, did the therapy improve you? That vasectomy, did
it work? Sometimes credence means we go beyond trust to sheer hope, e.g., we hope the
mechanic fixed our car and didn’t cause any new problems. This sentiment is captured per-
fectly when Charles Revlon says of his company: “In the factory we make cosmetics; in the
store we sell hope.”
Professional service providers (e.g., doctors, accountants, architects) are dominated by
credence elements. Recently they have begun accepting that marketing can help their busi-
nesses. Marketing consultation can help identify where to locate offices or how to find
clients. Marketing advice can help create professional appearances and settings. Marketers
have urged professionals to tap their personal and business networks, through parties or
other events such as client appreciation breakfasts. Professional service providers may be-
gin their practices with a reluctance to “market” themselves, but with experience comes a
desire for a competitive edge and, hence, a better appreciation for marketing. Increasingly,
professional schools (medical, dental, architectural) are providing courses in business skills
and marketing.
Goods are dominated by search and experience qualities, and services are mostly com-
prised of experience and credence qualities. These distinctions drive some marketing im-
plications. For example, it’s easier to price a pair of socks than it is to attach a numeric
value to consulting advice. And given that customers can more confidently assess the socks
purchase than the consulting advice, consultants will want to take marketing actions to
Intangibility Index
The Intangibility Index (II) is defined as the ratio of R&D to capital spending. It’s high for software
and pharmaceuticals companies; it’s low for oil companies, consumer packaged goods, and computer
hardware manufacturers. It rises when more companies emphasize the intangibles and invest in R&D,
and it falls with expansive capital expenditure.
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83Chapter 6 Products: Goods and Services
cue the client that their advice is sound and that the quality of the service they provide is
excellent.
Note that goods are not necessarily simpler purchases, and services are not necessarily
more complex. A huge part of the US and global economy is related to automobiles, and
cars are highly complex goods. Similarly, laptops, durables, aircraft, and hospital equipment
are all complicated but tangible goods. Conversely, some services, such as restaurants, ho-
tels, and credit card services are relatively simple, standard purchases.
6-2c Perishability
Services differ from goods in other ways: Services are simultaneously produced and consumed.
Whereas goods can be manufactured and then inventoried in distribution warehouses,
most services have to be created on the spot in the presence of the customer. For example,
you have to be present to have your hair cut. This inseparability of production and con-
sumption leads to the inevitable result that services tend to be more perishable. When an
airplane leaves the ground with some seats vacant, the airliner cannot recoup those empty
seats during rush traffic. Your time is inelastic in this manner too. If you’re a tax consultant,
the hours you spent twiddling your thumbs in August cannot be applied toward crunch
time in early April. Perishability has consequences for the marketer to even out demand, a
topic we’ll consider in Chapter 9 on pricing.2
The inseparability of production and consumption also has consequences in the interac-
tion between the service provider and the customer. For example, a cast rehearsing a Broad-
way play is offering roughly the same service during the rehearsal as when they perform
during show times. But when the audience is present and able to respond with laughter
or applause, the cast is more energized, and the adrenaline and pheromones in the theater
make for a different experience. The nature of interactions varies with setting and societal
norms, of course. An orchestra playing in the same auditorium would generally expect no
laughter, and applause at only appropriate breaks in the music—premature applause would
be censured by the frowns of other patrons at the offending novice.3
6-2d Variability
The final major difference between goods and services is that services are said to be more
variable. Manufacturers of goods can set quality standards like Motorola’s 6σ (only three
or four errors per million pieces produced) because a machine is producing their products.
For a service provider, say a hairstylist, experiences vary across customers or even with one
customer across time. Your friend might swear by this stylist, but you prefer classic styles
and your friend’s hair is always a little . . . edgy. Even with your own stylist, someone you
ordinarily like, some days you’re in one mood or the other, or the stylist is. The heterogene-
ity across experiences is due in large part to the ‘people’ component of services. The service
marketing exchange happens between a customer and a service provider representing the
company. The frontline rep and you have different and changing, needs, abilities, etc., and
the customer service interaction can be fruitful or frustrating.
Self-service is advancing in many industries, such as banking, airport check-in, pre-
scription renewals, grocers, and so forth.4 When customers interact with technology and
machines, the variability of the service encounter is reduced by the standardization of the
equipment. It should be noted that, like cholesterol, there is good and bad variability. Bad
variability involves errors in the system (e.g., poor customer service), and managers of lo-
gistics, human resources, and marketing are concerned with its reduction. In contrast, good
variability involves the customization and tailoring of the service delivery for the customer’s
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84 Part 2 Product Positioning
unique needs, and, not surprisingly, it often enhances customer satisfaction. Automated
services are usually introduced to reduce the errorful (bad) variability. With time, as menus
become more sophisticated and offer more options, it is conceivable that good variability
may also be enhanced (at least for customers who can deal with the technology).
Perhaps the most pervasive and successful example of self-service is online shopping.
Shopping at home in one’s jammies at 3 a.m. is the ultimate in convenience. In addition,
comparing information on prices and product attributes is easier online than IRL, and
made even easier with the AI of shopping bots. Furthermore, the advantages of the tech-
nology and standardization are clear: A website may occasionally crash, but it’s seldom
cranky. The online purchase is a mix of goods and services and of tangible and intangible.
6-2e To Infinity and Beyond Goods and Services
Intangibility, the search/experience/credence qualities, inseparability of production and
consumption, and variability comprise the fundamental differences between goods and ser-
vices. We’ll bring in each concept, where appropriate, when discussing marketing issues
throughout the book. There will be issues regarding advertising (e.g., portraying a realistic
service encounter to set clear expectations), branding (e.g., communicating a consistent
image in the face of the variability of the service encounter), pricing (e.g., for yield man-
agement), logistics (e.g., creating a clear flow process for the customer service), human
resources (e.g., empowering the frontline employees to facilitate service recovery), etc.
It is helpful to think of goods and services along a continuum because many purchases
have both elements, and the distinctions can be blurry. For example, Canon sells copiers
and also customer service packages. Customers buy toothpaste and also hope it will make
them more attractive.
6-3 WHAT IS THE FIRM’S CORE MARKET
OFFERING?
Some marketers say that everything we buy has some element of a good and some element
of a service. They maintain that perhaps only raw materials such as coal or wheat are
Continuum
Remember, goods and services lie along a continuum, and the distinction can be a little fuzzy.
Some simpler services may resemble goods. For example, we call a variety of things “financial services,”
and yet . . .
a service is intangible, but you can hold your credit card,
a service is inseparable production and consumption, but you don’t need to be at your bank to
access your checking account,
a service is perishable, but you can use your credit card whenever you want
a service is variable, but there is standard, mass production of insurance policies, savings accounts,
data systems for bond traders, etc.
(see fsmhandbook.com).
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85Chapter 6 Products: Goods and Services
examples of pure goods. Everything else has been processed, and that processing is a value-
added service. Thus we can examine any business and consider what are its the core vs.
the value-added services. Distinguishing these elements also helps us identify our compe-
tition. For example, Figure 6.2 depicts the purchase of a car, for which the provision of the
automobile itself might be considered the core purchase; it’s the corporate fundamentals,
the reason the car maker is in business. These are the qualities that the company better get
right; they’re the basics of what customers expect. The value-added supplemental services
are those on which the car company might distinguish itself; they might claim their financ-
ing and service plans are more generous, their people more competent and friendlier, etc.
When we discuss customer satisfaction (in Chapter 14), we’ll see another distinction
between the core and value-addeds. The core elements have come to be expected; they’re
givens. So if they’re good, a company doesn’t earn points in the eyes of the customer, and the
customer won’t rave to friends about how great the brand is. But if the core elements are bad
(e.g., the car is a frequently recalled model), they can definitely trigger dissatisfaction. In
contrast, a marketer can affect a customer’s level of satisfaction (or dissatisfaction) through
good (or bad) value-addeds (e.g., better service packages). Companies often compete on
Value-added
Core
Car
Financing Coffee
Service plan
Friendly staff
Image
Automobile
Figure 6.2
Core and
Value-Added
Offerings
Core: a salon
service;
Peripheral:
relaxation and
peace.
Sy
da
P
ro
du
ct
io
ns
/S
hu
tte
rs
to
ck
.c
om
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86 Part 2 Product Positioning
the value-addeds. For example, Starbucks is known for its service and combinatorial menu
selection. Want just a regular coffee? Yeah, they do that too.
While the concepts of core and value-added seem straightforward, it’s not as easy as
it looks. Companies can make the mistake of being myopic when they define their core
business, focusing on their product offerings (e.g., “We sell laptops”), instead of recogniz-
ing that their true goal is offering benefits and value to their customers (e.g., “We sell IT
solutions”). When business is good, this myopia is not a problem. But as Internet sites in-
creasingly offer software and storage, the particular configuration of the end user’s machine
become less important. If the company fixates on their laptops, instead of recognizing that
the laptops are morphing into dumb terminals, they may be out of business soon. If the
company defines its business more broadly, it could be on the frontier of developing soft-
ware platforms for their customers.
6-3a Dynamic Strategies
Core businesses change as industries change or as a firm’s competencies change. For exam-
ple, the business of the Victoria’s Secret mega brand used to be driven 70% by apparel, but
it is now 70% beauty and fragrance lines. As the production and sales proportions evolve,
the questions for adaptation become: What business are we in? What benefits do we want
to provide to the consumer? Who is our competition? If Victoria’s Secret sees itself as pri-
marily a lingerie provider, it would compete with department stores’ lingerie departments.
If it has come to see itself as a provider of beauty and fragrance goods, it would compete
with the department stores’ cosmetic counters.
In the huge and hugely profitable business of sports, we may identify the core service as the
ball game and the value-addeds as the experience at the park, on TV, or online. The performing
teams might be great (or not), and a family or friends can have a great consumer experience. It
is smart to define competition broadly here also: While the team competes with others in its
league, the marketer competes with other sports (e.g., for corporate skybox dollars) and with
other forms of entertainment, such as movies (e.g., for families’ weekend amusement dollars).
The definition of a company’s core business is somewhat like asking for its mission
statement. When a company says, “We’re an advertising agency,” is that it? What precisely
are you good at? What distinguishes you from the next ad guy? A more informative (albeit
a little clumsy) statement is, “We’re the ad agency who can help integrate your customer
Web interactions and targeted direct mailing efforts.”
IMDB.com
Prius
Other hybrids
Other cars
Other online entertainment
information sources
(e.g., movies.com)
Online or IRL sources of entertainment
information (e.g., TV Guide and
tvguide.com, cbs.com, People
magazine, Entertainment Tonight)
Other means
of transportation
Figure 6.3
What is Our
Business?
Who is Our
Competition?
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87Chapter 6 Products: Goods and Services
Figure 6.3 shows just how broadly competition can be defined in the minds of custom-
ers. It’s important to brand managers not to focus on defining competition too narrowly, as
when we compute market shares. The Internet Movie Database5 isn’t fighting just Fandan-
go, but anything that provides information about the entertainment industry.
6-3b Product Lines: Breadth and Depth
All product-related issues become more complicated when we broaden our scope to include
not just a particular brand of focus, but the company’s larger portfolio. Managers speak of
a product mix, comprised of several product lines, which can vary in both width and depth.
In Figure 6.4, we see that a hair salon carries only one product line, but does so with depth
to reflect their expertise in this product category. A grocery store carries more product lines,
but the hair care line is no longer covered in such depth. A large discount store has even
greater breadth and less depth in the product lines they sell.
Services Flowcharts
One of the ways that services marketers try to understand, manage, and control the service encounter
experience is to borrow from operations the notion of flowcharts. In services flowcharts, there is a
delineation between what a customer sees (e.g., a car valet) and what the company produces to make
that part of the encounter as flawless as possible (e.g., a sufficient number of valets who are well-
trained to be polite and good drivers, plentiful nearby parking, etc.).
Each part of the service encounter is described in steps that flow over time to simulate the
process of the encounter, and each step is described in two portions—that which is visible to the
customer, or “on stage,” and that which is “behind the scenes.”
For quality assurances, flowcharts include several key performance indicators to be measured at
each step to track what is working well and what needs to be streamlined in the process.
Breadth
Depth
Salon
Grocery store
Large discounter
store
Hair care
Shampoo
Lightening conditioner
Body enhancing spray
Glossy shine gel
Frizzy control lotion
Limp hair fluffer infusion
Hair care
Shampoo
Conditioner
Frozen treats
Apple pie
Ice cream
Hair care
Shampoo
Conditioner
Frozen treats
Apple pie
Ice cream
Automotive
Tires
Windshield fluid
Figure 6.4
Product Lines:
Breadth and
Depth
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88 Part 2 Product Positioning
While a brand manager’s responsibilities are to focus, supervising product line managers
must oversee these entire portfolios. Product lines can be pruned (e.g., if customers see no
distinctions between brands or lines) or supplemented (e.g., if the company recognizes an
opportunity for producing something that customers will value, especially if the company
can make the new brands or lines easily and better than competitors).
When economic times are good and one’s current market offerings and brands are
financially healthy, it is tempting to leverage one’s strengths and successes into more prod-
ucts (in either the breadth or depth direction). Doing so can absolutely be a good thing.
Indeed, in many ways, it’s a smart thing to diversify products in the same way that you’re
taught to diversify investments. After all, a brand is an investment.
Figure 6.5 shows a different way to think about expansion. The two scenarios at the left
depict a company serving its particular customer base very well, by offering one or more
products that suit their tastes.
At the right, a company is trying to offer different products to different customers.
This strategy is rather inefficient given that it doesn’t leverage the company’s knowledge
of its customers or its products. Extensions into breadth or depth business ventures have
to be done for smart, strategic reasons. Are the new launches consistent with the current
positioning of the brand or company? If not, can the brands be directed to different target
segments without diluting the existing position? We’ll continue with questions like these
in Chapter 7 for brand building and in Chapter 8 for new products.
Simple:
1 product,
1 segment
1 segment
served
well
Multiple
products
and multiple
segments
Segment 1
Product
1 2 3
Segment 2
Segment 3
Product
1 2 3
Product
1 2 3
Figure 6.5
Product Lines
Strategies
MANAGERIAL RECAP
Products are goods and services, a central offering in the marketing exchange between a customer and a company.
• Goods and services, as well as their marketing and management, share many similarities, but there are differences too. Services are
relatively more intangible, inseparable, perishable, and variable.
• A firm’s market offering is comprised of the core (the central element of what is purchased), and the value-addeds. The core helps
define the company to its target segments, and the value-addeds enhance customer satisfaction.
• Competition should be considered broadly, and a company’s competitors can evolve over time, as product lines are further developed
in length and breadth.
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89Chapter 6 Products: Goods and Services
Chapter Outline in Key Terms and Concepts
1. What do we mean by product?
a. The product in the marketing exchange
2. How do goods different from services?
a. Intangibility
b. Search, experience, credence
c. Perishability
d. Variability
e. To infinity and beyond goods and services
3. What is the firm’s core market offering?
a. Dynamic strategies
b. Product lines: breadth and depth
4. Managerial recap
Chapter Discussion Questions
1. When you get your hair cut, what’s the “core” of what
you buy vs. what are the “value-addeds” in the pur-
chase? What’s a consultant’s core vs. value- addeds?
What are the core vs. value-addeds for music?
2. Consider one of these purchases: health care, a car,
a time-share condo. What elements are tangible
vs. intangible? How do the tangible vs. intangible
components contribute to your satisfaction or
dissatisfaction with the consumption?
3. Some companies have traditionally been known
for their excellence in tangibles, e.g., Xerox in
copiers, IBM in computers, who now describe
themselves as primarily service companies. Do
you agree? What does it take for a company to
declare itself as a service organization (e.g., a
percentage of business, a certain strategy or mis-
sion)? What would it take for you to believe such
a claim?
Video Exercise: Kodak (9:21)
Kodak’s Graphics Communication Group (GCG) is one of the company’s largest growing business-
es. On one hand, Kodak’s GCG serves customers using offset or analog printing that requires long
production runs to be cost efficient. On the other hand, the company also serves customers who
use digital printing to provide quick, on-demand, short production runs. The company markets
four types of products—digital printing, consumables, workflow, and services—to commercial printing, corpo-
rate, and government customers. Most of the customers are commercial printers, which is one of four market segments
targeted by the GCG. The other three market segments are the packaging industry, publishers, and customers en-
gaged in transactional printing (i.e., printing of checks and documents). To more precisely target customer subsets
within these different market segments, the company relies on a customer relationship management (CRM) system
that contains a variety of detailed information about the needs, location, and characteristics of the customers. The
company also seeks lots of feedback from its customers to better understand their needs and their perceptions of the
company’s operations vis-à-vis the customers. This feedback is used to foster continuous improvement.
Video Discussion Questions
1. What are the main products offered by Kodak to its customers, and how would you position these products
on the goods-to-services continuum of products?
2. Describe the core elements and the value-added elements of Kodak’s product line(s).
3. Describe the breadth and depth of Kodak’s product line(s).
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90 Part 2 Product Positioning
MINI-CASE
Volta Financial
Volta’s core business is the financial investment instruments it wants to sell. Its value-addeds include financial
advisors who provide nearly free counsel.
Like most financial advisors, Volta’s people sell products that seem simple to them, but complicated to most of
their customers. Financial investments are a classic credence purchase, implying that the customer won’t know
for a long time whether the advice to invest in certain ways was indeed optimal. Volta’s clients come for advice
because they figure that the advisors have knowledge and abilities that they don’t.
Volta is a business, and as such, has a business manager. Some 18 months ago, the manager asked the advisors
to have their clients fill out periodic customer satisfaction surveys. The survey captures customers’ perceptions
regarding: whether a receptionist was polite when taking a call to make an appointment with an advisor; how
quickly the appointment could be made; how professional was the advisor, did the advisor’s work area appear to
be organized and professional, and so on.
Case Discussion Questions
1. What do you think about the survey? What measures do you believe would be good indicators of an advisor’s
performance?
2. How could the brand be positioned to be more tangible and experiential (and even more search) so that con-
sumers could be more confident in Volta’s quality and Volta would have more obvious bragging rights about
its brand?
3. What elements of financial investment assistance would you classify as “core” and what would you list under
“value added”? How could Volta distinguish itself from other financial advisor firms by modifying their core or
value-added services?
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91
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
What is a brand? Why do we brand—What functions do brands serve?
What are brand associations?
What are branding strategies for goods and services?
How do we assess brand equity?
Managerial Checklist
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
BRANDS
7-1 WHAT IS A BRAND?
What do you think of when you hear these names: Apple and Microsoft, McDonald’s and
Burger King, Rolex and Cartier? Business magazines regularly feature them on lists of top
ten global brands.1
Why do marketers care about brands? If branding is good or important, how do we do
it? Why are the brand strategies of The Gap and Versace both strong and yet so different?
In the last chapter, we discussed goods and services. In this chapter, we won’t discuss
products as classes of purchases, but brands as particulars: specifically, not shoe stores but
Zappos; not cars, but Fiat 500s; not printers, but HPs. Services get branded too, e.g., Turbo
Tax software; St. Thomas hospitals; Canyon Ranch resorts; Google and Bing as informa-
tion sources; and MoMA and the Louvre as specific museums.
Marketers believe that brands have value above and beyond the benefits of the product
itself. It’s not just that Coca-Cola is a well-known name; it’s that the name immediately
invokes certain images: the shape of the Coke bottle, the logo, the red color, some of their
ads. So while a brand begins with the name that a company uses to label a specific product,
a good brand goes well beyond that: It’s a portfolio of qualities associated with that name.
The brand associations begin with qualities under the company’s control. The product
shape and its packaging can be distinctive; e.g., from that Coke bottle to a Corvette. Brand
logos are shapes and symbols that may begin with little inherent meaning, but they come
to be associated with the brand and become shorthand for the brand itself; e.g., Nike’s
swoosh and McDonald’s golden arches are internationally known. Some brands are closely
associated with particular colors, e.g., Pepsi’s red, white, and blue vs. Dr. Pepper’s burgundy,
or John Deere’s green, and UPS’s “What can brown do for you?”
7
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92 Part 2 Product Positioning
Beyond the name and other tangible qualities, other associative elements may also en-
hance the imagery and market perceptions of brands. Companies build associations via
classical conditioning in consumer learning, e.g., a jingle, a slogan, a spokesperson. The
hope is that the catchy tune is in your head when you’re at the grocer (e.g., “Ask any mer-
maid you happen to see . . .), or that the slogan suggests the company has a worthy mission
(e.g., “Like a good neighbor, State Farm is there”), or that the spokesperson is admired and
the customer emulates the person through the purchase (e.g., Halle Berry for Revlon).
Other brand associations are not under the company’s control but are every bit as real.
Maybe when you were a kid, your mom substituted 7UP for root beer to make you ice
cream floats, or your soccer coach had cold 7UPs waiting for the team after every game, or
in college you asked for a 7UP instead of a beer at a party and someone called you a dork.2
The company can’t control all these representations, but it can make certain that every out-
going message from the company to the marketplace is excellent and positive.
7-1a Brand Name
So let’s get down to the nitty gritty. A brand is first and foremost a name. Some marketers
say that a brand is a symbol, but it first has to be a name. Otherwise, how would you register
a dot-com for it or search for it. To the extent that all words are symbols in communication,
then fine, brands are symbols. Some brand names immediately convey information, e.g., You
Tube captures the essence of user-created entertainment. Other brand names originate as not
a far stretch from a benefit they’re implying, e.g., Bud Light, Optical4less, The Home Depot.
Many firm and brand names are merely those of the founders. These tend to have no
inherent meaning, show little creativity in marketing, and serve primarily as an ego trip for
the founder. Yet family names aren’t entirely lame as brands. Their lack of explicit meaning
allows them to translate well to other brands across the firm, e.g., Hugo Boss, Christian
Dior, René Lacoste, Yves Saint Laurent, and Mario Prada have all lent their names first
to their clothing lines and then branching out to shoes, jewelry, eyewear, perfume, and cell
phones. And, with time, no one thinks of the people, such as Mr. Enzo Ferrari in 1898, or
Professor (seriously!) Ferdinand Porsche in 1948. Rather, they think of their companies’
cars. (Still, readers with entrepreneurial dreams should forgo ego and choose brand names
that convey information to customers about the benefits of the brand.)
7-1b Logos and Color
Regardless of the amount of information inherent in the brand name when it is introduced
to the marketplace, brand name meaning is built over time through the firm’s communi-
cations to customers. The marketer educates customers about the meaning of the brand
as well as its logos and symbols. Just as the brand name engages the customers verbally,
the logos and packaging colors engage the customers visually and sensually. Think of how
distinctive the fonts of The New York Times and Google look. The first is an elegant, Old-
English font simply in black, cast against the white page; the latter is sans serif, bold, simple,
and colorful. These simple cues are sufficient to identify the brands.3 Figure 7.1 shows logos
that combine a brand name with a symbol meant to suggest the brand’s value proposition.
Figure 7.1
Brand Names
and Symbols
as Logos
Ro
se
C
ar
so
n/
Sh
ut
te
rs
to
ck
.c
om
rv
ls
of
t/
Sh
ut
te
rs
to
ck
.c
om
ao
o3
77
1/
Sh
ut
te
rs
to
ck
.c
om
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93Chapter 7 Brands
Companies lucky enough to survive for decades need to adapt even down to their logos.
Figure 7.2 shows a logo morphing over time. It began pretty fancy schmancy and then got
simplified and stylized. Do you like the changes over the years? (Does it matter? Would you
avoid a company because of a logo change? Probably not.) Companies use brand names and
logos as a shorthand way to communicate to the customer: “This is who we are. This is what
we look like.”
7-2 WHY BRAND?
The U.S. Patent and Trademark Office issues more than 100,000 new brands each year. Some
say that consumers are becoming less brand loyal. But let’s face it, with such continued brand
explosion, companies are dividing their money pies more and more finely. Together, the sheer
numbers of brands and the heightened competition over them indicate that branding is more
important than ever.
So why all these brands? Brands first convey information to customers. Brand names iden-
tify company production and ownership.4 For example, when Honda puts its name on a car,
a motorcycle, or a lawnmower, it’s saying, “We’re proud to offer these products. These are
ours.” And with time, the brand name has gained status among consumers as being high
quality, “Honda is a good brand”; that is, anything that comes from the house of Honda will
be good.
Brand building is based fundamentally on the predictability of the item being purchased.
It would be difficult for a customer to say that they value Dell’s laptops if some worked well
and others didn’t. Brands can gain reputations for being bad, but the goal of a marketer is
to create a product that is reliable, that is predictable in quality. Some brands have avid fans
because their products work not just predictably but fabulously.
Why Brand?
For customers:
Brands convey information
Brands signal consistent quality
Brands confer status
Brands reduce customer risk
Brands makes many purchase decisions
easier
For the company:
Brands enhance loyalty
Brands allow charging premium prices
Brands inoculate the company from
competitive action
Brands assist in segmentation, targeting,
and positioning
Brands encourage channel partners’ support
Figure 7.2
Logo Memes
Updating and
Morphing
2013–20152010–2013 Today1998 1998–1999 1999–2010
So
ur
ce
: G
oo
gl
e
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94 Part 2 Product Positioning
When the brand name is an assurance of reliable quality, the customer’s decision- making
is made easier. There is less perceived risk associated with the choice among the products of-
fered in the marketplace when the customer knows which brands are good. Risk, as in fi-
nancial transactions, is essentially a measure of variability. Reliability is the opposite; it
implies consistency or predictability in the performance of the product. Reliability is a
signal that time and again the product will perform to quality standards; thus, across time
or customers, the product performs with little variability but high quality. The brand is a
known entity. Customers can count on it to perform as they’ve come to expect it to.
It is also clear that many brands serve as status symbols. The reason for knockoff designer
handbags or watches is that it’s thought to be cool to own one, yet the prices of the genuine ar-
ticles are out of reach for many consumers. BMW, Lexus, and Mercedes have entry-level cars
so that young successful people can show the world they’ve made it (yet pay as little as possible
to own a piece of the brand). The prestige of such brands bolsters the consumer’s self-image.
If those are the benefits of branding for customers, let’s consider the rewards of brands
for their companies as well.
Good brands can induce loyalty. Repeat purchasing might be unthinking due to inertia,
whereby the customer just reaches for the familiar (brand name, package, logo, color). If the
brand is known to be high quality and reliable (not risky), then the brand choice is easy to jus-
tify. Customers don’t have to think about the purchase or brand choice anymore. Repeat pur-
chasing and true brand loyalty can also be a more mindful process, whereby customers r eturn
Legal Stuff
A trademark is the legal ownership of identity. A trademark can include just the brand name, just the
logo, or, more inclusively, the name, logo, phrases, symbols, design, colors, sounds, etc.
Claims of trademark infringement occur when a me-too competitor makes part of their brand
identity similar enough to an extant trademark that it could lead to confusion among customers of
the me-too with the original brand.
The trademark symbol (™) essentially means, “Hands off, these are our ideas” (i.e., trademark rights
are claimed). When the trademark symbol graduates, it becomes a register mark (®), a more serious
designation that means, “Hands off, or our lawyers will get you” (the trademark has been registered).
There are different types of trademarks:
1. Fanciful: using a word as a brand name, which, prior to your use had no particular inherent
meaning, e.g., Geico
2. Arbitrary: when you appropriate a word with common meaning, e.g., Amazon
3. Suggestive: brand name that suggests the customer benefit, e.g., Jiffy Lube
With time, what had been company property can change, especially perversely if the brand
becomes “too” successful. For example, “Aspirin” had been a trademark of Bayer, but the name is now
deemed generic so other pain relievers can also call themselves “aspirin.”
Trademark issues arise online in the form of domain names and ownership. Generic names cannot
be defended as registered.
Laws in different countries are wildly different, but services are available that search for prior brand
elements (brand names, slogans, etc.) to see whether they’re free of TM or ®. In the states, this can be
done via the US Patent and Trademark Office (uspto.gov).
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95Chapter 7 Brands
to the brand because, quite simply, they like it. With that brand, the customer obtains the
particular attributes and features they seek, further supporting their perceptions of high quality.
To a company’s delight, most customers are willing to pay premium prices for brands
they value. Customers so appreciate the reliability, high quality, and status of their favorite
brands that they’re less price sensitive, knowing that they’re getting something good even
if they’re paying somewhat more.
Companies can also use brands or variants of their brands to provide different offerings
to satisfy different market segments. For example, Porsche’s 911 sells predominately to men
(90%), who are over 50 with a household income over $300k. Their Boxster customer profiles
are slightly younger and oriented more to women (30%). These different car lines allow the
macho 911 driver not to be offended by the infiltrating women buying the sister model.
How does a brand name come to convey meaning, imply quality and consistency, reduce
the riskiness and ease decision making, induce loyalty, achieve prestigious status, and com-
mand higher prices? The mechanism that gives brands meaning is the set of associations
that are linked to the brand in the customer’s mind. These associations are created through
a number of sources: They’re built from the company’s advertisements and communications
in the marketplace, the customer’s own experiences with the brand and company and com-
petitors’ brands, and the stories related about the brand by other customers. So we need to
understand brand associations.
7-3 WHAT ARE BRAND ASSOCIATIONS?
Branding may begin with simple physical qualities (a name, logo, color, packaging, etc.). But
the far more interesting and flexible aspects of a brand are the intangible cognitive and emo-
tional associations that the company helps the customer connect to its brand. Marketers talk
about a hierarchy of brand associations. At the bottom of a brand value hierarchy are the
concrete product attributes, such as color, size, shape, flavor. As we travel up the hierarchy,
these brand attributes extend to product benefits; e.g., this blue sweater will be flattering; this
messenger bag has a protective sleeve for my tablet; that new restaurant should be friend-
ly and informal enough for meeting a friend. Benefits are more intangible than attributes.
Services Brands
A brand implies consistency, making brand building a challenge for services marketing. Some services
are rather standardized, so creating a service brand for a hotel chain, an airline, or even a restaurant
is much like doing so for tangible products. But many services are more heterogeneous due to the
interpersonal exchange between the customer and the front-line service provider.
To enhance reliability and branding, service providers seek high quality when selecting employees
and take longer to train them to ensure their uniform interactions with customers.
Consistency across customer-employee interactions is enhanced if the training includes tight
specifications on the service delivery processes and, on the flip side, clear strategies for service
recovery, should the encounter proceed less than optimally.
Drawing a customer experience flowchart and noting various metrics at each point in the process
(e.g., time elapsed, customer satisfaction, etc.) can help diagnose problematic components that
might be redesigned and streamlined.
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96 Part 2 Product Positioning
Emotional benefits are the next level, and they’re even more intangible; e.g., a flattering swea-
ter is a means to the goal of being attractive; a good bag is a means to being productive, etc.
Strategically, the concrete features are easiest to deliver and explain to customers, but
competitors also match them relatively easily. The more abstract benefits are values that are
more meaningful to customers, as well as easier for a company to claim as a competitive
advantage, but they’re also more difficult to create.
The key brand association is the extent to which the customer likes or even relates to
the brand. For example, think of Mac users who use their Apples for anything a PC can
do, with an edge of cool. Or think of young executives who drive BMW 3-series cars as
a reward and symbol that they are on the road to great achievements. Brands aren’t just
extensions of the customer; they are expressions of customers’ ideal selves or the selves to
which they aspire. A brand carries a promise that it can help customers achieve their de-
sired persona. This aspirational function of brands begins in childhood, when kids believe
that their popularity and acceptance are partly a function of wearing the right sneakers or
listening to the right music on the right device. Adults may deny that they use brands in the
same manner, but watch their behaviors: They attend “certain” schools, drive “certain” cars,
and wear “certain” designer clothing and shoes.
Brands can also serve other social functions. Brands can become the focal point of bond-
ing, as in so-called brand communities, such as for Mini Coopers or Subarus, and exemplified
by the Harley treks, or communities around Lego and Barbie, Being Girl, H&R Block, or
even traditional fan sites (e.g., thousands for Taylor Swift), etc. To non-marketers, it can seem
surprising that fan dedication can be rabid—that people can talk about loving (some) brands.
All these connections can be depicted, as in Figure 7.3, in a brand association network.
The nodes in the network include elements such as the brand name (and perhaps compet-
itors), along with attributes and abstract benefits about the brand. The links between the
nodes indicate some connection (unlinked nodes have either no connections or weak ones),
and strong links are depicted with bolder lines.
This mapping is not meant to be a literal representation of what customers have in their
heads, and yet it’s not a bad metaphor. This idea is that we have stored in memory quite
a lot of information about a brand, and when the brand name is activated (e.g., through
advertising), the brand associations are subsequently (even instantaneously) triggered (like
brand information jumping across neurons). Links that are further from the brand may
take milliseconds longer to retrieve and activate than those most closely and directly asso-
ciated with the brand. That is, while the brand’s associations include even the indirect links,
Figure 7.3
Brand
Association
Network
Louis Vuitton
Good qualityLouis Vuitton
luggage
Want to be
successful
Shows good
taste
Bro-in-law Small
Louis Vuitton
briefcases
I can afford it
Expensive
Good design
Brown and
black
Co-worker
I travel with
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97Chapter 7 Brands
those attributes are not likely to be the very first qualities that come to mind when the
brand name is mentioned. In addition to memory implications, there are attitudinal ones.
For example, measures of customer satisfaction with the brand are most heavily affected by
the positivity or negativity of the nearest links.
When company advertising emphasizes one benefit, the cognitive maps may be simple,
for example, the mental link between Volvo and safety dominates everything else; ditto Tesla
and technical innovation. If those solitary links are strong and positive, the focused message
has been delivered, and the position of the brand in the marketplace will be clear and positive.
Networks can be more complex, either due to a consumer’s fuller knowledge of the brand (e.g.,
McDonald’s fries, quick and inexpensive meals, the two-all-beef-patties jingle, road trips, fatty
food concerns, etc.) or due to inconsistent advertising messages or customer experiences.
In addition to classic studies of brand associations to understand customers’ memories
and attitudes, recent research has examined two special classes of brand associations: brand
personalities and brand communities. We’ll look at both.
7-3a Brand Personalities
One way that marketers get customers to relate to their brands is by creating a brand per-
sonality. A brand doesn’t have to be personified or anthropomorphized, such as the Jolly
Green Giant or the Keebler elves. Any brand can be said to have a distinct personality.
In Figure 7.4 we see a conceptualization of five different kinds of brands: sincere, com-
petent, exciting, sophisticated, and rugged.5 The personalities capture information specific
Figure 7.4
What Type of
Brands Are
There?
Sincere
Competent:
Exciting:
Rugged:
Sophisticated:
Pa
ul
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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
98 Part 2 Product Positioning
to the brand, as well as holistic perceptions about the brand and company position in the
marketplace. For example, when customers say Campbell’s is sincere, they mean partly the
soups (e.g., they use only quality ingredients) and partly the company (e.g., those ingredi-
ents come from fair trade sources).
Competence often characterizes technical firms, exciting brands are those that are in-
novative or cool, sophisticated brands are often leaders in tasteful design and fashion, and
rugged brands bring to mind their toughness. None of the personality profiles are better
than the others; they’re just different. If the brand strategy had been to attain a certain
personality, and customer perceptions concur that the brand achieved that characterization,
then the branding and marketing efforts succeeded. If the brand manager doesn’t like the
brand’s current profile, then new marketing initiatives may be undertaken to reposition
the brand. For example, a marketing manager of a “competent” brand might be envious of
an “exciting” or “sophisticated” brand, but competent is good, just different. There’s a lot of
space and reward in the marketplace for competent. A brand would begin to lose its iden-
tity (and risk its current customers) if it aimed to be otherwise.
Consistent with their personalities, different brand experiences highlight different ele-
ments. Figure 7.5 illustrates that Disney appeals more to customers’ hearts, inducing feel-
ings and sentiments. Lego building blocks stimulate one’s curiosity and problem-solving,
engaging the customers’ head, and Gillette is action-oriented, results in a bodily experience,
affecting customers in a behavioral manner.6
7-3b Brand Communities
Most brands speak of engaging their customers’ hearts and minds, and increasingly market-
ers are seeing even more extreme attachments. There are brand communities around Apple,
Nintendo, and even Duck brand duct tape.7 Some customers are so passionate about their
love for certain brands that they like to connect with other like-minded customers. Wheth-
er these brand communities take the form of social media interactions or interactions IRL
(like the Harley posses who ride together or Lego fans who build projects together), customers
are coming together over brands. Currently, marketers don’t quite know what to do with these
communities (other than trying to engage them to spark viral campaigns). Will brand com-
munities enhance the bottom line? Probably. How could it not be a good thing if people gath-
er to rave about your brand? But companies are still figuring out how to monetize the groups.
Next, we turn to the more macro, corporate topic of branding strategies. That is, what
might we do with all our knowledge of our customers’ brand associations?
7-4 WHAT ARE BRANDING STRATEGIES?
As part of their overall marketing strategy, a company needs to answer several important
branding questions. First, will the company offer multiple products under the same brand
name or roll them out with distinct brand names? Second, what are the purposes of brand
Figure 7.5
Types of
Brand
Experiences
Affective
Disney
Hallmark
Intellectual
Legos
Sudoku
Behavioral
Adidas
Gatorade
Starbucks Gillette
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99Chapter 7 Brands
extensions, line extensions, and co-branding? How is brand equity determined and val-
uated? How are brands best rolled out globally? What is the role of a store brand? We’ll
examine the factors that affect the answers to each question.
7-4a Umbrella Brands vs. House of Brands
Most companies start by offering a single product in the marketplace. The brand name
might be the company name. As the company adds products, they have to decide: Should
they put the corporate name on every new product? Or should new brand names be chosen
for the subsequent products?
A company that attaches the same brand name to all of its products is using an umbrella
branding approach.8 There are lots of examples, such as The Virgin Group, which sells cruis-
es, balloon flights, mobile services, radio, etc., and calls them all Virgin. Nike makes athletic
shoes, sports jerseys, gym bags, and other products, all of which bear the same company
brand name and swish logo. Canon’s cameras and photocopiers say Canon. GE puts its
corporate brand on its diverse lines of appliances, lighting, financial services, and engines.
In contrast, with a house of brands approach, the company introduces a new brand name
for every major line of product it brings to the marketplace. Procter & Gamble (P&G) is
a famous house of brands. It produces some 80 major brands, including Charmin, Crest,
Downy, Gillette, Hugo Boss, Ivory, Pringles, Swiffer, Tide, and on and on. There are no
connections among these brands that are apparent to the customer. Unilever does the same
(Axe, Dove, Hellmann’s, Knorr, Lipton, etc.). In B2B land, DuPont had similarly introduced
a portfolio of great brands: Kevlar, Kalrez, Lycra, Teflon, Thinsulate, and Stainmaster.9
Each approach has strengths and liabilities. With an umbrella branding approach, once the
company has established the key brand name in the marketplace, subsequent product intro-
ductions sharing the same brand name are easier for the customer to understand and accept.
The new product line will begin with higher than usual levels of awareness. In addition, given
that the two products share a brand name, there will be some overlap between two different
products’ associations. Thus, it is critical that the majority of the existing brand’s associations
are positive, or new products will be introduced to the market with a perceived handicap.
In contrast, given the nature of the multiple brands’ autonomy in the house of brands
approach, the independence between brands assures that any problems with one brand
shouldn’t negatively affect any of the others. Even if a brand isn’t in the spotlight for being
a problem (e.g., tires that blow out, beverage bottling problems, weight control OTCs
that cause heart problems), a company with multiple brands almost surely is watching
those brands from different points in their life cycles. A brand whose image is waning is
less a liability in a house of brands where the names aren’t shared across the product lines.
A more positive way to interpret this brand independence is that the brand images
need not be consistent, allowing the company to reach multiple segments. For example,
Marriott’s portfolio has Courtyard and Fairfield to serve one part of the market, with
The Ritz- Carlton (without the Marriott name) at the high end; none of the segments of
customers would be confused or would expect an experience that the other hotels offer.
Evidence suggests that the umbrella branding strategy provides stronger financial out-
comes to the company than the house of brands. One reason is that certain costs are cut;
e.g., the house of brands approach requires more advertising to build the multiple brands’
equity, whereas advertising for the umbrella brands builds the shared brand name synergis-
tically across the products. In addition, psychologically, customers seem to build stronger
connections to the specific, concrete product; thus, the customer thinks positively about
Ivory without necessarily considering anything about its manufacturer, P&G. For umbrella
brands (e.g., Sony), the product-level associations replicate the same name across multiple
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
100 Part 2 Product Positioning
products (Sony memory sticks, Sony theater systems), and thus the attitude is reinforced
(Sony, Sony, Sony), thereby enhancing brand loyalty.
7-4b Brand-Extensions and Co-Branding
Brand extensions are a strategic use of a brand’s equity, in which the marketer leverages the
brand’s good name to get customers to buy something new. Recall the breadth and depth di-
mensions of product lines from Chapter 6. Here, too, the brand name may be applied within
a product line to go for depth; these are called line extensions. Or the brand name may be
applied across different kinds of products; these are called product category extensions.
Figure 7.6 illustrates brand extensions in the direction of breadth (product category) and
depth (line) in a familiar context. The vertical line extensions provide varieties of the core
product, and the horizontal product category extensions are the company’s ventures into
other product categories. Some companies focus on deepening brand extensions:
• Oscar Meyer has different length hotdogs for different length buns, and makes
Lunchables and bacon, all with the Oscar Meyer name.
• SAS (the statistical computing company, not the airline) has versions of its software
for marketers, big data visualization, students, etc. They’re all called SAS.
• Cheerios rolls out different flavors: apple cinnamon, honey nut, frosted, all called
Cheerios.
• Häagen-Dazs has different flavors of ice cream: apricot and cream, cappuccino truf-
fle, dark chocolate orange, green tea, rum and raisin, strawberry cheesecake.
Other brand extensions aim for breadth:
• Dove soaps took their wholesome value proposition and brand name to offer
deodorant, body lotions, and hair care products, all called Dove.
• Amazon has famously extended from books and CDs to drugstore goods, comput-
ers, furniture, jewelry, services (e.g., registries), just about everything.
Figure 7.6
Brand
Extensions
Breadth (Product Category Extensions)
D
ep
th
(L
in
e
E
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en
si
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ns
)
So
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ce
: o
sc
ar
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ay
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.c
om
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
and
Toys
First movie, Frozen
Children’s booksMusic
Anatomy of a Brand Extension
Success begets success . . .
. . . but wait, there’s more!
Disney/Frozen Partners
and excess . . .?
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Plans for second movie, Frozen 2
and
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Disney forges partnership with many manufacturers—temporary co-branding arrangements, where
synergistic sales are boosted by both brands. Frozen’s LA premiere was cosponsored by Kellogg’s, and
Frozen character pictures are found on packaging for Band-Aids and Popsicles.
Jo
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op
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co
m
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
102 Part 2 Product Positioning
Sometimes the distinction between a brand and line extension isn’t crystal clear. For
example, Hyundai has long been positioned as offering relatively inexpensive, small cars
(e.g., Elantra, Accent), and these might be considered brand extensions which extend the
line (depth). But with the introduction of the Equus model, Hyundai is dipping its cor-
porate toe into the luxury car pool, an altogether different business venture, targeting a
segment with different needs. So it would probably be better considered a brand extension
that crosses product categories (breadth).
The difference is a matter of degree: A slight new model twist may be going for depth;
a vastly different model/product extends the breadth. Per the logic of brand extensions,
Hyundai might have launched the Equus without reference to the umbrella Hyundai brand
name, allowing it to achieve greater independence as a new brand in the house of Hyundai.
However, by keeping the Hyundai imprint on the Equus, Hyundai’s challenge will be to
impress upon potential luxury car buyers—previous owners of Infinities, Lexuses (Lexi?),
BMWs, etc. —that Hyundai, a brand known for good but admittedly more basic cars, can
pull off the luxury positioning.
Co-branding is when two companies collaborate in a joint venture to create a good or
service for the customer: “Brought to you by …” both companies. Tevlar fabric is used and
touted when selling protective body gear (vests, helmets), bicycle tires, racing sails, and so
forth. Ingredient branding is the primary form of cobranding in which one of the companies
and its product is the primary host, and the other company and its product add value to the
host product. For example, Intel is inside many PCs, and Brembo brakes are in Aston
Martins, Lamborghinis, Maseratis, and Paganis. The Intel and Brembo brands are known
on their own merit, but obviously the customer buys the PC or car, of which the processor
or brakes are a component. The distinction between co-branding and ingredient branding
is one of degree: Co-branding implies symmetry between the two providers, whereas, in
ingredient branding, one brand dominates the other.
Dawn and Olay
Co-Branding.
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M
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.
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103Chapter 7 Brands
Marketers might go further and begin to brand one of their own ingredients to make it
seem like a particularly high-quality point of distinction from competitors. When a com-
pany is launching a relatively minor change, such as tweaking a current attribute (e.g., a new
scent for an existing laundry detergent), then cobranding (specifically ingredient branding)
might be fine for the short term, but in the long term, a self-brand is better, such as Tide’s
EverFresh scent. When the new product innovation is greater, e.g., involving an altogether
new attribute, such as adding cough relief medicine to candy, cobranding is better, provid-
ing strategic benefits in the short and long term.
7-4c How are Brands Best Rolled Out Globally?
First, what is a global brand? To be defined as global, at least 30% of the brand’s revenues
should come from other countries (no more than 70% from the brand’s home country).
Second, how do we roll out global brands? Analogously to the house of brands vs. um-
brella branding decision, some companies go global with different brand names in different
countries with the motto, “Manufacturer globally, brand locally.” This is the so-called phi-
losophy of glocalization. Other companies maintain the same brand name in every country
they enter.
Just as it was said to be typically more advantageous to choose the umbrella path vs.
the house of brands path, here, too, there appear to be greater advantages to maintaining a
single brand name worldwide, if possible.
A true global brand (and perhaps neither surprisingly nor coincidentally, the biggest
brands), carries one brand name and logo anywhere it is offered, and it is available in most
markets in the world. Amazon.com looks just like Amazon.co.uk, for example, and Google.
com looks like Google.fr. There are corporate efficiencies to using the same brand informa-
tion, communications, and strategies everywhere. Strictly speaking, true global brands are
those that seek, achieve, and maintain similar positioning in all their markets.
If a company wishes to serve different kinds of customer segments in different markets,
they would opt to use different brand names in those markets. For example, one of the
functions of a brand name is quality assurance, but quality per se might be of varying im-
portance, depending on the culture, segment, or product. And, of course, we’ve all heard the
examples of brand names that simply do not translate well. Finally, legal restrictions may
curtail certain marketing activities and even brand names (e.g., Diet Coke vs. Coke Lite)
that vary among countries. Still, these (admittedly big) caveats aside, the best marketing
guru thinking seems to be to use the same name globally if you can.
7-4d Store Brands
What’s the role of store brands? Don’t laugh! While the name sounds like an oxymoron,
store brands are big business. The traditional idea behind private labels is that they’re less
expensive and more of a me-too product offering than an innovative brand. Most of us are
price sensitive in some product categories that are usually (by definition) those we don’t
care much about. In product categories we care more about, we’re less price sensitive. Some
customers seem to be price sensitive across the board. These are customers with sort of a
cheap gene, a broader trait or propensity to go for store brands, across numerous categories
(or, of course, they’re simply working with limited resources).
Cost savings for customers aren’t the only motive for store brands. Retailers are also
offering premium private labels. While traditionally, generic (non)brands were packaged
unattractively and thought to be of lower quality, these days the packaging and quality are
usually on par with the big national brands, and many customers don’t recognize the store
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
104 Part 2 Product Positioning
brand as such. Walmart’s brand of “Sam’s Choice” might be an obvious name, but consider
Target’s “Archer Farms” or Kroger’s “Private Selection.” These are high-end or specialty
products made available at so-called value prices.
The retailer can offer decent quality for lower prices because certain costs are reduced.
They can advertise very inexpensively in local newspaper weekend flyers and radio spots,
and clearly and easily, they can promote the brands in the store. Thus, to the customer, it
looks like a brand, and it smells like a brand, so it must be a brand. And if it’s a brand, it
might be high quality. As is always the case, the advertising helps ensure trial, and the qual-
ity of the product determines satisfaction and repeat purchasing.
A lot of private label and pricing games go on in retailing. Retailers naturally want
their shoppers to buy their brands, and, given their tremendous growth in power, they
have been demanding better package deals from other source manufacturers. Between the
added competition (including the store brands) and the aggressive deal demands, the man-
ufacturers aren’t going to sit still, of course. Premium (i.e., real) brands are launching their
own second label, priced near the store label, to provide an alternative to price-sensitive
customers, rather than losing them to the store brand (or to other competitors). What do
the premium brand manufacturers do next? They raise the price of their original premium
brand. Yeesh.
Also note that if brands represent culture, then non-branded goods are embraced by
various countercultures. Such free spirits eschew big national brands due to the commer-
cialism they represent.
7-5 HOW IS BRAND EQUITY DETERMINED?
In recent years, the popularity of branding, coupled with factors that have required mar-
keters to be more accountable for their marketing expenditures and programs (e.g., slow
economy, intense competition), have resulted in efforts to
measure the worth of a brand.10 Figure 7.7 lists the top 20
US and non-US brands as reported annually by Business
Week. Do any of the brands on the list surprise you? Are
these companies or brands not so great by any parameters?
If Coca-Cola were to slip to tenth or eleventh in next year’s
poll, would you really consider it a lesser brand?
How are the rankings in Figure 7.7 determined (see
Interbrand.com for details)? When Rolls-Royce sold its brand to BMW for $60 million, where
did that number come from? Let’s see what goes into the consideration of a brand’s value.
What is a brand’s value?
U.S.
Apple
Google
Coca-Cola
Microsoft
IBM
GE
McDonald’s
Amazon
Disney
Intel
Non-U.S.
Toyota
Samsung
BMW
Mercedes-Benz
Honda
Louis Vuitton
H&M
SAP
Ikea
Zara
Figure 7.7
Top Brands
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105Chapter 7 Brands
The basic idea in brand valuation is to derive measures that translate as best as pos-
sible into a financial vocabulary. The reasoning seems fair and sound: If marketers argue
that their brands are assets, then they should be able to attach a monetary figure to that
worth.
Some of the numbers that enter into these calculations are available in annual reports for
public firms. Other numbers are obtained from customer survey data. Still other numbers
are proprietary to the firms, such as Interbrand, doing the calculations.
One approach is to find out just what sort of price premium the brand can demand. A
conjoint study can be run in which one attribute is brand (e.g., Shell Oil vs. unbranded
fuel). Price can be one of the other attributes, or it can be what is measured (e.g., How much
are you willing to pay for gas at a Shell station? vs. How much are you willing to pay for gas
at a local gas station?). (We’ll say more about conjoint in Chapter 8 on new products and
in Chapter 15 on marketing research.)
A related approach focuses less on the price per se but compares the brand to an un-
branded form of the product that is otherwise matched, feature-by-feature. Preferences and
customer choices are measured (e.g., How much do you like this Sony flat screen, costing
$499, with screen-within-a-screen, and holograph projection? vs. How much do you like
this unknown brand flat screen, costing $499, with screen-within-a-screen and holograph
projection?).
The Interbrand method is essentially to assess the value of a firm, subtract its physical
and financial assets, and call the rest the value of the brand. That’s a little simplistic because,
while this calculation exposes a firm’s intangibles, there are other intangible assets beyond
the firm’s brand (e.g., real investments in human resources or R&D’s patents). So they still
have to tease out the effect of the brand. These days, some 50% of a typical firm’s value is
estimated by determining its intangible assets, including its brand names. It may be chal-
lenging to estimate the value of those intangibles, but it is certainly done, therefore it is
important to do it well.
Branding Places
Branding cities and countries is becoming increasingly popular, as destinations seek more tourism
or business investment (see Morgan, Pritchard, and Pride’s book on Destination Brands). A unique
positioning can be claimed on the basis of historical, social, or cultural values:
Singapore highlights its blend of modernity, boasting a strong economy and a luxurious hospitality
industry, with a setting that is perceived as an exotic destination for many tourists.
Macau, barely a dot on the map 20 years ago, is one of the world’s richest economies due to its
gambling revenues, which surpass those of Las Vegas. It is now seeking to make a name for itself
in medical tourism, differentiating itself from China, for example, as a safer alternative.
Some cities, like some brands, are well-known but desire a shift in perception via re-positioning.
Milan is currently seen as a business destination but it seeks to enhance potential travelers’
awareness of its cultural and entertainment offerings.
The national profile of the Australian brand is characterized by high awareness and relatively
positive brand associations. Much of these branding successes may be attributed to movies (e.g.,
Crocodile Dundee, Mad Max, Thorn Birds). Tourism leaders seek to extend this strong position by
enhancing awareness about specific cities, nature trips, and food and wine.
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106 Part 2 Product Positioning
So, how to actually do it? Figure 7.8 tracks the following computations. First, open up
this year’s annual report for your favorite brand, and find the operating earnings generated
by that brand (e.g., a corporate earnings number for an umbrella brand or a brand number
for a brand in a house of brands). Say you find that the net sales figure is $25,000,000, and
the operating earnings figure for that brand is $7,000,000. Those earnings are taxed (say
25%), so subtract the taxes ($1,750,000). Suppose the tangible capital figure is $12,500,000,
and multiply it by a rate of return of, say, 6% (a little conservative) and subtract this
$750,000. The result is the figure for the earnings based on intangibles.
The next step is the magic of teasing out the brand effect. Interbrand estimates that
brands are very important for perfumes, e.g., 90% of a firm’s intangibles may be attributable
to its brand, less important for cars (40%), and still less for retailers (20%). When this so-
called brand contribution index is used as a multiplier against the intangibles, we derive the
proportion of those intangible earnings that we may claim are due to the brand. We have
an estimate of the brand value.
The method’s not perfect, and the proprietary nature of the indices is annoying. But
work in the area of brand valuation is new, so look for better developments soon. Regardless
of any of the methods’ shortcomings, when customer judgments of numerous brands are
gathered, and the data are correlated with their companies’ financials, marketers find clear
evidence of strong positive relationships linking brands to shareholder value.
Strong brands deliver greater returns and with less risk (the classic desired state of
higher means, lower variance) than comparable benchmarks. Marketing matters. Brands
make companies financially healthier. Marketing always helps!
Work sheet Numbers Needed
a. Net sales (revenue for the brand) $25,000,000
b. Operating earnings $7,000,000
c. Tax on earnings 25% × b → −1,750,000
d. Tangible capital $12,500,000
e. Rate of return 6% × d → − 750,000
f. Intangible earnings $4,500,000
g. Brand contribution index (bci) 40%*
h. Brand earnings g × f $1,800,000
*Depends on product category
Figure 7.8
Brand
Valuation
MANAGERIAL RECAP
Brands are promises to customers. Brands are names and logos and colors and fonts. In addition:
• Brands signal information to customers about predictability in their purchases, about anticipated reliability and expected quality.
• Brands can command higher prices because the brand offsets any uncertainties or risks associated with the purchase in the mind of
the customer.
• Brand associations are the cognitive and emotional elements that combine to create the larger brand story.
• Companies can employ any of a number of strategies with their brands; they can put their corporate name on everything
(i.e., an umbrella brand), or they can create a portfolio of different brands (i.e., the house of brands).
• Brand valuation, e.g., per the method of Interbrand reported in the BusinessWeek annual polls, are all the rage, and it is likely to
continue to be important to branders for the future.
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107Chapter 7 Brands
Chapter Outline in Key Terms and Concepts
1. What is a brand?
a. Brand name
b. Logos and color
2. Why brand?
3. What are brand associations?
a. Brand personalities
b. Brand communities
4. What are branding strategies?
a. Umbrella brands vs. house of brands
b. Brand extensions and co-branding
c. How are brands best rolled out globally?
d. Store brands
5. How is brand equity determined?
6. Managerial recap
Chapter Discussion Questions
1. What is one of your favorite brands (why)? What is
a brand you hate (why)?
2. Which brand personality best describes you? Your
business school? What is it about these images
you like? What would you change about these
images to make them even more desirable
(and how would you do so)?
3. Read the methodology of Interbrand.com for
brand valuations. How might you improve their
methods and the sorts of measures they use to
assess brand equity?
Video Exercise: Method (7:43)
Eric Ryan and Adam Lowery, cofounders of Method, a line of household cleaning products, dis-
cuss how the product concept came into being and subsequently was developed into a premium
line. Ryan and Lowery saw an opportunity to create a premium brand from the observation that
the lucrative $20-billion-a-year household cleaning products category suffered from product same-
ness that was uninteresting and uninspiring. Method’s philosophy of branding stresses that “the brand is the
promise that the consumer gets from the product you are selling and the product itself delivers on that promise.”
Ryan and Lowery created a line of nontoxic, high-performing cleaning products that would make a home feel
fresher, more livable, and more beautiful. These products were packaged so attractively that they would market
themselves on stores’ shelves. They sought to extend the reach of the brand by focusing on audience segmenta-
tion rather than product segmentation, wherein Method cultivated customer loyalty to the brand across all the
company’s cleaning products rather than cultivating loyalty to a particular cleaning product.
Video Discussion Questions
1. What are the key product features or qualities that define the Method brand of household cleaning products?
2. What value accrues to customers who purchase the Method brand of household cleaning products? What
value accrues to Method itself?
3. Is Method’s line of household cleaning products a luxury brand? Explain your answer.
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108 Part 2 Product Positioning
MINI-CASE
6MD
A biotech firm creates bone replacements that have been used successfully for about 5 years in a variety of appli-
cations—joint replacements, trauma, etc. The parts are primarily titanium, a metal that has a decent track record
for such uses because it is strong yet lightweight. It is also said to be biocompatible (i.e., rarely causes rejection
problems).
None of that is new. What’s new to the firm’s technology is that the titanium is calci-plated. Bones wear down
faster than titanium, and in fact, titanium is so strong that it causes further wear on surrounding tissue. The
calcium-like plating surrounding the bone pieces offers the advantage of slowing down that friction, making
the pieces last longer, but also greatly slowing the onset of any returning aches and pains. A by-product of the
calci-treatment is that it does not set off security systems at airports.
The firm is obviously happy about their products’ successes, but they are regretting their status as a component
piece. They wish to begin branding their pieces. Much like the success of the “Intel Inside” advertising campaign
for their micro-processing chip, the biotech firm draws an analogy and wants people to understand that they are
offering an excellent “ingredient” brand.
The firm is pretty set on calling the product lines by the brand name 6MD. It began as a skunkworks project
nickname, representing the bio-engineers’ respect for the Six Million Dollar (6 m.d.) Man. They had even hoped
to get Lee Majors to be their spokesperson, but initial contact made clear that he was too expensive. He was also
looking a little long in the tooth. The name also stuck because the “MD” piece of the brand name should resonate
with one of the constituencies who would use the brand.
Case Discussion Questions
1. Who is/are the biotech firm’s customers?
2. How should they position this brand?
3. Will the customers appreciate the brand’s USP (unique selling proposition)? Why?
4. What directions might you suggest to the biotech firm for brand- or line-extensions?
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109
NEW PRODUCTS
AND INNOVATION
8-1 WHY ARE NEW PRODUCTS IMPORTANT?
“New and improved!”1 You see it everywhere. Why? New products are fun for customers,
they’re fun for employees to work on, and they fuel the company’s income.
Companies, like people, are ever evolving. The primary way that companies make changes
is by offering so-called new and improved goods and services to customers. Companies
seek to improve their current products for numerous reasons: a simple point of corporate
pride, to be consistent with an image of being innovative, as an effort to better satisfy
current customers or attract new customers, or to stave off competition. Having achieved
some success with its existing portfolio, the company poses a question with product devel-
opment: What else can we do that might appeal to customers and that is something we’re
likely to be able to do better than our competitors? How can we leverage our strengths and
technical advantages? How can we serve new markets?
Change is inevitable. The macroenvironmental context continually shifts, and trends
in demographics create predictable transformations in markets and in customer demands
for new and different products (which we’ll discuss later in the chapter). For example, the
availability of natural resources—even simple supply-side basics such as oil, wood, and
sugar—have implications for many companies.
Change is good. New products increase a company’s long-term financial performance
and value.
8
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
How to develop new products and introduce them to customers?
What is the “product life cycle”?
How do new products and extensions �t in marketing strategy?
What trends should I watch?
Managerial Checklist
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
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110 Part 2 Product Positioning
And change is fun! From the customers’ point of view, if you like cars, you can’t wait to
see next year’s models. If you like fashion, you eagerly anticipate each new season. If you
like movies, you can’t wait until Friday. From the marketing manager’s point of view, it’s fun
to work on a new project, to be a part of offering something new in the marketplace, and
to watch the customers respond (ideally) positively!
In this chapter, we’ll look at the process of new product development and the stages of the
product life cycle. We’ll examine strategies to maintain strong product portfolios, and, as already
implied, we’ll need to keep a close eye on our classic Cs: change in the business context, strengths
of our company, our customers’ desires, and possible collaborator and competitive actions.
8-2 HOW DOES MARKETING DEVELOP NEW
PRODUCTS FOR THEIR CUSTOMERS?
Companies differ in their approaches to designing new products. Some pride themselves
on being innovative, whereas others are more conservative, launching me-too products
after other companies break new ground. We’ll see that one of the primary philosophical
differences is in how and when companies involve their customers. We’ll then see how the
process typically unfolds.
8-2a Philosophies of Product Development
Ideally new product development involves conversations and interactions with the
customer, but companies differ in how much they draw from customers relative to how
much they emphasize their own assertions. These differences are referred to as “top-down”
(when a company thinks up a new idea, develops it, and doesn’t involve the customer until
somewhat later in the process) or “bottom-up” (ideas spring from the customers them-
selves, and the company then pursues them in development). The top-down approach is
often favored in companies with technical expertise (e.g., engineering and medical), but
both approaches have their strengths, as we shall see.
Top-Down. The process of developing new products depends first on a company’s culture.
Some companies take a nearly exclusively top-down approach, beginning with idea gener-
ation, proceeding to design and development and then to commercialization. Marketing is
essentially an afterthought, something to help with the final launch phase to introduce the
product to customers.
A top-down approach is found frequently among companies with strong engineering
orientations, pharmaceutical and biomedical firms, financial services, and many high-
technology companies. The internal R&D team has expertise that the end users lack.
So it creates cutting-edge products (e.g., a new computer, pill, mutual fund, TV), with such
advanced technological benefits and advantages that seem so obvious to the experts that the
team believes the product will sell itself.
This approach is the build-a-better-mousetrap phi-
losophy, and it has facilitated zillions of successful new
products. It’s not necessarily a simple process, or a partic-
ularly quick one (e.g., drugs spend years in development).
Furthermore, the process can be top-down for poor reasons,
such as a CEO with a pet project who won’t let it go.
Top-down is sometimes also called “inside-out”
because the idea comes from within the company. Feed-
back from the outside (customers, suppliers, etc.) is sought
Change is good, and
change is fun!
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111Chapter 8 New Products and Innovation
later in the process. As long as any feedback is obtained from customers, this can be a
perfectly fine approach. It is indeed usually the case that such companies can envision more
cool new products than their customers could have articulated.
Bottom-Up. If this process is called top-down (or inside-out), its opposite should be
called bottom-up (or outside-in), but these days it’s referred to as “co-creation” (with the
customer). The truth is, in the real world, neither extreme occurs—i.e., where the engineers or
IT guys are consulted and the customers are not, or vice versa. So the difference between
these styles is just a matter of when and how frequently feedback from customers and
business partners is sought.
8-2b Marketing
In marketing-oriented companies, customer feedback is sought at most phases in the
process. As is true of most marketing phenomena, consumer packaged goods companies
(and those that provide some simple services) excel in the iteration between thinking up
what the company can create and testing that with customers. Even the kinds of companies
that have traditionally ignored marketing are becoming increasingly aware of its impor-
tance. Mercedes-Benz says, “Here’s our new car; you’re lucky if you can buy it.” And they’re
right. Whereas Honda says, “We can configure all kinds of features and services for our
cars. What would our customers want?” And they’re the better marketers.
The new product development process might sound simple: Get an idea, develop it,
put it out in the market. As Figure 8.1 indicates, for most products, the process is more
complicated. For example, a great deal of refinement occurs throughout the entire process,
including winnowing ideas and tweaking them in-house.
Idea
Generation
Market
Potential
Concept
Testing
Design and
Development
Beta
Testing
Launch
Figure 8.1
New Product
Development
Process
The figure is also a little misleading because it looks linear and straightforward (step 1,
step 2, etc.) when in fact, a lot of iterations occur. A decision may seem appropriate, and
then, in subsequent stages, the earlier decision becomes untenable. It may seem obvious
in the abstract that we shouldn’t continue to push forward with something that is already
known to be problematic. Unfortunately, that happens a lot (e.g., people tout sunk costs,
want to meet preannounced launch dates for PR or investors, don’t want to create political
waves). Clearly it’s better to revisit decisions and get things straightened out, even if it may
feel disappointing to go backward temporarily or to seem to be slowing down.
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112 Part 2 Product Positioning
Marketing management is involved throughout. In the early stage of idea generation, a
knowledge of customer needs and wants interact with corporate and marketing strategies
to see what potential new products makes sense for the firm. Marketing research should
also be involved in all the refinement phases and in the decisions about the marketing
mix that must be made as the launch approaches. Ideally, all the marketing components
(e.g., pricing, packaging, channels) are treated holistically from the beginning of the pro-
cess through to launch; thus, as the product concept is refined, so are decisions about retail
outlets, price points, etc., in order to offer the customer a consistently positioned product.
Let’s look at the new product development process in greater detail.
8-2c Idea Creation and Market Potential
Ideas can come from anywhere (see Figure 8.2). If necessity is the mother of invention, one
source of new products is marketers’ observations of the world around them. This nonsys-
tematic, qualitative form of marketing research helps marketers identify customer’s prob-
lems that might be solved with products the firm could offer. Your kids don’t like brushing
their teeth? No problem; our toothbrushes light up like a game.
Solving Problems
The Shanghai Automotive Industry Corporation (SAIC) has created a concept car that will have
a negative carbon footprint. It creates an artificial photosynthesis process, like a plant, that will
enable the car to remove more pollution than it creates. The car is called, “Yez,” which is apparently
Chinese for “leaf.”
To help Mother Nature, a hyperabsorbent peat moss has been invented that cleans oil spills in
water. The moss is scattered on the oil spill and it absorbs the oil but not the water. The moss is
then scooped up like kitty litter, and, voila, there is clean H
2
O (Inhabitat.com).
Medical tattoos insert nanosensors to monitor conditions such as diabetes, which turn colors
when glucose levels change (Ideaconnection.com).
Figure 8.2
Where Do
New Ideas
Come From?
Internal
• The Boss
• R&D, In-house experts, Brainstorming
• Employees (e.g., suggestion box)
• Feedback from front-line, sales force
External
• Customers (complaints, lead-users, marketing
research—focus groups, scan blogs)
• Business partners (requirements to decrease
costs, requests to enhance quality),
• Competition
• Context (remember PEST); i.e., Trend-spotting
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113Chapter 8 New Products and Innovation
Ideas can come from observing social (or cultural or economic) trends, from listening
to customers, your sales force, or your frontline service workers. Ideas are often somewhat
serendipitous, but remember what Louis Pasteur said: “Chance favors the prepared mind.”
For example, Viagra was originally created to relieve heart pain. It wasn’t particularly
effective for that symptom, but users reported an interesting side effect. The rest is history.
The typical method of idea generation begins with good old-fashioned, coffee-fueled
brainstorming meetings. These sessions generate discussions on the basis of the classic,
“No idea’s a bad idea; let’s get everything up on the whiteboard.” Companies that pride
themselves on being innovative are increasingly putting real resources behind their claims,
including supporting employees’ allocating a day a month to work on their own pet
projects, to be assessed later and perhaps funded for development.
After many ideas have been generated and sketched out, the next step is in-house
winnowing and refinement. This is the phase during which we acknowledge, “Okay, maybe
some ideas are in fact bad ideas.” Ideas are screened for their plausibility in construction
and provision, their compatibility with corporate and marketing goals, and their likelihood
of success with customers. At this point, the expertise of the designers, engineers, chemists,
etc., are being balanced with the marketers’ knowledge of the target customer segment(s)
and management’s guidance about the firm’s identity. (e.g., Rolex doesn’t want to make an
affordable watch, and Disney needs to stay wholesome.)
While feasibility assessments and business analyses are somewhat fuzzy at this stage,
they are valuable exercises in making assumptions explicit: Who is the target segment?
What is its size? What competitors already seek their dollar? What products of our own
might we cannibalize? Do we have channels already in place for the distribution of this
product, or should we be studying those issues as well? How does the new product initiative
fit with our organizational goals and our marketing objectives? As the product develop-
ment process continues, teams can be assembled to investigate answers to these component
questions.
8-2d Concept Testing and Design & Development
At this stage in the new product development process, the company has a number of
ideas that it thinks might work, and it’s time to get customers’ feedback as to which ideas
sound the most promising. The form of the marketing research at this stage is usually
focus groups and, increasingly, web surveys (especially for technical target audiences). The
particular marketing research techniques used aren’t half as important as the fact that
any marketing research is conducted at all. This stage is the first of several during which
marketing research can save a company from a bad idea, yield information to tweak a half-
baked idea, or result in encouragement that the company is pursuing an idea with true
potential. Time and again, new product success (vs. failure) is attributed to good (vs. poor
or nonexistent) marketing research.
If focus groups are the vehicle of choice, then two to three groups (per segment) of eight
to 10 target customers are invited to see the concepts and offer feedback. These (one-and-
a-half- to two-hour) discussions can begin as broadly as asking the customers to describe
their uses of products in this category (e.g., household goods, foods, their driving habits,
etc.). The aim is to get background information that can inform the product development
or the positioning of the product via communications materials developed subsequently. The
concepts might be described verbally, but visual cues are very helpful. These visual aids can
be as simple as artist’s renderings, but they can be sleek photos or mockups and prototypes.
Still more complex is a rendering via virtual reality. Competitors’ products can be provid-
ed also, as a point of discussion, to get the customers to react to tangible, existing goods.
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114 Part 2 Product Positioning
Descriptions and photos (of proposed and existing products) can also be shown
via Web surveys.
In either a focus group or an online study, a conjoint procedure can be run. In a conjoint
study, different combinations of attributes are put together and compared. The customer
is simply asked which product combination sounds best, next best, and so on. From those
overall evaluations, the conjoint analysis derives which attributes matter more than others.
For example, the company may learn that it’s important for laptops to be light and powerful
and less important that they’re encased in color. For the attributes that customers care most
about, what are the levels sought; e.g., for qualities like a laptop being light and powerful,
clearly lighter is better, and more powerful is better. But for a segment that cares about
color, what do they want? High-tech gray? Neon blue? And if an important attribute is that
the laptop be “preloaded with lots of software,” what programs in particular do customers
want to see?
Conjoint is great because it gets at customers’ trade-offs. It’s not unusual for customers
to say they want the best of everything and—oh, by the way—at a really cheap price.
Typically a company cannot offer all of that profitably. So a conjoint allows the detection of
what price a customer is willing to pay for the loaded laptop, or, if the customer isn’t willing
to pay a high price, what features all-of-a-sudden become less important. That is, what
features are they willing to trade off?
After the marketing research conducted in this concept testing stage, the marketing
manager has a better sense of which products and features seem to be the most attrac-
tive to customers. Internally, the second major winnowing-and-refinement phase critically
assesses the paths that no longer appear to have potential and should be discarded or tabled
(e.g., those that require advances in technology or societal acceptance), and those that cus-
tomers find appealing or might with further modifications.
“Marketing Research is Important,”
Says P&G!
Marketers point to Procter & Gamble and say that the company learned about the importance of
marketing research after a slump in the 1920s and hasn’t had to relearn the lesson.
Insights from customer feedback are often quite eye-opening. In-house experts assume
they know what’s best and are frequently surprised by customers’ reactions. When customers
do not like the proposed products, the experts can be dismissive, regarding the customers
as stupid. Nevertheless, those unenlightened souls comprise the target purchasers; hence
the difficulty lies in the product or the vision, which apparently isn’t being communicated
clearly. For example, it is not unusual for creators of high-tech gadgetry to overload
their new products with all kinds of whiz-bang features. Yet customers’ reactions can be
lukewarm because the multitude of options and capabilities seems overwhelming, and the
product seems difficult to use.
Another round of refined-concept testing might occur if ambiguities remain, or if suffi-
cient changes were made that the reactions to the initial concept are likely to be no longer
relevant. When the company is confident it has a handle on which product to develop, it
begins to do so. Usually only a single prototype is developed, rather than multiple proto-
types, in part because development can be expensive but also, more humanly, because the
issue is about narrow attention spans. It’s just easier for the product development team to
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115Chapter 8 New Products and Innovation
focus on one product at a time: If one product development goes forward, great, otherwise,
it’s back to the drawing board to work up the next one serially, rather than process several
in parallel.
8-2e Beta-Testing
At this point, a beta version of the product is made available for trial and consumption.
Ideally, the product is used in the consumer’s home or in as similar a setting as possible
to simulate a real-world purchase decision and evaluation, for more accurate forecasting
later.
While the product is being developed, so should be the marketing materials. Their early
development and refinement will help make consistent the positioning information being
absorbed by the customer. Thus, while products are being shown to customers for their
reactions, advertising copy is also shown to them, price points are made clear, distribution
and availability are explained, etc. Showing the customer the marketing information both
helps clarify the image of the product and allows the company to get feedback on the
marketing information itself.
The marketing manager now has evidence of customer potential, and the product has
been repeatedly refined. It’s time to try the product in the market on a small scale, before
a more expensive full-scale commercial rollout.
Thus far, the marketing research has been comprised of fairly tightly controlled stimuli:
A product and ad and price are shown to a set of customers, and their reactions are noted.
Even if competitors knew of the new product development efforts, they cannot inter-
fere with the tests being conducted. Yet, when customers are sitting in a focus group or
answering questions online, they know they’re doing something out of context (it feels
weird); their behavior isn’t likely quite the same as what it will be in the natural market-
place environment (e.g., at a grocery store, at the mall, or at Amazon). So the idea under-
lying test marketing is to try to simulate a real-world setting to help customers’ reactions
be more predictive of their subsequent actual purchasing behavior when the product is
launched.
Area test markets are a neat idea. Some 40–50 small metropolitan areas throughout the
United States are known to marketing research firms as having characteristics (e.g., demo-
graphics, socioeconomic status) that are representative of the country as a whole. A few
(two or three) of these areas are randomly sampled to be test markets, in which the product
is made available for purchase (and the remaining areas serve as control markets). Ads are
run in the test markets, deals are made with the local retail chains, etc. Sales are observed
through the test period (three to 12 months) and compared to sales in the control markets
in order to give the company a sense of how well the product is likely to sell.
Area test markets aren’t used that frequently any more, mostly because they’re expensive.
They require setup that, while small-scale, nevertheless requires manufacturing, machines,
personnel training, etc. They also signal to competitors, who are living and observantly
watching in those test markets, just what might be coming down the pike, and many a
lawsuit has been filed over a product that has been scooped by a competitor. Finally, each
of those areas, while chosen for being fairly representative of the broader target population,
can have their own local flavors and oddities that can bias the results in unpredictable
ways; i.e., if sales are high in one area but low in another, did something about the markets
spuriously inflate or suppress sales?
Electronic test markets are also a cool idea. A sample of metropolitan areas is select-
ed, and, within each market, some households are designated to be test and others to be
control. All the local context is therefore equated (local TV stations, newspapers,
local stores, local brands, cultural interests, etc.). So whatever differences exist between the
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116 Part 2 Product Positioning
households’ purchasing is more cleanly attributable to some households having exposure to ads
(e.g., via cable transmissions not sent to the control households) or having access to the
product (e.g., in stores closer to their homes), etc. Given the tighter constraints, the validity
of the electronic test market dominates that of the area test market.
Today, simulated test markets are the popular means of premarket launch tests. A customer
is recruited (e.g., via email) to go to a website, where they are given a budget and have an
opportunity to buy the new product, which is offered among competitors’ or related prod-
ucts. Virtual grocery store aisles are displayed (sometimes in 3-D or virtual reality, but often
just in a 2-D view) that provide the same information the customer would see on a typical
trip to the grocery. There would be row after row of pictures of competitors’ products, and
the new product embedded, on the “shelf,” as it would be when eventually launched. The
marketer is looking for how often the new product is selected in this quasi-realistic context.
The advertising materials would be available with competitors’ ads and offered subtly
(e.g., in the context of a popular magazine), or TV ads would be inserted into natural
commercial breaks of shows the customer might be asked to view. Marketers would watch
the “purchases” of the new product, and the customers would be asked to fill out a litany of
survey questions. All of this customer data would be used as inputs to sales forecasts.
8-2f Launch
In the final steps toward commercialization, both time and money matter. Let’s consider
money first.
Forecasting. Upon completion of the test marketing, the marketing manager takes the
customer data and tries to predict the product’s likely success. If the predictions of sales are
not promising, this stage is the last opportunity for the company to abort before launching
(and likely failing). If the predictions are promising, the company will proceed to commer-
cialize. The forecasting numbers are useful throughout the organization—to accounting
and finance for budgeting purposes, to the sales force for setting goals, to production and
logistics for planning regarding equipment, storage, and transportation, etc.
Forecasting can be highly technical, but here’s a simple formula to get a sense of
the basic logic. The goal is to estimate the sales potential ($SP), which is not the same as
estimated sales but more like a ceiling.
The first estimate we need is the market potential (MP); that is, how many units
might possibly be sold. Recall the chaining model approach from Chapter 4 on targeting.
We might start with secondary data (e.g., the size of the target potential by census
demographics) or with other relevant in-house benchmarking data. For example, if
the new product is somewhat like a current offering, as with a brand or line extension, then
the company would know its numbers for the existing product.
The next piece is the estimate of purchase intention (PI), or the likelihood that the
target segment will buy the product. This number comes from the most recent marketing
research that was conducted. Let’s say that, among the customers sampled from the target
population, the average stated purchase intention was p = 0.7. It is important to know that
customers predictably overstate their purchase intentions. Companies with databases of
past new product launches can look to compare the PI vs. realized sales and adjust accord-
ingly. For companies without such experience or data, research has suggested ratcheting the
estimate downward by a factor of ¾. Thus, if the data said p = 0.7, the estimate to be used
in the forecasting would be PI = ¾ (0.7) = 0.525.
Finally, the component that is under the company’s control is the price the company
intends to charge (Pr). (Of course, as economics would tell us, the components in the
equation aren’t entirely independent; PI is likely to increase a smidge as Pr drops.
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117Chapter 8 New Products and Innovation
That’s why the marketing mixed should be tested with customers along with the product
itself.) These pieces come together in this equation:
$SP = MP × PI × Pr.
For example, a mid-level electronics manufacturer has developed a cell phone that
allows users to be represented as holographic avatars. The holograms are not yet particularly
realistic-looking, so the designers simply created avatars that resemble cartoon characters
more than real people. As a result, the company thought the product would likely appeal to
kids more than adults. Very young children are not likely to have their own cell phones yet,
so the company has in mind as a target population kids from 13- to 15- years old.
In cooperation with a national cell phone carrier, the electronics firm is test-marketing
its holographic avatars, or holotars for short, in an affluent Dallas suburb, and of course it
will want to extrapolate the findings to the broader US. The population estimate of the US
is a little over 300 mm (million). Of that number, the US teen population is 33 mm, and
roughly one-third of them are assumed to be in the 13- to 15-year-old age bracket. From
cell phone industry statistics, let’s say the company learns that about 20% of eligible target
customers are likely to purchase this model of phone. Based on those gross secondary sta-
tistics, an upper limit estimate for MP is some 2.2 mm (= 33 mm ÷ 3 × 0.2) young teens
to whom the holotar phone is targeted. If testing suggested that PI (with the correction
factor already included) is 0.525 and if the company plans on charging $99 for the phone,
then the estimate is:
$SP = 2,200,000 × 0.525 × $99 = $114,345,000
That number is not profits; it’s (potential maximum) sales with no development or produc-
tion or marketing costs factored in yet. Is that number good news, or is it barely enough
to make the company bother? If corporate decides that’s a worthy goal, then the next step
is to launch the product, which means that finally, after months and sometimes years in
development, the product sees the light of day. Woohoo!
New products
forecasting
is hugely
important
for Pharma
companies.
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ax
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St
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118 Part 2 Product Positioning
Timing. New product development can move along fairly speedily for straightforward
brand or line extensions in the context of a mature consumer packaged goods company.
In other settings, the development process can seem torturously slow. For example, phar-
maceutical testing begins on animals2 (for months to years), and then the drug is tried
on 20–100 healthy patients (for months) to check basic safety (e.g., side effects). Next, the
drug is tested on several hundred patients with the particular disease (from three months
to two years) to continue to check safety and to add checks on efficacy. Finally, hundreds to
thousands of people (healthy and sick) are observed (for one to four years) to check safety
and efficacy and to tweak dosage.
Time is indeed money, and, to recoup the cost of this extended testing and investment,
pharmaceuticals spend $20 billion annually on promotional efforts, e.g., providing retail
samples to doctors. D2C (direct to consumers) pharma advertising is growing like crazy
(doubling every two years). It is interesting to marketers and salient in business news be-
cause of its novelty, but as yet it is actually still fairly small in size (e.g., 5–10% of sales).
There can also be external, regulatory delays to product launches:
• The FDA (Food and Drug Administration) is trying to reduce the length of time
to market with shortcuts on clinical trials. Yet every action is met with an equal and
opposite reaction, and the FDA is under investigation for pushing drugs to market
too quickly (arising from problems with drugs that produced rare but serious side
effects).
• Other industries voice complaints about delays by analogous approval agencies, such
as patent offices. Some big companies ask for court intervention to speed things up
so that they don’t lose millions of dollars in opportunity costs.
• Comparable issues occur with copyright registrations for intangibles like software,
movies, video games, music, and architectural plans. A current controversy concerns
when a copyright takes effect. Is the material copyrighted when it’s registered, or is
it sufficient to have simply filed and applied for the registration?
Product Development Challenge
Businessweek.com reports a Boston Consulting Group study in which “length development times”
was the #1 obstacle in innovation.
8-3 WHAT IS THE PRODUCT LIFE CYCLE?
Another reason that new products are important is that the company’s product portfolio
may be aging. The product life cycle is a popular metaphor in marketing to describe the
evolution and duration of a product in the marketplace (see Figure 8.3). Just as people
are born, grow, mature, and eventually die, products are thought to go through a similar
life cycle. The stages are:
1. Market introduction (the new product development phase we’ve been discussing)
2. Market growth
3. Maturity
4. Decline
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119Chapter 8 New Products and Innovation
Sales and profits behave predictably during the different phases (indeed, usually the phase
in which a product exists is determined by these indicators), and the marketing actions that
are thought to be optimal during each phase are also clearly prescribed.
B
ea
uc
o
up
$
Sales $
Profit $
Decline stageMaturityIntroductory Growth
Z
er
o
$
Time
Figure 8.3
The Product
Life Cycle
(PLC)
During market introduction, a new product (good or service) is brought into the market-
place with heavy marketing spending (e.g., communications to spark awareness). In addition
to advertising to provide information and attempts at persuasion, promotion can include sam-
ples and coupons to spur trial. Strategically, prices might start low (penetration), but they of-
ten start high (skimming) in part to recoup development costs and in part due to the fact that
early on there is little competition. Distribution is somewhat limited in these early phases, and
all of these factors contribute to the typical result that sales are low and slow in the beginning.
The second phase is market growth. Sales accelerate and profits rise at first. Customer
awareness is stronger, and there may be some buzz in the marketplace. Distribution channel
coverage is greater, so access also contributes to stronger sales. The firm might be able to
begin increasing prices (resulting in higher margins and greater profits). At the same time,
competitors observe the pioneering company’s successes and start sniffing profit potential,
so they enter the game. Competitors either kill each other off, or they begin to specialize a
little, identifying emergent segments to which their products can be tailored and targeted.
The initial firm can sustain the competition if it had had enough foresight to have launched
a product with some reasonable edge of a competitive advantage and if the product can be
slightly altered to maintain distinctiveness (and supporting possible price maintenance for
interested segments). At this stage, advertising is intended to persuade customers that the
brand is superior to all competitors’ brands.
At some later point, a product nears market maturity. Advertising continues to try to
convince customers of a brand’s relative advantages and serves as a reminder to buy in the
product category. Products may proliferate to a fuller product line in order to satisfy more
segments of customers. Industry sales have leveled off, so competition is intensifying; there is
more competition than in any other stage in the life cycle. The stiff competition has induced
higher marketing costs and likely lower prices; thus, while sales are stronger than ever, profits
have declined. In addition, the pie is no longer growing in size, so strong competitors gain
market share or increase their sales only by taking it away from other competitors. Hence,
weaker firms begin to fall out of the marketplace. In addition, because firms are going after
each other, their product offerings often begin to homogenize to the point that customers see
fewer distinguishing characteristics. Instead of swirling into price drops with competition,
it’s smart to try to find new benefits and to either increase or at least maintain current prices.
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120 Part 2 Product Positioning
The final phase in the product life cycle is market decline. Sales and profits are both drop-
ping, and new products are replacing older generations. The firm needs to decide what to
do with the old product.
• Sometimes it is divested. If this route is taken, the decision should be made as
early as possible because the best sales price is obtained if it is sold off early, while
the product still looks attractive to another firm. Unfortunately, early timing for
divestment is difficult to judge; often companies aren’t sure the product has quite
hit the decline stage, and they aren’t willing to give up on it. So they hold onto it
until it is typically too late to be sold off, i.e., it is no longer a desirable investment
for another firm.
• An old product can be “harvested.” The firm reduces supportive and marketing
expenditures in order to extract more profits. They’re merely milking the product,
and they know that demand will continue to drop.
• Perhaps the happiest prognosis for a dying product is when a firm wishes to rejuve-
nate it, as in “new and improved!” The product is refurbished to have new beneficial
features that the target customer might desire.
While the product life cycle is an intuitively appealing metaphor, critics point out that it
is just that, a metaphor. They point out that brands and products are not organic; therefore
they don’t have to die. They argue that the life cycle is actually a self-fulfilling prophecy;
e.g., when a firm determines that a product is mature, it might lessen the advertising sup-
port, in effect causing the product’s decline.
The lengths of product life cycles vary a lot. Researchers point to the short lifespan of
movies (years and millions of dollars spent in development for only a few weeks in the-
aters). Yet movies are “born again” or “reincarnated” (to continue the life cycle metaphor)
into international box office, cable, DVD rentals and sales, with each reincarnation reinvig-
orating the product and sales, albeit in a different guise and to a different target audience.
Other products and brands, such as Coca-Cola, Tide, or Holiday Inn, seem to be in that
juicy sales phase of “maturity” for an extended life.
Finally, the length of product-category life cycles tends to be longer than those of in-
dividual brands. That is, a particular movie might not live a long life, but the category of
movies is 100 years old. Or the macro level category of sports is a healthy and very mature
product, but one could point to NASCAR as an example of a recent, young subproduct
with explosive growth.
8-3a Diffusion of Innovation
In addition to the marketing actions underlying the product life cycle, marketers have also
developed a theory about what customers are doing during these phases as well. The con-
cept is that new products are like, well, contagious diseases. If a person with a cold is in
a room full of people and sneezes, think about who will get sick the soonest: the people
closest to Sneezy.
A similar phenomenon is thought to occur when a new product is introduced. The
friend in your circle who likes new high-tech gadgets will get a new electronics toy (busi-
ness instrument) and show it to all his friends. They’ll ooh and ah, and, the next thing you
know, some of them have the new toy as well, and they’re telling their friends. Or the friend
in your circle who likes movies will naturally read more and know more about what new
movies are coming out. She will be among the first to see the new show, and she will then
inform all her friends about the movie and recommend that they see it or not. This word-
of-mouth or “viral” marketing helps activate the process of the diffusion of innovations.
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$
Sales
Profit
Time
Intro Gro
wth M
aturity
Decline
Goals
First-time
buyers
Encourage loyalty
Attract new buyers
Product
One product Twe
ak product N
ew features
Reduce number
of products
Price
High Red
uce to compete
Maintain share
Lower if still profit
able
Promotion
Give
Information
Compare to
competitors
Reminders
Cut to stay profitab
le
LC
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Anatomy of a Product Life Cycle
PLCs are different for brands, industries, technologies, markets . . .
Toy
sales Industry
Global
ticket sales Video games
DVR
release
(Fad) current
must-have
video game
Movie
sales
U.S. box
office
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122 Part 2 Product Positioning
The model itself is pretty simple. Marketers posit a normal curve (see Figure 8.4) and
partition the customer base into groups. The so-called innovators are the first 3–5% who
like to try new ideas and are willing to take risks. They tend to be relatively educated and
confident in assessing information about a product on their own. (Note that you might be
an innovator with electronics and not movies, or vice versa, and that some people are inno-
vators across multiple categories. You tend to be an innovator in the product categories in
which you have greater involvement unless you have an overwhelming risk-aversion streak
that just dampens everything.)
∼
2.
5%
“
In
no
va
to
rs
”
∼
13
.5
%
“
E
ar
ly
a
d
o
p
te
rs
”
∼
34
%
“
E
ar
ly
m
aj
o
ri
ty
”
∼
34
%
“
La
te
m
aj
o
ri
ty
”
∼
16
%
“
La
g
g
ar
d
s”
N
um
b
er
o
f
ad
o
p
te
rs
in
a
g
iv
en
p
er
io
d
Time
Figure 8.4
Successful
diffusion of
VFusion de-
pends on the
product and
on the target
customers
The early adopters are the next group (10–15%); these
are even more influential as opinion leaders, primarily be-
cause they are a bigger group. This group is so influential
that the loss of one of these early adopters costs the firm
more than the loss of later adopters.
The early majority (34%) are more risk averse than the
first two groups. They’re waiting to hear that the early
adopters have had favorable experiences with the new
product.
The late majority (34%) are even more cautious, often
older and more conservative, and wish to buy only proven
products.
The final group, the laggards or non-adopters (5–15%),
are the most risk averse, skeptical of new products, and
stereotypically lower in income (and so perhaps cannot
afford to be risky with their purchases). Sometimes the
product category has no relevance to them (e.g., your
grandfather probably doesn’t appreciate the features on
your new phone).
The curve of new adopters at each point in time (in
Figure 8.4) can be recast to show cumulative sales—the
number of adopters thus far at each point in time, such as
the S-curve in Figure 8.5. The point at which the sales rate
increases rapidly—when sales take off—is determined
New! I coulda
had-a V8, with
energy!
So
ur
ce
: p
in
te
re
st
.c
om
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123Chapter 8 New Products and Innovation
via calculus as the point of inflection in the curve. In contemporary parlance, it’s referred
to as the “tipping point,” the point at which the product or idea catches on and moves like
wildfire throughout the marketplace.
C
um
ul
at
iv
e
sa
le
s
($
)
Point of inflection;
“tipping point”
Figure 8.5
Cumulative
Diffusion
Number of
customers
adopting at
time t
Coefficient
of innovation
(avg. 5 0.04)
Coefficient
of imitation
(avg. 5 0.30)
Max possible; total number of
customers in target segment, all
of whom will eventually adopt the
innovation (i.e., market potential)
Number of customers
who have already
adopted the
innovation so far
(at time t 2 1)
nt
Nt21
M
p 1 q 1M 2 Nt2121 2435 Figure 8.6Model of
Diffusion
Marketers have forecast sales using this logic. In the equation in Figure 8.6, we are try-
ing to forecast nt, the number of units we will sell during time period t. The prediction is
a function of several components: Nt − 1 represents the number of units we have sold so far
(cumulative sales in units). M is the max on the likely market potential. The term on the
right, (M − Nt − 1), means, how we are doing so far: What’s the difference between what we
could sell (M) and what we’ve sold so far (Nt − 1)?
Traditionally the pieces that interest marketers are the parameters p and q. The first, p, is
called the coefficient of innovation; it’s the likelihood that someone will buy or adopt the
new product due to information obtained from the marketer. The second, q, is the coeffi-
cient of imitation, the likelihood that someone will buy or adopt the new product due to
word-of-mouth information obtained from another consumer (e.g., an innovator).
There are two different ways the diffusion model has been used. First, we can observe
early sales data, fit the model, and make predictions about the future. For example, once
sales begin, we’ll have numbers for nt and Nt − 1 (t can be yearly data, quarterly, weekly,
hourly, etc.). We conduct market sizing exercises (Chapter 4) to obtain an estimate for M.
We then solve for estimates of p and q. Alternatively, we can use past results on products
similar to ours and plug in those numbers to make predictions about the future even before
launching the product.3
The imitation effect (q) is usually bigger (p:q is about 1:10), and, if you consider the mas-
sive size of the majority in Figure 8.5, it’s easy to see why. The percentage of innovators and
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124 Part 2 Product Positioning
early adopters (the customers who are driving p) is about 10–15% of the market, whereas
the remainder of the market (the majority, etc.) is 85–90%, and they’re driving q. Marketers
can speed up innovators (make p bigger) by introducing price decreases early, or they can
speed up imitators (make q bigger) by introducing price decreases later.
Marketers are interacting with customers throughout these phases. The first job in a new
product launch is heightening awareness, traditionally done through advertising. Advertis-
ing can be expensive, and marketers have long known that, if they have a hot product, word
will spread like wildfire, and the buzz will do the job of advertising—for free. In diffusion,
word of mouth increases the size of q, the imitation effect. The question is how to identify
the opinion leaders, or market mavens, and activate their networks. This topic is so import-
ant that we’ll focus on it in Chapter 13, when we consider social media.
8-4 HOW DO NEW PRODUCTS AND BRAND
EXTENSIONS FIT IN MARKETING
STRATEGY?
We’ve been examining the new product development process, the product life cycle, and the
diffusion of innovation. Let’s zoom back out and check in on the marketing Cs. A com-
pany can begin its new product plan internally by identifying the corporate and marketing
missions and objectives to be achieved via the new product or service. Applying SWOT
analysis, the marketer asks of the company: What are our strengths and weaknesses? Of the
industry, the question is: What are the opportunities and threats?
It should be clear that customers are important in the feedback they provide in the new
product development process. A number of factors influence customers’ acceptance of new
products and the diffusion of the innovation throughout the marketplace. Customers will
ask: What is the benefit of this new thing? Why should I buy it?
Consumer acceptance tends to be higher when the new product:
• Has a clear relative advantage over existing products.
• Is compatible with the customer’s lifestyle.
• Is not overly complex, or the complexity is masked by a user-friendly interface.
• Is easily tried or sampled in order to facilitate initial assessment.
The customer is important from the beginning, when marketing identifies the target and
conducts market analyses to begin to project sales forecasts (e.g., estimating size, growth,
customers’ unmet needs, trends, etc.).
Competitor analysis is integral to the mission planning in that the differentiating
benefits of the new product (sustainable competitive advantages in the value proposition)
must be clear. For instance, customers can ask, “How is yours better than the competition?”
And competitors can ask, “Why don’t we offer the same thing—even better?” Compet-
itor analyses also take the form of identifying which industries and companies are truly
competitors and guesstimating their likely reactions.
Most companies offer multiple product lines, so they’re constantly balancing the stra-
tegic needs of products at different points in their life cycles. Different stages in the life
cycle require different investments; e.g., periods of growth need cash, while periods of
slower growth might generate cash to be reinvested to maintain share. For new service
innovations, some of the R&D investment is the training of employees before the service
is launched as operational.
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125Chapter 8 New Products and Innovation
Much like the personalities of people in the diffusion of innovation, companies vary in
whether they desire to be known as cutting edge. Some companies value their reputations
as innovators, and their business relies on new product market growth. Other companies
are more comfortable in their roles as reactors. They might not be the innovators, but
they can be quick responders, coming to market soon with slightly different attributes
or with better price points, for example. Finally, later companies may be more risk averse
or not aggressive marketers, and they offer a product only when it’s clear that customer
demand exists.
Much research has been generated investigating each of these strategies. Market
pioneers have difficulty with really new products. The first to market is often the first to
fail. A new concept takes awhile to sink into the minds of customers. By comparison, first
movers may have advantages in launching incrementally new products because there is less
risk. In either case, after the first firm, the next few early follower firms have approximately
the same survival risks when launching either the really new or the incrementally new
products. Next-generation products (e.g., smartphones, desktops, video games) are easier
to launch because there is an existing customer base, channels of distribution, and much
more predictability.
8-4a Strategic Thinking about Growth
Marketers have to be smart about where all these new products fit into their marketing
and corporate portfolio. It’s true that some things in life are serendipitous and that we
might occasionally behave opportunistically, but, as a company gets bigger and bigger,
lots of people are counting on a product’s success. The top folks need to show they have
vision, know where the company is going, and not react willy-nilly to whatever’s going on
around them.
The strategic paths to growth that marketers typically talk about may be classified by
whether you stick to your current product mix and take it to new target segments or you
generate altogether new products. That’s all it comes down to new stuff or new peeps.
Figure 8.7 shows the matrix of growth opportunities.
Current products
Current
markets
New
markets
New products
Market
penetration
Product
development
Market
development Diversification
Figure 8.7
Growth
Strategies
Market penetration means we’re hunkering down and trying to sell more—the same
stuff to the same customers. If the customers are not completely tapped, this is certainly the
easiest of all the four strategies. We don’t have to make anything new, and we know how
to reach these customers. Companies strive for more sales (via this strategy) by suggesting
new ways to use the product, by opening more stores, or by improving the marketing mix
(more intriguing advertising, better pricing, better reward program, better in-store service,
better store ambience, etc.).
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126 Part 2 Product Positioning
Product development is for the company that wishes to be innovative. New or modified
products are offered to the current customer base to keep them happy. These new products
may be as dramatic as brand and line extensions, but often they are modest extensions
(e.g., larger sizes, new flavors, different packaging, etc.).
Market development is the path we take when we’re settled on our product mix and
we think there are more segment opportunities to target. This path can be dramatic when
we launch our brand internationally, but it is also more often subtle (e.g., trying to appeal
to a slightly younger or older crowd, trying to appeal to men if the product mostly sells to
women, etc.). The product may remain the same, but, to reach the new target, we might
need to expand our channels and modify our promotional communications to create a new
image for that new target.
Finally, diversification is the toughest. We’re going after new customers with new prod-
ucts. If you think of the 2 × 2 matrix in Figure 8.7 as a game board and the company starts
in the upper left corner (market penetration), moving to the right (product development)
or down (market development) isn’t that difficult. From either of those places, it is easier to
move to diversification. But it’s just too big a jump for most companies to go from “doing
what we know how to do for the customers who like us” (upper left) to “doing something
we don’t have a clue about for customers we don’t know and who don’t know us” (lower
right). Baby steps: Go right or down. Then go down or right.
8-5 WHAT TRENDS SHOULD I WATCH?
It’s important to keep an eye on how the world is changing and the directions things are
going because trends form the context in which all new product forecasting occurs. Demo-
graphic, lifestyle, and cultural trends can boost or constrain the success of a new product.
Perhaps the most stunning demographic trend in America and Western Europe is
the aging of the population (e.g., more elderly, fewer kids and teens). In 20 years, 20% of
Europeans will be 65 years old or older. Sheer age carries both health and wealth concerns.
Aging brings greater health care needs because the populace will experience predictably
more rheumatoid arthritis, osteoporosis, prostate problems, etc. Supplemental health en-
hancement industries will also grow. For example, in the vain attempt to delay the aging
process, witness the growth of botox and health spa consumption. And to help with those
creaky old bones, people in the US are retiring to the sunbelt (Southern and Western
states), which will have huge real estate and retail implications.
A wealth implication of aging revolves around whether retirees have prepared to be
financially independent. For example, in the US and Japan, people spend what they earn
(or more), so retirees are going to be hurting. Italy’s citizens are among the oldest in
First to Market is Not Always Best
A Fortune magazine article by Jon Birger talks about a “second mover advantage” in which Lowe’s
is compared to number one Home Depot. The second mover is in a good position. They watch what
number one does, and then they do something different (e.g., number two Target vs. number one
Walmart; PepsiCo vs. Coca-Cola). The number twos will do their best to compete on price, cost, oper-
ational efficiency. Lowe’s has wider aisles, brighter stores, and friendlier salespeople. Being number
one, you’re a natural target.
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127Chapter 8 New Products and Innovation
Europe, but they’re good savers. Germany’s age demographics and savings habits are some-
where in between.
Among other large-scale demographic shifts are the facts that in the US, 1 in 7 people
is Hispanic and that this subpopulation is growing faster than any others. The power of the
Hispanic consumer is therefore a substantial trend: They control nearly $1 trillion in spending
power, a number that cannot be ignored by any firm except the most niche or naïve of players.
Beyond simple demographics, numerous lifestyle trends should be salient when compa-
nies are considering new directions. For example, there are more wealthy Americans than
ever before, accompanied by an expectation that the number is still rising. Baby boomers
are in their peak earning years, and they’re becoming empty nesters and hence will have
more discretionary funds. Worldwide financial wealth is also tremendous; the top coun-
tries for numbers of millionaires are: the US (about 4.3 mm of them), Japan (2.5 mm),
Germany (1.1 mm), China (0.9 mm), and the UK (0.5 mm). The top countries for num-
bers of billionaires are: the US (536), Germany (103), India (90), Russia (88), Hong Kong
(55), Brazil (54), U.K. (53).
There is also a growing concern for the environment and corporate social responsibility.
For example, consumers are concerned about air pollution from transportation, and, in B2B
land, industrial equipment by-products are a concern. Companies are learning that green
marketing can be profitable; e.g., the use of agriculture for fuel would help both pollution
and farmers.
A final class of trends to watch would be cultural differences, across countries or even
sometimes within them. For example, university students take their online access for
granted, but consider these Internet penetration numbers: more than 80% in the US,
Japan, Germany, the U.K., France, and Korea, but less than 50% in China, India, Indonesia,
Vietnam, and Egypt.4
Clearly China’s sheer numbers are going to drive a lot of near-future phenomena.
They’ve been a strong manufacturing force for years, but their role has primarily been
behind the scenes. Now they are trying to break out into their own global branding
presence to demand better margins and to make a point of national pride (e.g., Beijing’s
cooperative with IBM to produce Lenovo). Yet, to put things into perspective, Japan’s
per-capita GDP is about $46,000, the US is about $48,000, and China compares at a
different level at $6,000.
Techno Trends
Apps: Apps are making many market transactions smoother, and more fun. There are apps to let you
try on a new haircut, voice changer apps, apps that ask questions to do a mood check, and apps that
wake you with gentle sounds. Trendwatching.com highlighted several new apps:
• WordLens lets travelers aim their phones at a sign or a menu to get a translation.
• Leafsnap uses visual recognition so that while out and about, nature hikers can take pictures of
a leaf and get their phone to identify the species of tree to which it belongs.
• Google’s Skymap lets astronomers and dreamers aim their phones at the sky to learn details
about the constellations they’re viewing.
• Maybe for a class project, you can create an app to estimate market size or fit a diffusion model
and become really rich!
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128 Part 2 Product Positioning
Lastly, other countries to watch would certainly be the fast-growing economies of the
BRIC (Brazil, Russia, India, China). Less prominent but perhaps even more promising
(given that US and Western European companies are getting tired of the issues they have
to deal with in India and China) are Egypt, Mexico, Poland, South Africa, South Korea,
and Turkey.5
MANAGERIAL RECAP
New (and improved!) products are fun to create, and they are crucial to a company’s growth. To develop new products, marketers go through
a process:
• From idea generation to testing the market potential, to concept testing, design and development, then beta testing, and ultimately
the launch (review Figure 8.1).
• Reinvigoration along product lines is important because products evolve through a life cycle:
� From introduction, to growth, maturity, and decline;
� Each stage is recognizable by its sales and profitability,
� And each stage carries standard recommendations for the 4Ps.
• Models can be used to forecast sales. Most include factors that reflect word-of-mouth or buzz marketing. Information technology is
facilitating viral marketing.
• A manager who wants to be seen as innovative and foresightful would do well to study trends.
Chapter Outline in Key Terms and Concepts
1. Why are new products important?
2. How does marketing develop new products for
their customers?
a. Philosophies of product development
b. Marketing
c. Idea creation and market potential
d. Concept testing and design and development
e. Beta Testing
f. Launch
3. What is the product life cycle?
a. Diffusion of innovation
4. How do new products and brand extensions
fit in marketing strategy?
a. Strategic thinking about growth
5. What trends should I watch?
6. Managerial recap
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129Chapter 8 New Products and Innovation
Chapter Discussion Questions
1. Consider the trends described in the chapter
(e.g., aging, heightening environmental concern,
or China). How will each affect the business you
are in (or were in before coming to b-school)?
2. Make a list of 3 of your favorite brands.
What would be a great brand-, or line-extension
that you would like to see developed as a
new product?
Video Exercise: Smart Car (12:52)
Smart USA, headquartered in Bloomfield Hills, Michigan, sells the Smart Fortwo: a two-passenger ve-
hicle that is produced in France by the Mercedes Benz car group. Smart Fortwo is the smallest car
sold in the United States, and it is the most fuel-efficient vehicle outside of the hybrid cars. Smart
Fortwo offers three different vehicle models, each with a different price point and a different pack-
age of standard equipment and options. When the Smart Car entered the U.S. market in 2006,
and before a full network of dealerships was established, Smart USA discovered that it needed to
connect with prospective customers in a different way. The company essentially took the Smart Car
to consumers by (1) using a reservation program so they could move ahead in the sales process as the dealer net-
work was being established and (2) conducting a 50-city road tour in 2007 where the vehicles were displayed and
promoted. The Smart Fortwo defies traditional target marketing, and it appeals to all socioeconomic strata and
cuts across all age groups. The reasons the Smart car appeals to different customer groups are price, size, and to
serve as a second or third vehicle.
Video Discussion Questions
1. What methods did Smart USA use to test market the Smart Fortwo car among prospective customers?
2. What trends are influencing the market potential of the Smart Fortwo car?
3. How does Smart USA utilize buzz marketing
MINI-CASE
Wild Foods
A huge, highly regarded consumer packaged goods firm wishes to branch into pet food. The company knows a lot
about packaging, communications, and pricing. It has a great reputation in trade so the channel partners should
be supportive. It figures that selling pet food can’t be all that different from their current strengths.
The company is beginning with cat food. It is developing product lines currently, and plans to launch within
6 months. About a year after that, they’ll follow with their dog line. The company has talked about developing
foods for other pets (ferrets, snakes, and hamsters), but to date, no firmer plans have been made.
The brand is going to be called Wild Foods and the new-to-the-world feature that the brand will offer is
that these canned goods will comprise wild animals. Instead of cat food being the same meats eaten by their
owners (e.g., beef, turkey, chicken, tuna), the foodstuffs will be mice, rats, crows, and pigeons (the company’s
first recipes).
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130 Part 2 Product Positioning
The company expects their new pet food line to be wildly received by pet owners—they expect that pet
owners will say, “Finally! A company that knows what my cat wants to eat!” The company also thinks it will earn huge
points from people concerned with the environment, given that they’re creating a useful by-product of large
populations of some unpopular animals usually regarding as vermin or pests.
Case Discussion Questions
1. In the company’s projection of their product line’s likely success, what assumptions do you believe
they’ve made, and do you agree with all of them?
2. What kinds of pre-launch marketing questions, about any of the 4Ps, do you have?
3. What kinds of marketing research would you suggest for them to address your concerns?
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131
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
How do demand and elasticity enter pricing decisions?
For low pricing, check “break-even”.
For high pricing, measure customers’ price sensitivities.
Should we keep prices constant or allow changes
How to use prices to attract different segments.
Managerial Checklist
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
PRICING
9-1 WHY IS PRICING SO IMPORTANT?
Our mantra is that marketing is the exchange of benefits and costs between a customer and
a company. Yet most of the marketing 4Ps are focused outward, with the company attempt-
ing to deliver value to the customer by making a good product, making it available through
accessible channels, and communicating the product’s ben-
efits clearly. It’s price, though, that provides the company a
mechanism for obtaining value back from customers.
Marketers need to know how to set prices. Whether the
brand positioning is at the low end or high end, prices must
be set accordingly. To know how prices will be received and
affect demand, marketers have to understand how cus-
tomers perceive prices and price changes, like promotions.
Finally, we’ll see how to use price as a segmentation tool.
9-2 BACKGROUND: SUPPLY AND DEMAND
If you know supply/demand charts like the back of your hand, you might wish to skip this
section and go right to reading about “Low Prices.” If you’re not an economics whiz or
could use a refresher, read on.
How do you know if
the price is right?
9
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132 Part 3 Positioning via Price, Place, and Promotion
You learned in economics that demand tends to fall off as price goes up (Figure 9.1). If
a firm prices its brand too low, they could probably raise prices and pull in more money
(better margins and profitability). If the brand is priced too high, generally sales drop off.
So if prices are adjusted downward, then the volume of sales would pick up, and, again, the
company could pull in more money (better demand and greater volume in unit sales).
Pricing is easier to change than the other marketing mix variables (e.g., imagine chang-
ing the product itself, the communications, or the partners in the supply chain), but it is
still more complicated than it sounds. We’ll talk about the major approaches to pricing,
acknowledging that, while it all can sound very precise, there is always an element of trial
and error. Still, while we can acknowledge a need for wiggle room, pricing policies will be
smarter and even more readily revised if they are built on thoughtful, systematic planning.
A simple way to think about pricing is to consider price points that are low, medium, or
high. Figure 9.2 illustrates these three simple—and most frequently employed—pricing
strategies. The lowest sensible price is set by covering costs and then adding some margin.
The highest possible price is set by figuring out just how much a customer is willing to pay
and pricing near that mark. Competitive pricing is somewhere in between, using competi-
tors’ prices as a starting point and adjusting from there.
Note that the Cs of marketing directly affect pricing: The costs inherent to the company
help determine the low price point, the customer’s sense of the product’s value help deter-
mine the high price point, and what the competition charges helps determine a sensible
intermediate price point. Once you establish these three benchmarks for your brand, it is a
strategic move to choose among them.
There are numerous other considerations in setting prices, and we will examine them as
well. For example, pricing typically varies over the course of a product’s life cycle. Willing-
ness to pay varies across segments, so a firm might offer differential prices to those different
segments. Prices can have multiple elements that can be tweaked.
Figure 9.1
Demand
Curve/Line
P
ri
ce
High
Low
Less More
Sales (units)
Figure 9.2
Pricing
Strategies
Hi-End:
Price = Customer willingness
to pay − Markdown
Middle:
Cost-Based:
Price = Cost + Markup
$
Customer
Company
Competitor
Price = Competitor ± Fudge factor
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133Chapter 9 Pricing
Not only is pricing unusual among the marketing 4Ps in how easy it is to change, and
thus it is frequently tempting to do so. It is also true that the impact of changing price is
easier to measure than modifications of the other Ps. However, it is important to resist
dropping prices to enhance a quarterly sales bump because this is short-term thinking.
Pricing is not just about making money. It’s as important as any of the other Ps in terms
of sending a signal to customers, competitors, and collaborators regarding the positioning
and image of the brand. You’re sending a message to these constituencies: We’re low price
(a good value or just cheap?). Or, we’re expensive (exclusive or just overpriced?).
One might even argue that price is more important that the other Ps as a signal because
price is so clearly assessed by the customer. For example, customers might see an adver-
tisement for a retail shop and think, “Oh, the brand is upscale” but not be sure, whereas
there is little ambiguity in a high price tag. Or a retailer partner might think, “Gee, that
manufacturer doesn’t seem to be supporting that brand with service much anymore,” and
any uncertainty would be removed when the manufacturer slashes prices.
Thus, it’s worth being thoughtful about pricing. From a marketing perspective, pricing
should be about the customer. Let’s look at the variety of pricing strategies and figure out
how to choose among them.
Clearly your price point affects your profitability. If we define profit as
Profit = π = (Price × Demand) – (Fixed costs) – (Variable costs × demand)
= [(Price – Variable costs)] × demand – (Fixed costs)
then profits increase as price increases. Per the demand function in Figure 9.1, however,
demand typically falls off with those price increases. So we have to find a happy medium.
In another kind of marketing paradox, note that profits also increase as fixed or variable
costs decrease. Yet sometimes companies do things to enhance their brands, such as by
providing special services that raise costs. If instead, they were to cut those costs, it can of-
ten result in perceptions of reductions in quality in the minds of customers, thus indirectly
causing a drop in demand.
As the demand line in Figure 9.1 implies, at the ex-
tremes, we could get stinking rich by either selling some-
thing like gum for a really cheap price and selling it to ev-
eryone (i.e., go for volume), or we could sell something like
fine art for an exorbitant price and we’d need to sell only 1
or 2 pieces every once in a while (i.e., profit margin).
But what is that cheap or exorbitant price? If our gum
is selling like crazy, why not raise prices and make more
money? At what point would customers get annoyed and
walk away, thinking, “Forget it, it’s just gum, it’s not worth that price”? For that matter,
paintings don’t fly off the walls at art galleries; so if something’s not selling, how does the
gallery manager know that the special buyer is still to come as opposed to deciding that the
piece is overpriced?
These questions suggest that the oh-so-precise-looking line in Figure 9.1 has some wig-
gle room. Officially, that wiggle is known as “elasticity” or “price sensitivity.” One way elas-
ticity has been described is like this: If the company drops prices, there should be a volume
increase (more units are sold). The question is whether enough additional units will be sold
to “stretch” and cover the profits lost due to the price decrease.
Another popular interpretation of elasticity is from a consumer’s point of view: If there
is a price drop (or increase), just how much does demand (units sold) increase (or de-
crease)? If demand is barely affected, the demand is inelastic; if demand bounces around,
it’s stretchy and elastic.
Don’t cut prices! Increase
customer benefits!
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134 Part 3 Positioning via Price, Place, and Promotion
More technically, in Figure 9.3 we see two demand scenarios. In the left plot, demand
is relatively elastic (the slope is flatter than in the right plot). When the price is $7, the
number of units sold is 10, for a total revenue of $7 × 10 = $70 (boxed areas 1 and 2). If
we drop prices to $4, we’d sell 40 units (areas 1 and 3), for $4 × 40 = $160. So yes, with
the price drop, we more than made up (with the $160) the original revenue of $70. We’d
say that demand is elastic.
Or, conversely (to get facile with these plots), stay with the left scenario. Now imagine
that we began at $4, bringing in the $160, and then we raised prices to $7 and watched
sales drop off to $70. Thus again we see that consumers’ demand is elastic (of course, it’s
the same plot).
In contrast, in the scenario to the right, demand is more inelastic. If we simulate the same
scenario, we begin with a price point of $7, sell 35 units (areas 4 and 5), for $7 × 35 = $245.
Dropping the price to $4 results in 40 units sold (areas 4 and 6), taking revenue down to
$4 × 40 = $160. Demand is inelastic. We changed price a bit, and demand didn’t change
much. We lost margin (the $3 price difference), and we didn’t make it up in volume (an
increase of only 5 units). Thus, the margin wasn’t made up by the too few additional unit
sales. IRL, inelastic means that this is an item that many customers will purchase even if we
raise prices (e.g., sporting events, musical concerts).
In Figure 9.3, we see that elasticity is characterized differently depending on the slope
of the lines. Indeed, elasticity is defined by the slopes. Elasticity is defined as the proportion
change in quantity compared to the proportion change in price. Elasticity is
)
)
(
(=
−
− =
−
−
E
Q Q
Q
P P
P
P Q Q
Q P P
.
2 1
1
2 1
1
1 2 1
1 2 1
Thus, in Figure 9.3:
=
−
− = −
= −E
400 100
100
5 8
8
3
0.375
8left and =
−
− = −
= −E
105 100
100
5 8
8
0.05
0.375
0.133right
Figure 9.3
Elastic vs.
Inelastic
Demand $7
$4
35 40
Sales (units)
5
4 6
P
ri
ce
P
ri
ce
Demand is InelasticDemand is Way Elastic
$7
$4
2
1
10 40
Sales (units)
3
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135Chapter 9 Pricing
Elasticity is always computed to be negative, so the negative signs are just ignored (they’re
a given). Then E is assessed:
• If E > 1, as in the left plot, demand is said to be elastic. Price and revenue go in
opposite directions: With a price drop, revenues shoot up; with a price increase,
revenues fall off.
• If 0 ≤ E < 1, as in the right plot, demand is inelastic. Revenue follows price in the
same direction: If price goes up, revenue goes up; if price goes down, so do revenues.
• If E = 1, demand is said to be unitary. Prices goes up or down, but revenues remain
about the same.
That was economics-speak. Now let’s talk marketing. Figure 9.4 depicts typical market-
ing findings. For the purchase of almost everything, there are very likely to be these two
segments. Brand loyal customers are inelastic, less price sensitive; they’ll buy our brand no
matter what the price. In contrast, the price-sensitive segment is quite elastic and deal prone,
and they will run to a competitor (or even drop out of the category) when we raise prices.
So if we can raise prices as demand goes up or as supply dries up, what factors drive
demand? Demand goes up as a function of a customer’s desire: the more customers there
are who want the brand, or the more any customer wants the brand. Demand goes up with
enhanced perceptions of the product’s benefits or brand image. Demand goes up if compet-
itors’ brands aren’t great, i.e., if there are few good substitutes, or they’re priced even higher.
Alternatively, instead of considering demand, which is focused on the brand or product
or company, consider the flip side: the factors that drive a customer’s price sensitivity. Cus-
tomers are more price sensitive (price is more elastic for them) when they don’t care that
What Is a Good “Value”?
Value pricing sometimes means low (i.e., good prices, good deals, inexpensive) and sometimes means
high (i.e., it’s the price customers are willing to pay because they perceive value in the product).
Figure 9.4
Elasticity
Varies with
Customer
Segments
Sales (units)
1 2 3 4 5 6 7 8 9
P
ri
ce
($
)
8
7
6
5
4
3
2
1
Deal-Prone
(elastic)
Brand-Loyal
(inelastic)
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136 Part 3 Positioning via Price, Place, and Promotion
much about the purchase, purchase category, or brand. If their preferences aren’t strong,
they feel no brand loyalty. Price sensitivity is greater when the item is a luxury good rather
than a necessity, when many substitutes are available, when the purchase is a relatively big
one (compared to a customer’s household income). Finally, it’s no surprise that price sensi-
tivity is generally greater for customers with lower household incomes.
Price sensitivity should increase when price information is easily available to customers
to compare across competing brands. Thus the Internet is having an interesting effect on
prices for many items. Price comparisons are easier online than driving from store to store,
and in particular shopping bots such as Bizrate.com facilitate easy and quick comparisons.
9-3 LOW PRICES
Regarding low prices, there are two issues: First, how do we determine whether costs are
covered? To address this basic question, we will compute a variety of break-evens—simple
math computations that determine how many units we have to sell to make money. The
second pricing issue is whether low prices are a constant strategic choice, such as everyday
low price providers (EDLPs) who position themselves around good value in the minds of
consumers. Or should we pulse the market with price fluctuations, offering and rolling back
temporary price discounts. We discuss break-evens first.
To make sure you can stay in business, covering costs sets the absolute minimum floor
on pricing. Cost-plus pricing is simply computed per unit, as
−
Unit Cost
X1 %
,
where X% is the intended return (say, 30%, so we’d compute: Unit cost/0.7).
π = Profit
In marketing models, profit is often denoted as π. Market shares are often depicted in pie charts, round
figures with the sizes of “slices” representing a brand’s proportion of sales in the marketplace. Hence pi,
like pie. Get it? Yes, well, econ humor.
Why Go Low?
Low price points come from:
Cost-plus pricing: mark up above average cost
Loss leaders: sell below cost to bring in customers who will purchase other products
Market penetration: price low to attract volume
Early in the product life cycle to generate buzz and demand
Late in the product life cycle to milk profits before the brand dies
Nearly predatory: price low enough to discourage competitors
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137Chapter 9 Pricing
If your fixed costs (including marketing, advertising, R&D, depreciation, etc.) are high
relative to variable costs (which include labor or unit components), the strategic objective
is to maximize sales volume (to spread the fixed costs over as many units as possible). If
instead, variable costs are relatively high, the strategic objective is to maximize per unit
margins. (We can’t bring down price in hopes to build sales volume because volume drives
up variable costs.)
9-3a Concept in Action: Break-Even for a Good
So what is a break-even (BE)? A break-even analysis is a means of figuring out how many
units you’d have to sell before you make back your costs. Here’s a thought experiment to
illustrate. Say you’re heading out of town to meet a client. You can take a cab from your
place, or you can drive to the airport. Say a cab costs $20 + $5 ($1 airport fee and $4 as
a 20% tip), and it costs $20 a day to park in your city’s airport parking lot (pretend gas is
free). For trips of what length is it smarter (cost-efficient) to take a cab vs. drive and park
at the airport?
• If the trip is 1 day (i.e., you’re flying to a nearby city and back the same day) and you
take a cab, it would cost $50 (roundtrip). If you parked, it would cost $20.
• If the trip is 2 days, the cab still costs $50, and parking now costs $40.
• For 3 days, the cab is $50, and parking is $60.
• For d days, the cab is yes, still $50, and parking is $20d.
So, if the trip is 1 or 2 days, then the smart thing is to park. If the trip is three days or longer,
take a cab.
You do break-evens intuitively like this all the time. Now we have to make your
thinking official. Let’s also be clear up front that we’re pricing for a one-time transaction.
Some com-
panies (e.g.,
Walmart) use
‘every day low
prices.’ Others
(e.g., Kroger,
Safeway) use
‘high-low’ vari-
able pricing
(i.e., sales).K
en
W
ol
te
r/
Sh
ut
te
rs
to
ck
.c
om
Su
sa
n
M
on
tg
om
er
y/
Sh
ut
te
rs
to
ck
.c
om
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138 Part 3 Positioning via Price, Place, and Promotion
If marketers are long-term focused, as in relationship marketing via CRMs, they might
be willing to not quite break even on the first purchase because they expect to break even
shortly thereafter. The early hits on the company are investments in the customers.
A breakeven can be computed in terms of number of units sold or monetary values.
We’ll look at BE in terms of units sold first. As the term “break-even” suggests, we can
look at how many units we need to sell before we make any money. Our profits are
defined as
Profit = [(Price – Variable costs) × Demand] – Fixed costs
If we just broke even, profits would be zero at a level of demand that we will call BE:
0 = [(Price – Variable costs) × BE] – Fixed costs
Rearrange terms to solve for BE:
BE =
Fixed costs
(Price – Variable costs)
That’s it. The last term, [(Price – Variable costs)], is also called “contribution per unit to
fixed costs.”
Let’s turn to an example slightly more complicated than the taxi vs. parking issue. Imag-
ine you have a friend who is thinking about launching a business targeted to business stu-
dents in which leather portfolios were embossed with a subtle, elegant logo of their univer-
sity. The friend would buy and stock the basic leather portfolio (in black, navy, and brown),
and upon receipt of an order, emboss the lower right corner of the front panel of the port-
folio with the requested university logo. For such a business proposal, Figure 9.5 breaks
down the basic costs. The fixed costs include a modest income for your friend, some mar-
keting and administrative costs, and rental space (maybe a small office in a shopping mall
or on campus). The variable costs are listed as well: $75 for the portfolio and $5 for the
embossing. The bottom figures show how much it would cost to set up a shop to sell 30, 60,
90, or 120 portfolios per month.
Fixed costs for 1 month:
Your friend’s salary $1,000
Marketing, admin 350
Space rental, utilities, part-time help 650
Total $2,000
Variable costs per portfolio:
Leather portfolio $75
Embossing 5
Total Unit Variable Costs $80
Total costs for quantity portfolios sold:
30 2,000 + (30 × 80) = $4,400
60 2,000 + (60 × 80) = $6,800
90 2,000 + (90 × 80) = $9,200
120 2,000 + (120 × 80) = $11,600
Figure 9.5
Costs for
Portfolio
Business
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139Chapter 9 Pricing
Figure 9.6 begins with revenues generated, which is, as you keep hearing, a function of
price and demand! So at the max (lower right of the top table), if we could sell about
4 portfolios a day (can we?) and if people would pay $140 for it (would they?), we could
make $16,800. Woohoo!
But wait. Now we have to subtract our costs. In the table at the bottom, we see that there
are many scenarios of price-and-demand combinations where we lose money!
In this example, we use the BE equation for each price we’re considering, as follows:
BE = (Fixed costs) / [(Price – Variable costs)]
BE100 = 2,000 / (100 – 80) = 100
BE120 = 2,000 / (120 – 80) = 50
BE140 = 2,000 / (140 – 80) = 33.3
The first equation shows that if we priced at $100, we would need to sell 100 units to break
even; if we priced at $140 dollars, we would need to sell only 34 units.
Now that we can compute a breakeven, let’s face it, breaking even isn’t a great business
goal. It’s simply how low can we go. Here’s a better idea: Let’s look at the scenarios in which
we would actually make money! If we charged $100 and sold at least 120 readers or charged
$120 (or $140) and sold at least 60, we’d make at least a little bit of money.
These are daunting scenarios: The prices seem high, and who knows whether we could
really move 2-4 portfolios a day? Alternatively, could we cut costs and become more effi-
cient or “productive,” e.g., could we ask our friend to take less in salary? Could they find a
supplier that could offer a better discount? But these are managerial questions to ponder,
separate from the issue of the breakeven.
9-3b Concept in Action: Break-Even for a Service1
Let’s look at a BE scenario that involves pricing for a service. Services are tricky because
they are notoriously disproportionately high in variable costs. As a result, the cost numbers
will move faster with an increase in demand.
Figure 9.6
Break-Even
for Portfolio
Business
Income
Number of portfolios sold:
Price 30 60 90 120
100 $3,000 6,000 9,000 12,000
120 3,600 7,200 10,800 14,400
140 4,200 8,400 12,600 16,800
Recall Total Costs were:
4,400 6,800 9,200 11,600
Income – Total Costs:
30 60 90 120
$100 −1,400 −800 −200 400
$120 −800 400 1,600 2,800
$140 −200 1,600 3,400 5,200
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140 Part 3 Positioning via Price, Place, and Promotion
So let’s consider a slightly different scenario. Say we have another friend who is consider-
ing a business with a storefront where consumers can bring their tablets and a service is
provided in which the customer’s favorite software is loaded, the machine customized, new
apps put on, etc. We’ll keep the fixed cost constant from the previous example just for some
consistency and to be able to compare across a good and a service to see the effect of the
service and its inherent variable costs.
Figure 9.7 shows the variable costs. (In the previous example of the portfolios, there
were variable costs as well but they were smaller than for this tablets example.) It costs the
store’s staff time to load the software (given their salaries and their time, say that averages
out to about $30 a tablet), and the store must maintain legal licensing fees on a variety of
software packages (say this is roughly $3 a tablet).
The question remains: How much should or could be charged for the service? How
many customers would be needed before the store makes money?
In Figure 9.7, the first row reminds us of the fixed costs, and the next rows capture the
variable costs, with the totals at the bottom. Figure 9.8 shows possible income, depending
on price and demand. Figure 9.9 contains the differences, or profits. This analysis could be
refined, using continuous numbers rather than our rougher numbers (15, 30, etc.). Similarly,
the prices charged could be assessed in a more refined manner, with a continuous scale ($0
to 500 a unit), but again the discrete price points gives us a sense of the breakeven problem.
In Figure 9.9, let’s take a look at the money we’d make (or not). First, note that $30 is
just a totally ridiculous baseline. We’d lose money fast, and, as we service more machines,
Fixed costs 2000 2000 2000 2000
Number
Variable costs of sold: 15 30 45 60
Labor ($30) 450 900 1,350 1,800
Licensing ($3) 45 90 135 180
Total monthly
variable costs 495 990 1,485 1,980
Total costs (fixed
and variable) 2,495 2,990 3,485 3,980
Figure 9.7
Costs for
Tablet
Customization
Business
Number of served: 15 30 45 60
Cash inflow $30 450 900 1,350 1,800
Revenue $50 750 1,500 2,250 3,000
Sales $100 1,500 3,000 4,500 6,000
Figure 9.8
Break-Even
for Tablet
Customiza-
tion Service
Business
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141Chapter 9 Pricing
we’d lose even more money. If we charged $50, we’re still not doing well. Increase the charge
a little more to $100, and we can make money if we customize 30 e-book readers or more.
So how do we decide on pricing? We will compute this in a more refined manner in a
moment, but just looking at this table, to breakeven, we’d have to charge at least $100 (and
service at least 30 tablet customers). Later, when we talk about the value to customers or
their willingness to pay, we can figure out whether we could charge just $100 or even more.
Depending on the ZIP code of the mall, $200 may be quite tolerable. If that’s the case, why
would we charge the mere $100?
Once more, return to the BE equation. Fixed costs are $2,000, and variable costs are
$33 (the $30 labor and $3 licensing per e-book reader). For a price of $100 for the service
BE = Fixed costs / (Price – Variable costs)
= 2,000 / (100 – 33)
= 29.85
Round that up to 30 since table customers are integers. That’s the number of units we’d
need to sell to break even.
BEs are usually computed in terms of the quantity we need to sell. If we wanted to see
the revenue required for the break-even point (from which costs will be recovered), we
merely translate our figures by multiplying the BE quantity by the price point under con-
sideration. Specifically, 29.85 times $100 for $2985.
Finally, we can, of course, have a profit target, not just the break-even point where
profit = 0. To incorporate that goal, we would say
Target profit = [(Price – Variable costs) × Demand] – (Fixed costs),
so
BE = (Fixed costs + Target profit) / (Price – Variable costs).
Figure 9.10 shows the break-even goal in terms of linear functions from which we may
interpolate. The number of units sold forms the horizontal axis, and money (both costs and
revenue) form the vertical axis. The first horizontal line in the graph itself shows the fixed
costs, steady across all number of units (of course, it’s fixed). The line labeled “Total costs”
includes these fixed costs and have an increasing slope because they also reflect the variable
costs, which increase with numbers of units produced and sold. The “Revenue” line is our
income, and the point at which this line intersects the “Total costs” line is our breakeven
point, as we just computed, right at 30.
BE analyses should be performed for every price decision to understand the lower
bounds. Let’s turn now to the upper bounds.
Number of served 15 30 45 60
$30 −2,045 −2,090 −2,135 −2,180
$50 −1,745 −1,490 −1,235 −980
$100 −995 10 1,015 2,020
Sales –
Total
costs
Figure 9.9
Break-Even
for Tablet
Customiza-
tion Service
Business
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142 Part 3 Positioning via Price, Place, and Promotion
9-4 HIGH PRICES
The MasterCard commercials that end with “. . . priceless” are great fun, but most of us have
an upper limit on what we’d pay for many items. The trick for marketers is to discover that
upper bound and price just below it.
We’ve discussed the concept of price elasticity and can compute it (for any brand or
segment) to answer the question: How much would sales drop off in the face of a price
increase? In markets that are fairly stable (e.g., mature products with few technological
introductions), marketing managers might see that their price sensitivity estimates are also
fairly stable. If that’s the case, we can turn the elasticity or price sensitivity (PS) equation
inside out. The price changes are under our control. If PS is largely stable, we can plug that
estimate in and solve for a decent forecast as to what the sales change might be.2
)(
=
× −
change in sales
PS P P
P
% .2 1
1
This estimate would be very useful in budgeting. If we have no good estimate for price sen-
sitivity, or if the recent historical data move around a lot, we should get current estimates.
There are several means of obtaining the data require to make good guesses of price sensi-
tivity. Let’s take a look at a few.
9-4a Using Scanner Data
Any marketing manager working on consumer packages goods has the luxury of working
with scanner data, which can yield very precise estimates of demand and price sensitivities
at numerous price points. Scanner data include indicators of which brands are bought, the
quantities bought, the shelf price of the objects, the paid price (e.g., whether a coupon was
used), the price of competitors’ brands that week, a flag for whether any of the brands were
Number of purchased
15 30 45 60
6,000
5,000
4,000
3,000
2,000
1,000
0
D
o
lla
rs
Fixed costs
Total Costs
Variable Costs
Revenue
Figure 9.10
Break-Even,
if Service
Fee = $100
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143Chapter 9 Pricing
featured in local weekend newspaper flyers or in end-of-aisle displays in the store, advertis-
ing exposures to panel households, etc.
If all of these variables remain constant, a firm can run an experiment by randomly
selecting some outlets as a test market and dropping prices, say by 20% in some stores,
33% in others, and allowing still other outlets to serve as a control group, a benchmark for
comparison (in case anything like the displays or competitor prices change). For example,
the effect of a 20% decrease would be estimated to be
)
)
(
(=
−
−
PS
S S S
P P P
/
/
,off benchmark benchmark
off benchmark benchmark
@ 20%
@ 20%
where the benchmark might be initial sales or the sales averaged over the control group outlets.
If this PS is large, then the 20% discount was effective in stimulating sales. If it is small,
then either the discount wasn’t big enough or these customers just aren’t price sensitive.
Even firms not interested in conducting experiments, per se, can use the scanner data
and run straightforward regressions to forecast expected changes in sales. For example, we
can forecast sales as a function of price and include any other marketing or market infor-
mation we might have as control variables, to see the effect of price:
= + + + …+Sales estimate b b Price b Ad b Factor .k k0 1 2
Price
appeals are
relevant for
high-end
services.
Im
ag
e
Co
ur
te
sy
o
f T
he
A
dv
er
tis
in
g
Ar
ch
iv
es
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144 Part 3 Positioning via Price, Place, and Promotion
9-4b Using Survey Data
Even without scanner data, several marketing research tools can be used to assess a custom-
er’s willingness to pay (WTP). For one, we can simply ask our customers: What are you
willing to pay? (Radical!) Imagine a survey in which some annual online banking service
was described, and consumers are asked:
Q1 At $25.00, I definitely would not buy 1 2 3 4 5 6 7 definitely would buy
Q2 At $35.00, I definitely would not buy 1 2 3 4 5 6 7 definitely would buy
Even if we’re not price-sensitive types, most of us prefer to pay as little as possible.
So it wouldn’t be surprising if the average score for question 2 was lower than that for
question 1.
Still, the items can convey information. Some people simply aren’t interested in the
banking service no matter what the price, so their scores would look something like Q1 =
2 or 3, and Q2 = 1 or 2. At the other extreme, some people might be really keen for the
service, so their scores would be Q1 = 6 or 7 and Q2 = 5 or 6. A final segment might be
sort of interested in the banking service, if the price was right; their scores would be some-
thing like Q1 = 4 or 5 and Q2 = 3 or 4.
Price studies can also be tested using different samples. Some customers would be
randomly assigned to fill out survey form A, and others would fill out form B. The sur-
veys would be identical except the price in A would be higher than that in B. More
versions than two could also be used to obtain a finer estimate of demand sensitivity to
prices.
9-4c Conjoint Analysis
More than surveys, marketing managers’ favorite tool to study pricing is conjoint. In a
conjoint study, customers are shown products with various combinations of features and
attributes, price being one of them. The customers are asked: Which combination do you
prefer most? Then: Next most? And so on.
For example, in Figure 9.11, a Red Bull class energy drink is offered in a 4-pack
for $2.99 or $3.99, and a store brand drink of the same variety is offered at the same
price points. Two different kinds of segment preferences are represented in the figure.
Price as High as You Can
High price points come from:
Determine customers’ willingness-to-pay, then price right below that sensitivity point
Price high for margins, not worrying about volume (the ‘market skimming’ strategy often used
early in the life cycle of a high-end brand to heighten its sense of exclusivity)
Prestige or status pricing: price high for image appeal
Price high due to real quality differences or true rarity
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145Chapter 9 Pricing
Both segments say their most preferred choice would be the Red Bull at the cheaper price,
and both would least prefer the store brand at the higher price. What distinguishes these
segments is whether they value the brand or price more. On the left is a consumer who
wants the brand and who is willing to pay more. On the right is a consumer who appreci-
ates a good deal, and gives up the brand to retain the lower price.
What’s neat about the conjoint approach is that customers aren’t ever directly asked
about price, so the method obviates the customer’s natural inclination to say, “I want to pay
less.” We also know that customers are indeed willing to pay more for what they want, and
the conjoint technique helps detect what those attributes are. Customers are asked for a
simple judgment: Which one of these do you like most, next most, etc.? And they can do
this easily and quickly. We derive from the conjoint analyses the attributes that customers
seek, including what price they’re willing to pay. (We’ll do a conjoint in Chapter 15.) The
analysis allows us to infer their price sensitivities.
Part of the point of developing a brand is to charge a premium price. If brand associa-
tions go beyond the basic features, customers will pay higher prices accordingly. Some mar-
keters define a good brand by whether the customer is price insensitive, i.e., the customer is
determined to buy the brand regardless of its cost.
9-5 UNITS OR REVENUE; VOLUME OR
PROFITS
There is, of course, a difference between maximizing the number of units sold to produce
volume vs. maximizing revenue and profits. Figure 9.12 illustrates the comparison among
cellphone calling plans. For a similar package of minutes and data, AT&T, T-Mobile, and
Pricing in the Middle
Mid-point prices come from seeing what competitors price at, and adjusting according to corporate
and brand strategy:
Price higher if you offer more benefits or brand equity, wish to enhance image
Price a little lower if you wish to be perceived as good value
1 = Most preferred, . . ., 4 = Least preferred
$2.99
$3.99
1 3
2 4
$2.99
$3.99
1 2
3 4
Red
Bull
Store
Brand
Red
Bull
Store
Brand
Figure 9.11
A Conjoint
Experiment
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146 Part 3 Positioning via Price, Place, and Promotion
Sprint are fighting over a particular city. AT&T leads on numbers of customers (45%), and
T-Mobile and Sprint have similar shares. AT&T charges $99 monthly, T-Mobile charges
$49, and Sprint charges $79. Thus for revenue, the picture is that AT&T still leads, but
Sprint does better than T-Mobile because it charges more.
If Profit = Revenue – Expense and Revenue = Price × Quantity sold, then to maxi-
mize profits we need to find a price where any further increase in price would lead to a large
falloff in demand. Specifically, profit maximization (Pmax) occurs when marginal revenue
(MR, the extra money brought in by selling one more unit) equals marginal cost (MC, the
extra cost by selling one more unit); that is
Pmax: MR = MC
In Figure 9.13, we see where this matching occurs. Prices are listed from $1 to $2 for, say, a
soft drink from a vending machine. Naturally, as price goes up, fewer customers partake (as
the price in column 1 goes down, quantity sold in column 2 goes up). The third column
represents the variable (or marginal) cost of $1 a unit, and the fourth column shows revenue
(price × quantity).
The final column presents marginal revenue. These numbers are computed as follows:
the $1.50 is [($350 – $200)/(200 – 100)], the $1.00 is [($450 – $350)/(300 – 200)], and so
on. Marginal cost was stated to be $1, and marginal revenue achieves $1 when we price at
$1.50, thus covering costs nicely.3
Revenue share
profit $
Market share
(units sold)
Sprint
27%
AT&T
45%
T-Mobile
28%
Sprint
30%
AT&T
55%
T-Mobile
15%
Figure 9.12
Units vs.
Profits
Marginal
Price Quantity MC $1/unit Revenue revenue
$2.00 100 $100.00 $200.00
1.75 200 200.00 350.00 $1.50
1.50 300 300.00 450.00 1.00
1.25 400 400.00 500.00 0.50
1.00 500 500.00 500.00 0.00
Figure 9.13
Profit
Maximization
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147Chapter 9 Pricing
9-6 CUSTOMERS AND THE PSYCHOLOGY
OF PRICING
Our pricing discussion thus far has involved some strategic thinking and a lot of number
crunching. Yet any model you’ll ever see (marketing, statistical, economic, etc.) will be of
the form
Our prediction = Our model + ε
where ε (epsilon) is the error term, also referred to as noise, variability, heterogeneity, a
fudge factor, or “beats me.” The idea is that, no matter how well we think we know a system
(e.g., the factors that influence a consumer’s decision to purchase something), we are still
dealing with human beings. And even if the purchase seems simple, seemingly endless
factors contribute to the decisions. We typically don’t have good data on all the factors, and
actually we typically don’t even know all the factors. So we acknowledge that the model is
a simplification of the world, and that we’ll make some errors in prediction, but we’ll do as
good a job as we can (until we can get better data on more factors).
Sometimes we use models and they’re consistently off, always predicting too high or too
low. When we identify such systematic biases, then we know that something else is going
on in ε land. In particular, much of pricing has been derived from economics, and it sort of
makes economists nuts that human beings introduce systematic variation into ε. There are
eight kinds of so-called biases that are actually quite rational.
First, price often serves as a cue to quality. Counter to the anticipated economic effect of
higher prices causing a decrease in demand, for some products and services, higher prices
can make a purchase seem more appealing. For some purchases, customers use price as a
cue to quality, implicitly reasoning that the brand can command a high price because its
quality is so good. That argument assumes a belief in the efficiency of the marketplace, yet
many studies have demonstrated that there is no correlation between price and quality for
most product categories. But our beliefs persist.
A price’s role as a cue is so strong that prices are known to contribute to the formation
of expectations prior to a purchase. A price is a clear, tangible cue, and higher prices set
higher expectations.
Price differentials can reflect different product functionality, but different prices can also
reflect mere cosmetic differences. To say the product differences are superficial is not to
B2B Pricing
B2B pricing tools are the same, even if they’re called different things:
Trade discounts and price discrimination: discounts for cash, quantity, bulk, seasonality
Trade allowances: cut prices to intermediaries based on the functions they perform, such as
participation in advertising or sales support programs
Differential prices based on geography: based on distance and transportation costs
Transfer prices: pricing passed along through the channel network
Forms of barter: payments in goods, services, or buying agreements rather than in cash
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148 Part 3 Positioning via Price, Place, and Promotion
say they are not relevant or rational if they contribute to brand image differences. Further,
if an ad claims that a brand is superior due to the presence (or absence) of some feature,
customers frequently trust that somehow that feature is therefore important. A high price
point almost becomes the sought feature, as when basic Visa cards can be obtained with no
annual fee, but American Express charges $2,500 for their elite Black card.
Second, consumers process absolute numbers and relative numbers differently. Say you receive
some email coupons for Office Max. Your Office Depot is much closer. Would you drive
to the Office Max for $15 off a box of printer toner (that costs $49)? What about if the
coupon was for $15 off a new tablet (that costs $199)?
In both cases, the coupon offers the same face value, a $15 discount, but for the toner,
$15 off is a larger proportion ($49 vs. $199), so it seems like a better deal. Rationally, we’d
assess the absolute value; but there’s a logic to assessing the relative value as well.
Third, the contextual frame in which information is expressed matters—the spin, if you
will. Imagine you’re planning a spring break trip with a friend, and you’ve narrowed your
choices down to two vacation packages: One is priced at $499, the other at $599 with a
$100 discount when you book. Which choice seems more appealing? In either case, your
credit card is going to be charged $499. But the second choice starts at a higher price, so
it’s not unusual to assume that maybe the trip package is of better quality (e.g., nicer hotel,
more activities). You’ll feel like a smart shopper by getting more value, a $599 trip for just
$499. $499 is $499, but it’s not irrational when we have a rationale.
Fourth, price discounts serve as mood inductions. Temporary price discounts are not only
an economic lever. Customers think they’re smart shoppers when they get a good deal. Peo-
ple feel good when they get something for a price that’s better than usual. The experience
is about feelings of happiness, pride, appreciation, confidence, etc., not about money per se.
Fifth, there’s a reason the prices of many things—groceries, books, clothing, cars—end
in 9, such as $4.99 or $49.99 or $4,999.99. Wouldn’t you think that their whole number
counterparts ($5, $50, $5,000) would be easier to understand and advertise? Well, it’s
reliably known that $4.99 is far more attractive than $5, much more than the penny dif-
ference. Why? Apparently, because we read from left to right, we process and internalize
the “4” before we hit the “.99.” So we’re thinking, “Oh, the price is $4-ish,” not, “Wow, the
price is $5!”
Sixth, consumers keep track of their spending; it’s called mental accounting. They also
rationalize compensatory or future purchasing. Just as we speak in financial terms of dis-
counting future sales for the time value of money, we do this mentally also. If we buy a case
of wine for an upcoming party, the current purchase is seen as an investment, not spending.
And the later consumption of that wine at the party is seen as “free” because it’s not tied
closely in time to when it was purchased. This concept of an immediate vs. future cost-ben-
efit analysis has also been used to explain why we don’t do things in the short term that are
good for us (as individuals or collectively as a society) in the long term (e.g., engage in
healthy behaviors, or sound environmental ones). We simply pay less attention to future
consequences.
Cupcakes
If you normally sell 5 cupcakes for $10 and you wish to have a promo, you’re better off announcing
“5 cupcakes for $8” than “5 cupcakes and 1 bonus cupcake free for $10.” For “vice” purchases, consumers
have an easier time justifying a price discount than a quantity bonus. If you sell celery stalks, do the
opposite. For more, see research by Professor Mishra (University of Utah).
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149Chapter 9 Pricing
Another form of mental accounting is how we think of categories of money. You might
think that money is money. It’s fungible: Money spent on one household item comes from
the same budget as a competing item. However, we often classify money as if it were non-
fungible, meaning that we categorize our purchases and budget within the categories. For
example, just because we splurged at a great restaurant last weekend doesn’t mean we will
cut corners on spending as we plan next month’s vacation.
A relatively new phenomenon is the customer processing of alternative currencies—no,
not the euro vs. the yuan. Rather, all the zillions of companies’ loyalty programs are gener-
ating additional currencies, which usually have fairly transparent monetary values (and can
be traded or given away). The airline mileage programs are the most mature, and it is not
infrequent to see customers behave in seemingly inconsistent manners, e.g., refusing to pay
for business class seats but having no problem redeeming points for upgrades.
Seven, marketers frequently observe the compromise effect in consumers. To illustrate,
consider the following: One group of consumers was given the choice of buying two pro-
fessional basketball tickets for $250 or two tickets several rows up for $200. On an order of
2:1, most (67%) went with the cheaper seats ($200).
Next, an entirely fresh sample of consumers was offered two tickets for $200, two slight-
ly better seats for $250, or two even better seats for $300. About 10% went for $300. Of the
remaining 90%, the preference for the $200 and $250 reverses from the first scenario: 2:1
with 60% of the sample asking for the $250 seats and 30% for the cheap $200 seats.
This effect is called a “compromise” because the middle choice in the second choice set
is an attractive compromise between the two extremes. The seats are probably better than
the $200 seats, but the tickets are not as expensive as the $300 ones. It’s thought that this
effect occurs because ultimately, whether we can articulate it explicitly or not, we apparently
believe in an efficient market. That is, if a company charges more, we assume that they must
be providing something better or more of something. If they were not, eventually consum-
ers would figure it out and the company would have to drop prices. Note that the company
doesn’t really care how many $300 tickets it sells; it introduces the $300 tickets to make the
former high price of $250 seem more enticing.
Eight, and lastly, consumers work with referent pricing. When we evaluate a product’s
price to determine whether we think the price being charged is fair, we compare the price
to some reference, either an externally available price or an internally (mentally) stored
price. Sometimes a product’s price tag will offer this comparison to encourage the consumer
to believe that the current price is a good deal, such as, “MSRP is $49.99, now available
for $35.99!” Other external reference forms are popular during sales; e.g., “Now $14.99,
regularly priced at $35.00!” Or some companies position themselves as having an EDLP
(everyday low price) when they state, “Our price $34.99, compare at $45.00!” Whenever
we refer to someone experiencing sticker shock, the idea is that the price on the sticker is
much higher than the referent.
The reference price point can also be internal. The expectation regarding how much the
product costs comes from a variety of sources, including the buyer’s experience. For exam-
ple, if the product being purchased is one that consumers buy a lot, they would be familiar
with the product’s typical price. Internal references can, of course, be faulty or not very
relevant; e.g., how much you paid for your last car (even though that was 5 years ago, and
it was an economy car vs. the luxury model you’re now buying). Internal references can also
be based on inferences, e.g., is the store an upscale one, leading us to believe that perhaps
the prices of the store’s service are a bit inflated? Or do the high prices imply high-quality
brands?
We know that customers vary, and that’s why we consider segmentation. They also vary
in these psychological profiles of reactions to prices, and we can use that information to
price smartly.
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150 Part 3 Positioning via Price, Place, and Promotion
9-6a Price Discrimination, a.k.a. Segmentation
Pricing
Price Discrimination, with a capital P and D, is not legal. We’re not allowed to charge
different prices to different people for the same goods or services. However, marketers
frequently speak of price discrimination, with a small p and d. Let’s instead call it segmen-
tation pricing.
Good marketers will do their homework and inevitably find customer segments who
value different things. Then it is perfectly acceptable to charge different customers dif-
ferent prices for different goods and services. In most markets, there are almost always a
price-sensitive segment and another that seeks quality. (Remember Figure 9.4.) There is
nothing wrong with a company offering a stripped-down product at lower prices to the
former and a souped-up version at a higher price to the latter.
For example, periodic deals are offered on soft drinks, oil changes, dinners at local restau-
rants, and so forth. Some customers will buy their favorite brands and hardly pay attention
to the deals. How can a marketer price when there are different segments?
In Figure 9.14, we see that as price goes up (in column 1), demand falls off for both the
deal-prone and brand-loyal segments (columns 2 and 3). The difference is that there is high
volume of buyers in the deal segment at the low prices, whereas the brand-loyal segment
is willing to pay more. Column 4 sums these purchases in units and revenues. Column 5
shows that, if we offer just one price, contribution is maximized at a price of $4.
Legal Stuff Related to Pricing
No “price fixing” (two or more firms agree on what price to charge, to reduce the effect of
competition that drives prices (and profits) down; Sherman Antitrust Act 1890 and Federal Trade
Commission Act 1914).
No “vertical price fixing” (manufacturers cannot force a retailer to charge a certain price, hence we
see “MSRP” or Manufacturer Suggested Retail Price). Retailers need to charge the manufacturer’s
minimum price, to ensure the manufacturer gets some profits, not just the retailers; Fair-Trade
Laws.
No “predatory pricing” (cannot price “unreasonably” low to drive out competition; Unfair-Trade
Laws). Yet grocery stores routinely sell certain products cheaply, e.g., below costs, call them “loss
leaders,” count on their attracting traffic to the store. Also, huge companies routinely drop prices
to discourage new competitors (then lawyers define “unreasonable”).
No “price discrimination” to consumers or channel partners (cannot charge different prices to
different customers for the same product; Robinson-Patman Act 1936). Different prices must
reflect a difference in costs, e.g., the loyal segment gets a deal because it costs less to process
them, or they’re charged more because they require more services.
No “deceptive pricing,” a.k.a. “bait and switch” (cannot mislead customers by advertising one
product, but only making another, usually more expensive, product available for purchase, or by
posting one price, but scanning and ringing up another).
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151Chapter 9 Pricing
The final two columns break out the segments. For the deal-prone customers, $4 re-
mains the optimal price. For the brand-loyals, we maximize at a higher price, $6 or $7, and
as long as they don’t seem price sensitive, we might as well charge the higher of these two
choices, $7. Now, what do we do with this information? Either we can determine that a
high-end image is our strategy, price at $7, and let the deal-prone group fall off. Or we can
price $7 during a regular season and get the purchases of the brand-loyal segment, and then
we price around $4 for the deal-prone segments during promotion times.
It is important to keep these distinct segments separate. Customers can get irritated
if they learn that they’ve paid more than another. Web designers need to be sensitive to
this issue also: When a checkout process prompts customers to “enter promotional
codes” (a digital coupon), some customers may be a little annoyed to realize they don’t
have one. A suggestion is to offer the customers a back door part of the website to obtain
the deal.
9-6b Quantity Discounts
Another completely legitimate and accepted form of segmentation pricing is to offer
quantity discounts—the more you buy, the more you save! Figure 9.15 works through the
numbers on an Internet offer. We begin with sales or survey data, determining how many
customers want 1 month of Internet access for $15, or 2 months for $25, or 3 months for
$30. Customers are used to seeing these offers, they can compute the average price per unit,
and demand falls off with higher prices. None of that surprises us. In the column labeled $,
it looks like we should go for the “3 for $30” because $960 is the biggest number. However,
the per unit sales registered in the last column shows us that we would do best to use the
“2 for $25” deal.
Trade-off Ethics?
Say you’re in a crunch. You need to withdraw $20, and you draw it from another bank’s machine. The ATM
is clearly labeled as saying that it will charge $1.50 for transactions for users who are not its customers.
In this case, since the withdrawal value is so low, that fee is 7.5%. Is the fee unethical? A rip-off, highway
robbery, usury? Yes. Kinda stupid of you? Um, yes. But unethical? No. You’re paying for convenience, and
you had full knowledge. (For more, see D. Kirk Davidson’s Moral Dimension of Marketing.)
Figure 9.14
Pricing and
Brand and
Deal Seg-
ments
Price
($)
“Deals”
Segment
“Brand”
Segment
Total
Units ($)
Contribution
(−1$ per unit)
Just Deal
Segment
Just Brand
Segment
2 9 0 9 ($18) $1 × 9 = 9 = $18 − $9 1 × 9 = 9 1 × 0 = 0
3 7 9 16 ($48) 2 × 16 = 32 = 48 − 16 2 × 7 = 14 2 × 9 = 18
4 5 8 13 ($52) 3 × 13 = 39 = 52 − 13 3 × 5 = 15 3 × 8 = 24
5 2 7 9 ($45) 4 × 9 = 36 = 45 − 9 4 × 2 = 8 4 × 7 = 28
6 0 6 6 ($36) 5 × 6 = 30 = 36 − 6 5 × 0 = 0 5 × 6 = 30
7 0 5 5 ($35) 6 × 5 = 30 = 35 − 5 6 × 0 = 0 6 × 5 = 30
8 0 4 4 ($32) 7 × 4 = 28 = 32 − 4 7 × 0 = 0 7 × 4 = 28
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152 Part 3 Positioning via Price, Place, and Promotion
9-6c Yield or Demand Management
You know the expression, “Time is money.” Just as customers can be divided into segments
that are more or less price sensitive, customers can also be more or less time sensitive.
In particular, services are said to be perishable, meaning that there is no such thing as
storing inventory or excess capacity. All the customers rush a system when they want to be
served, and, if they overload capacity, it can be a problem for the service provider, and the
quality of service can deteriorate. So another example of segmentation pricing is to vary
prices during peak and nonpeak seasons.
For example, if you’re willing to go to the movies during the day, when most people are
working and the theater owners would like encourage better attendance, you get a price
break. You can also frequently get price breaks by making airline or hotel reservations far
in advance of your needs, which these service providers appreciate so that they can plan
better. (You can also, if your plans are flexible—that is, if you’re not in the time-crunch
segment—get price breaks at the very last minute because they wish to operate at full
capacity.) Some restaurants recognize different segments by pricing differently during the
weekdays vs. weekends.
Whether a customer experiences a price or time shift, it’s important that the compa-
ny manage perceptions of fairness. With regard to time, FIFO (first-in/first-out) seems
universally fair in queuing, but customers also tend to be understanding when there are
exceptions (e.g., larger parties wait longer to be seated at restaurants).
These practices of yield management are popular in services, many of which are char-
acterized by high fixed costs and lower variable costs (e.g., airlines, hotels, rental cars) to
enhance revenue and capacity utilization. The systems have also gotten very complex, but an
advantage of this approach to pricing is that it is based on the market, not on costs per se.
9-7 NON-LINEAR PRICING
If it’s not complicated enough to set a single price, marketers further complicate things by
trying to coordinate the pricing of multiple pieces of their product offerings. Some prices
are set using a so-called two-part tariff: A customer pays some amount for one part of
the service (usually a fixed fee, such as an entry fee at a night club or a ticket to enter a
theme park) and another amount for another part of the service (usually a charge per
unit of usage, such as drinks at the club, or food, T-shirts, and memorabilia at the theme
park).
Consumers, interested in buying:
1 month for $15? 25 said yes
2 months for $25? 35
3 months for $30? 40
Number Avg Net
of Buy for$ Price (−$2 cost) Net Profit Demand $ Per Unit
1 15 15.0 13.0 13.0 25 325 325.0
2 25 12.5 10.5 21.0 35 735 367.5
3 30 10.0 8.0 24.0 40 960 320.0
a b c = b/a d = c −2 e = d × a f (above) g = e × f h = d × f
Figure 9.15
Pricing with
a Quantity
Discount
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
153Chapter 9 Pricing
For example, in Figure 9.16, we see an illustration that cell phones charge a monthly
fee with some basic coverage, but calls beyond that are charged extra. The plot to the right
illustrates the theme park, with an initial charge (the admissions ticket) and additional fees
for whatever consumption is enjoyed in the park (e.g., beverages, T-shirts). Part A of each
graph shows the base fee, and part B shows the extra fees, so the total amount charged per
customer depends on how much the customer wishes to buy.
Figure 9.17 depicts data sampled from patrons of local upscale restaurants responding
to survey questions about the fees proposed for a newly opening wine bar. The wine bar
plans to offer wine classes during which customers would sample triplets of wine as the
sommelier describes them. For access to this instruction, the wine bar hopes to charge
a cover fee (like a bar charging a cover for live music). The entrance fee is the first tariff,
and the glasses of wine that the consumer drinks comprise the second part of the price
structure. The graph (or table) tells us that 35 respondents said they’d go to the wine bar
once (in a month) if the cover charge was $5, and slightly fewer (20) said they’d go twice
if the entrance was priced at $5. Ten said they’d go once (in a month) if the cover charge
was as high as $15, and no one said they’d go four times (once a week) if the price was
that steep.
Data plan
usage Food, T-shirts,
etc. consumed
at park
P
ri
ce
p
ai
d
Cell Phone Theme Park
B
AP
ri
ce
p
ai
d
B
A
A B A B
Figure 9.16
Two-Part
Tariffs
$5 $10 $15
Buy 4
Buy 3
Buy 2
Buy 1
35
30
25
20
15
10
5
0
Figure 9.17
Using Self-
Reported
Demand Data
to Set Prices
Number of visits sold Total
Price 1 2 3 4
$5 35 20 10 5
$10 20 10 5 0
$15 10 5 0 0
@$5 $105 $120 $90 $60 $375
@$10 $160 $160 $120 $0 $440
@$15 $130 $130 $0 $0 $260
Let’s weight the number of sales by the profitability. Say we take $2 as a variable unit
cost. The values in the lower part of the table are computed as follows:
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
154 Part 3 Positioning via Price, Place, and Promotion
• In column 1: 105 = 35 × ($5 – 2), 160 = 20 × ($10 – 2), and 130 = 10 ×
($15 – 2)
• In column 2: 120 = 2 × 20 × ($5 – 2), 160 = 2 × 10 × ($10 – 2), 130 = 2 × 5 ×
($15 – 2)
• In column 3: 90 = 3 × 10 × ($5 – 2), 120 = 3 × 5 × ($10 – 2), and 0 = 3 × 0 ×
($10 – 2)
• In column 4: 60 = 4 × 5 × ($5 – 2), 0 = 4 × 0 × ($10 – 2), and 0 = 4 × 0 ×
($15 – 2)
When we aggregate these values to get the row sums of $375, $440, and $260, the results
suggest the $10 price point would lead to the greatest overall profitability.
With two-part tariffs, you price items separately even though you know customers will
probably purchase both pieces. Price bundling is sort of the opposite. It aggregates prices of
2 or more complementary products for a single price.
9-8 CHANGES IN CHA-CHING
A smart company doesn’t just set a brand’s price and forget about it. There are a number of
reasons to think about changing prices, including the product life cycle, coupons, and price
discounts.
9-8a Pricing and the Product Life Cycle
Like any of the 4Ps, a firm needs to revisit the strategic questions about pricing from
time to time. Two contrasting strategies are referred to as pricing for market penetration
or skimming. If you want to disperse your brand quickly and widely throughout the
marketplace, that is, penetrate the market, the brand would be priced low at the time
of its introduction to stimulate sales and to encourage trial and word of mouth. This
approach is intended to capture a large market share. It is a little risky because, if many
customers immediately start buying your brand, you better be ready. The product better
be good (no beta testing, thank you!), and your production capacity and your channels
better be ready to serve. With time, the price is usually raised. As the brand reaches ma-
turity and finds its segments, the product is adorned with more features that customers
care about, etc.
In contrast, market skimming is a strategy where a high price is set because the company
is seeking profit margin, not volume. The only customers who will buy this brand at a high
price are the ones who really want it. Think of your digit-head friends who want the latest
in software or hardware and who are willing to pay (a lot) for it. Think of the authors you
like so much that you buy their new books in hardback, rather than waiting a few months
for the lower-priced paperback or e-book to come out. Over time, the price is usually low-
ered to make the brand accessible to more customer segments.
Regardless of the starting point—whether high (skimming) or low (penetration)—
modifications can occur as the product matures. For example, as segments develop, differ-
ent product lines could be priced differently. As the brand matures, a drop in prices might
restimulate sales, but, if a firm believes in the brand, sales would also be restimulated by
maintaining (or raising) prices and by adding features and benefits. Finally, when the
brand has one foot in the ground, prices often tumble because the firm wants to dump
inventory.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
155Chapter 9 Pricing
9-8b Price Fluctuations
Another element of changing prices is a price promotion, through temporary price
cuts or the issuance of coupons. These techniques are reliable in generating a modest
short-term uptick in sales, but there are also equally predictable side effects that aren’t
as positive.
First, competitors can imitate price cuts immediately. So whatever market share increase
in volume you were aiming for gets negated, and you (and your competitors) have shot
yourself in the foot by squeezing your own margins. Second, price drops attract disloy-
al customers, and why not? Customers are savvy and often price sensitive, and they are
quickly trained to buy when brands are on sale. Indeed, one motivation for your price drop
was probably to widen the circle of customers who will purchase your brand and perhaps
come back with future repeat purchasing. However, certainly some proportion of those
newly attracted customers will be fickle and not return. You’re betting on your brand and
true product differentiation to retain customers. If your brand and product are similar to
competitors, however, customers will switch back to cheaper substitutes when you raise
your prices again.
Another dirty little secret is that price discounts are often not profitable. Yes, demand in-
creases with deeper discounts, but only to a point. And even if the temporary price discount
is profitable in the very short run, it may come at the expense of longer-run profitability.
For example, for many consumer packaged goods, the uptick in sales due to a promotion
is due to some households who accelerate their purchasing, stock up and inventory their
goods, and wait to buy again only during the next sales promotions. Hence, sales may dip
a bit after the promotion.
A final cause for concern of occasional price fluctuations is the deleterious effect on the
image of the brand. From the company’s point of view, price promotions are intended to
increase sales. From the customer’s perspective, the occasional savings are appreciated, but
there is also some question as to why the brand would need a sale. Brands that are suffi-
ciently high quality shouldn’t need the gimmick of a promotion.
9-8c Coupons
Coupons are a slightly different pricing instrument. They’re more temporary or ethereal
because by definition they’re relevant only to the segment of customers who are coupon
clippers. It’s likely that price is more important to these customers than brand image, so
the concern of temporary price drops reflecting poorly on the brand is less of an issue for
coupons.
Coupons are big business. By some estimates, 350 billion are available yearly in the
United States alone, with an average value of about $1. Potential savings thus is $350
billion, so it’s good for companies that the redemption rate is less than 1% (annually and
across SKUs). Coupons are especially effective at encouraging new (current) customers to
try current (new) products and brand extensions.
9-8d Competitive Strategy and Game Theory
In addition to concerns about the impact of price points or price changes on our own brand
image, marketers must consider that the competition won’t just sit idly by while we enjoy
increased sales due to a price cut. Marketers frequently use game theory to try to estimate
the likely results of various actions, most frequently price cuts and competitive response.
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156 Part 3 Positioning via Price, Place, and Promotion
Say a competitor such as the market leader initiates action by dropping prices. We must
then decide whether to cut prices also in order to convey to our customers our equitable
value or to maintain prices and emphasize to customers that our brand is based on non-
price features. Further, do we offer a line extension to diminish the brand confusion but
risk cannibalization?
Game theory isn’t about Nintendo; it’s just a structured way to think about the behavior
of interdependent players, like two (or more) firms. The point is to get players to think
about the broader market, rather than only optimizing their own needs. While it may seem
counterintuitive at first, and it is important to avoid collusion or even the appearance of it,
the point is to find a solution to avoid price wars. Mutual cooperation can yield even better
outcomes than both parties acting selfishly on their own accord. Go figure.
For example, Figure 9.18 illustrates a price cut game. Current prices are $5 per unit.
Both firms are tempted to drop their prices to $4. Why? Currently, with us both at $5, we’re
selling 100 units each. That’s fine. But if we drop prices and our competitor does not, more
customers would flock to us. We’d sell 300 units, and our competitor would sell only 50.
That’s great! Well, unfortunately our competitor isn’t stupid, so they’re thinking the same
thing: If they drop prices and we don’t, they’d get 300 and we’d get 50. But if we’re both so
motivated, and we both therefore drop prices, we’re back to splitting the pie, 50:50, but at
worse margins. Brilliant.
9-8e Auctions
As long as we’re talking about changes, let’s talk about dynamic pricing. The idea is that
there isn’t a fixed price; rather, the price is negotiated between the buyer and seller. In a
sense, auctions have always been around, and they are interesting in part because they con-
tinue to grow in popularity online.
The factors discussed previously that increase or decrease demand are analogous to fac-
tors that give bargaining power to a buyer or a seller. Buyers have strength if they account
for a significant portion of the seller’s sales or if they have multiple options for meeting
their procurement needs. Sellers have strengths when products are in short supply, in high
demand, or differentiated, or simply when the economic times are good. Prices stay down
when there is high supply relative to demand, intense brand competition, etc. Prices are
boosted by controlled supply, high product value, product differentiation, high buyer de-
pendency on suppliers, high switching costs, etc.
Price
cut ($4)
No price
cut ($5)
Our Firm
Price cut ($4) No price cut ($5)
T
he
ir
F
ir
m
Them:
50 units
Them:
200 units
Us:
200
Us:
300
Us:
50
Them:
300 units
Them:
100 units
Status Quo
Change?
Change?
Us:
100
Figure 9.18
Price Wars!
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157Chapter 9 Pricing
The defining characteristic of an auction is that the price point isn’t set or fixed, nor is it
even negotiable between a seller and one buyer. Rather, buyers/bidders compete to obtain
the item. As in any marketplace, sellers want to yield high prices, and buyers want low
prices. There is a particularly odd sense of efficiency in that whoever bids the highest is very
probably indeed the customer who values the item the most. Everyone else would have
fallen out of the auction when the price exceeded their so-called reservation price—the
point of indifference at which you say, “If you raise the price, forget it, I won’t buy; if you
drop the price, okay, I will.” So, a reservation price is really a good estimate of the customer’s
willingness to pay. Naturally this price cap varies by segment and product category.
An auction can be comprised of very few bidding participants, as when B2B suppliers bid
for projects (e.g., an architectural design for a new office building, territorial rights for energy
and minerals, etc.). In consumer bidding, the numbers of potential buyers can be quite large.
Many nonprofits hold sealed auctions, during which attendees at the event offer to pay
a certain sum for a desired item (sculpture, exotic travel, etc.), and there is no knowledge by
any bidder what the other bidders’ price offers are (to reveal such, oh très gauche).
In contrast, many large-scale consumer bidding systems (e.g., online) are open auctions
in which all bids are transparent to all participants, and the bidding proceeds in a sequential
manner. In so-called English auctions, bids increase among the players over time. As the
price surpasses the value to a customer, that customer drops out of the auction, and, with
time, whoever remains standing pays the last, highest bid, to obtain the item. In contrast,
so-called Dutch auctions begin high and prices drop over time (though not below the sell-
er’s reservation price). When the price finally drops low enough that a buyer is willing to
buy the item at that price, the item is sold and the auction is concluded.
Whether you are interested in auctions, or price changes, or price as a driver of image,
if you can’t remember the math of pricing, take away this: Competing on price is nearly
always dumb. Find a benefit that your target segment values, and play that up and charge
for it. Value is an assessment of what the customer gets (e.g., quality, psychological benefits)
compared to what the customer gives up (e.g., cost, time, effort of driving to a store). Cus-
tomers can be taught to value many benefits, and then the costs incurred seem “worth” the
value. So be a smart marketer, and teach them what your brand’s benefits are!
Auctions
Auctions have always been around as a mechanism of competition, pricing, and distribution. They
have been a common means of sale for fruits and vegetables, tobacco, and timber. Contemporary
auctions are numerous and financially voluminous, selling:
Fish, Tokyo’s Tsukiji market (founded 1923, $5.5B annual, Tsukiji-market.or.jp).
Real estate, Williams Auction (founded 1957, $.75B, Williamsauction.com).
Antiques, Tepper Galleries (founded 1937, Teppergalleries.com).
Thoroughbreds, Keeneland (founded 1935, $1B, Keeneland.com).
High-end artwork and other SKUs, Christie’s (founded 1766, $5B, Christies.com) and Sotheby’s
(founded 1744; $5B, Sothebys.com).
And, of course, anything on eBay (founded 1995; $8B).
Fun fact: In an old (1949!) issue of the Journal of Marketing, C. W. Kitchen described the challenges of
auctions for perishables and the huge advantage of (then) new “refrigerated-carriers,” known as “reefers.”
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158 Part 3 Positioning via Price, Place, and Promotion
MANAGERIAL RECAP
Here are the key concepts of pricing for a marketer:
• Pricing strategies are basically: low, medium, or high:
� The company and its costs dictate the lower-bound price, where price is a function of the costs and some markup (thus we calculate
break-evens).
� Customers’ willingness-to-pay marks the upper bound, where price is a function of the customer’s value of the item, minus some
markdown (thus we learn techniques such as conjoint to try to obtain high-end price sensitivities).
� In the middle, price is tweaked up or down relative to competitors’ prices, depending on our firm’s and brand’s pricing strategies and goals.
• Pricing can be used to shape a brand’s positioning, and can attract (repel) different target (non-target) segments, e.g., through tactics
such as quantity discounting.
• There is a yin and yang in pricing between economic and psychological approaches to studying consumer behavior. Seemingly
irrational behavior (so says an economist) may nevertheless be perfectly logical (so says a psychologist). Part of the reason marketing
is interesting is because real life is not simple.
Mark-ups vs. Margins
The difference between a mark-up and a margin is one’s point of view. If you’re a retailer, and you
buy a sports watch for $100 and you sell it for $200, then your “mark-up” is ($200-$100)/$100 =
100%. The mark-up is the price you’re adding going forward into the channel toward the
customer.
Now change perspectives. You’re still the retailer, but you’re looking at what proportion of the
customer’s price is profit coming back to you. That’s the “margin” and it’s ($200-$100)/$200 =
50%. We can add channel members and more price changes, and it will look more complicated,
but the concept is the same:
From the manufacturer’s point of view:
$50 = cost of manufacturing (raw materials, labor, etc.)
$150 = the manufacturer’s price to the retailer
→mark-up = (150-50)/50 = 200%
→margin = (150-50)/150) = 66.67%
From the retailer’s point of view:
$30 = cost of retailing (rent, salespeople, ads, etc.)
$40 = the retailer wants to build in a profit of $40
$270 = the price to the customer
→mark-up = (270-150)/150 = 80%
→margin = (270-150)/270 = 44.44%
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159Chapter 9 Pricing
Chapter Outline in Key Terms and Concepts
1. Why is pricing so important?
2. Background: supply and demand
3. Low prices
a. Breakeven for a good
b. Breakeven for a service
4. High prices
a. Using scanner data
b. Using survey data
c. Conjoint analysis
5. Units or revenue: volume or profits
6. Customers and the psychology of pricing
a. Price discrimination, aka segmentation pricing
b. Quantity discounts
c. Yield or demand management
7. Nonlinear pricing
8. Changes in cha-ching
a. Pricing and the product life cycle
b. Price fluctuations
c. Coupons
d. Competitive strategy and game theory
e. Auctions
9. Managerial recap
Chapter Discussion Questions
1. Lawyers are changing their pay structures. It used
to be that they would bill hourly (top dollar for
top lawyers, less experienced helpers had cheap-
er rates). Now they’re beginning to price like
consultants—per project. Thus they must begin
assessing the value-added to the client firm of
the legal expertise and assistance. What advice
would you give a law firm to proceed fairly and
profitably?
2. Why do you think the fashionista segment pays
such high prices for designer clothing with the
knowledge that it will be passé after the current
season?
3. What are the kinds of purchases for which you’ll
“spare no expense”? What kinds of purchases do
you want to buy spending as little as possible?
What are the major differences between these two
categories that drive your attitude regarding price?
Video Exercise: Washburn Guitar (7:02)
Washburn Guitar has been a maker of fine musical instruments since the company’s founding in
Chicago in 1883. The company promises that “each guitar [it produces] represents the finest qual-
ity at the best possible price.” Washburn has four price points: (1) entry level at $349 and below;
(2) intermediate level at $1,000 and below; (3) professional level at $1,000 to $3,000; and (4) collec-
tors level at $3,000 and above. Amid the evolving perception that lower prices indicate lower quality, Washburn
has taken steps to ensure the quality of its products at all price points. Interestingly, guitars made in the United
States typically are of better quality and workmanship than are guitars made offshore. Consequently, U.S.-made
guitars command higher prices. Indeed, most musical artists demand U.S.-made guitars. Washburn uses a manu-
facturer’s suggested retail price (MSRP) as the pricing guideline for retailers selling its guitars. If discount and on-
line retailers offer Washburn guitars for sale at below a minimum advertised price (MAP) that is set by Washburn,
these distributors are warned to cease the practice. If the practice of violating the set MAP continues, the retailers
lose their distribution rights for Washburn products.
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160 Part 3 Positioning via Price, Place, and Promotion
MINI-CASE
Personal Brand Management
Impress4Less is a company founded by two b-school recent alumni. They both had taken advantage of their
school’s career placement services, and thought they could offer additional supplemental services and advice.
They’re constructing a website where anyone looking for help in positioning themselves for a new job might go
to download templates of resumes, examples of personal brand brief ‘elevator pitches,’ videos of strong and weak
interview answers, and the like. Their plan is to offer some of those basics for free, to get people onto the website.
But what they’re really interested in selling is their consultation time, consisting of feedback on resumes and help
with practice interviews.
They’re working with their former school’s entrepreneurial club in proposing to launch their online premium
service for $50. This past year served as a test market at the b-school. Given the friendly partnership, and as a learn-
ing opportunity for the students, Impress4Less shared some information on basic cost structures. Their fixed costs
on this project were $3,000, and variables costs were $10 per user exchange.
Currently at the b-school, the situation is as it looks in the figure below (to the left); that is, 200 users purchased
their services during the last academic year at the $50 price. But the club members get regular feedback (from
classmates) that the $50 price tag seems steep, so they’re asking Impress4Less for a price cut of 10%, essentially
going to the figure at the right.
Case Discussion Questions
1. How many users would have to buy at $45 to at least meet last year’s profits?
2. Should Impress4Less drop prices further? Could they raise prices above $50?
3. What assumptions are you making?
Current
price $50 Drop price
10% (to $45)
Variable
cost $10
Current sales = 200 units
Contribution
Covering
variable
costs
Contribution
Covering
variable
costs
Variable
cost $10
More
variable
costs
New sales = ? units
Contribution
lost to
price cut
More units,
more
contribution
Video Discussion Questions
1. How does the concept of segmentation pricing relate to Washburn Guitar’s four different price points?
2. How does Washburn’s four different price points reflect customer wants and needs?
3. Are Washburn’s four price points an accurate indicator of differential quality? Why or why not?
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161
CHANNELS OF
DISTRIBUTION
In just about Anytown, USA, on Saturday mornings during seasons when the weather is
nice, the town holds a farmers’ market (see Figure 10.1).1 Local farmer Eli brings a portion
of his week’s corn haul, and local baker Emma brings her famous apple pies. Eliot’s selling
his asparagus and squash, and Eliza has flowers freshly cut from her garden. Emery’s selling
his chili, and Emily sells her oatmeal cookies. These providers register with the community
center and pay a small fee to set up a booth to sell their wares.
The buyers are yuppie gentry who fill their SUVs with reusable bags of this very fresh,
unbranded produce. During the week, these buyers shop at national chains, where the food
is perfectly fine (it is fresh and there is a good variety). They also shop at upscale groceries
(where the food might be fresher still and perhaps organic or exotic, and probably more
expensive). Still, Saturdays harken back to the marketplace of old.
Providers have large quantities of their goods, e.g., Eli has more corn than his own fam-
ily could possibly consume, so he’d like to sell some of it. Buyers wish to pick up only a few
of any one particular item, e.g., several ears of corn (but not Eli’s whole stash), a bunch of
flowers (but not more than one vase full), etc. The different needs of the buyers and sellers
can be met nicely in the market.
In marketing, we talk about realigning the discrepancies between the quantities and
selections that the sellers and buyers offer and desire. Given that it is more efficient for
any particular seller to produce a large quantity of a limited number of goods, and yet most
buyers wish to purchase a smaller quantity of a wider variety of goods, the large supply
of the sellers’ goods must be made available to be sold in smaller batches (this process is
known by the charming term breaking bulk). It might be a little hassle for the farmer to
10
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
What are distribution channels and why do marketers use them?
What decisions need to be made in designing good networks?
What happens when channel members disagree?
Managerial Checklist
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
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162 Part 3 Positioning via Price, Place, and Promotion
stand around all Saturday morning until all his corn gets sold in batches of 2 or 3 ears at a
time (that is, some “costs” are involved), but he’d wait forever until someone was willing to
buy his whole truckful.
The market has benefits for the buyers too. The central location of the market allows a
buyer to go to purchase fruit and vegetables and homemade baked goods all in one con-
venient stop. (It’s an old-fashioned mall!) Otherwise, the yupster in the SUV would track
mileage up to Eli’s farm for the corn, over to Emery’s for the chili, back to Emily’s for
cookies, etc. Before you know it, the morning is shot (and car emissions have contributed to
global warming). As a compromise, a consumer might hire a professional shopping agent
to go to these locations to pick up these goods, saving the consumer time, but almost cer-
tainly incurring some service fee. Similarly, farmer Eli might hire a helper to meet him at
his farm and haul away some corn to be delivered to consumers or grocers. Here too, the
convenience of the helper relieves Eli of some hassle but will cost him for the assistance.
10-1 WHAT ARE DISTRIBUTION CHANNELS,
SUPPLY CHAIN LOGISTICS, AND WHY
DO WE USE THEM?
These scenarios are different forms of “channels of distribution,” each of which is trying to
solve the age-old problem, “How do I get my stuff to where consumers want to buy it?” A
distribution channel is a network of firms that are interconnected in their quest to provide
sellers a means of infusing the marketplace with their goods and buyers a means of pur-
chasing those goods, doing all as efficiently and profitably as possible.
The actors in the distribution network include manufacturing firms, distributors or
wholesalers, retailers, consumers, and other players with other names. In the end, the
names aren’t as important as the functions that the parties serve. These functions include
customer-oriented activities, such as ordering and handling and shipping, product- oriented
activities such as storage and display, marketing-centric activities such as promotion,
financial activities such as, well, financing, etc. The links between these actors include the
movement and ownership of physical products, the flow of payment and information, and
assistance in promotions and other marketing activities. When managers speak of logistics,
they’re talking about coordinating the flow of all those goods and services and information
throughout the channel, among the channel members.
Eli’s Corn
Emery’s Chili
E
lio
t’s: S
q
u
a
sh
&
A
sp
a
ra
g
u
s
Emma’s Apple Pies
E
m
ily
’s
C
o
o
ki
es
Eliza’s Flowers
Figure 10.1
Farmer’s
Market
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163Chapter 10 Channels of Distribution
In the spirit of the saying, “No one is an island,” it’s hard to do business without partners.
But as soon as you start taking on partners and forming a network of distribution channel
partners, not surprisingly, those partners want to make some money for the services they
provide. So the tension in channels always takes a certain form: Does this channel mem-
ber contribute value? Does the member provide more benefit than cost? This is the classic
make-or-buy decision that firms constantly address: Should we do this (some function)
ourselves (i.e., make it) or ask someone to do it for us (buy it, outsource it)?
One view of how channel members can make a marketplace more efficient and cost-
effective is depicted in the contrast between Figures 10.2 and 10.3. In Figure 10.2, the
manufacturers are delivering their goods to the consumers directly. In Figure 10.3, they go
through an intermediary player, such as a common retail outlet. In the first scenario, the
number of contacts in the network is the number of manufacturers times the number of
consumers; in the second, the number of links is the number of manufacturers plus the
number of consumers. Presumably some cost is associated with each link (e.g., managing
that marketing relationship), and, as a result, if the costs are roughly the same, it follows
that the marketplace with the fewest links, or costs, is more efficient. Thus, the system with
an intermediary channel member (Figure 10.3), is more efficient than all firms going direct
to consumers.
Manufacturer 3Manufacturer 2Manufacturer 1
Consumer
Consumer Consumer Consumer
Consumer Consumer Consumer
Figure 10.2
Manufacturers
Direct to
Consumers
Consumer Consumer Consumer Consumer
Consumer ConsumerConsumer
Channel
Manufacturer 3Manufacturer 2Manufacturer 1 Figure 10.3
Manufacturers
through a
Channel
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164 Part 3 Positioning via Price, Place, and Promotion
The channel member in Figure 10.3 is not well defined, so Figure 10.4 shows explicitly
the three general classes of distribution channels. For example, many laptop and cell phone
companies make their products and sell them directly to consumers online (as well as
through a channel), and these companies do so because they can make (or save) money
doing both.
Next we see the template for companies that collect stuff from manufacturers in order to
sell it and serve as a touch point to consumers. For example, book publishers (and zillions of
other SKUs) can sell through Amazon.com, which provides a coordination service for con-
sumers. It’s handy for consumers, who can go directly to Amazon to obtain whatever they
wish; it’s handy for the book publisher who doesn’t want to deal with that many consumers.
And of course, it’s handy for Amazon. Amazon is not capable or interested in producing all
those SKUs. It is simply functioning as the electronic equivalent of the farmer’s market—a
place where buyers and sellers can meet to enact their desired exchanges.
Finally, in Figure 10.4 we see that companies can make something and hand it over to
an agent who, in turn, hands it over to retail outlets to make the product available to con-
sumers. For example, Pixar is in the business of making fun movies. The company may not
be good at or interested in getting its movies to the audiences directly, and so it hires and
expects to pay distribution partners. The distributors see to it that the movies are available
in theaters, and the theater serves as the retail point of access for the consumer audience.
The three different channels systems have to deal with different issues. The PC or cell
phone company doesn’t have to deal with other companies, yield to their goals, split profits
with them, or any of that. But they have to do everything themselves. Amazon has to have
cooperation and reliability from its suppliers, and then it has to deal with customers. Pixar
has to deal with its distributors and then is somewhat removed from its audiences.
Figure 10.5 illustrates these differences. Using the “vertical” lingo of marketers, when
a company is dealing with partners that are upstream, it’s called supply chain management.
The partners that are downstream comprise the channel members; i.e., they provide the way
to channel stuff to the customer. Referring back to the companies in Figure 10.4, a laptop
company’s suppliers (e.g., of batteries, hard drives, plastic computer casings) are invisible,
but implied. Amazon’s supply chain is the manufacturers. Pixar has suppliers (film, camera
equipment, agencies of personnel) and channel members (distributors and theaters).
Figure 10.4
Forms of
Distribution
Channels
Manufacturer
(e.g., Dell) Manufacturer
Manufacturer
(e.g., Pixar)
Wholesaler
Retailer
(e.g., Amazon)
Retailer
(e.g., local
movie theater)
Consumers Consumers Consumers
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
165Chapter 10 Channels of Distribution
So if the what of channels is a network of suppliers and providers, and the why of chan-
nels is efficiency, scales, and consistency in positioning, just how do we design effective
marketing channels? To optimize delivery systems, we consider several factors: whether we
want to distribute intensively or selectively, and how we will align the motives of all these
partners to smooth over these large systems. Several kinds of partners are special (e.g., re-
tailing, catalogs, e-commerce), so we will look at their concerns as well.
10-2 HOW TO DESIGN SMART DISTRIBUTION
SYSTEMS: INTENSIVE OR SELECTIVE?
Although distributor partners add value, there is no question that some companies go it
alone and are very successful. So how does a company decide to go direct or indirect, or, as
most do, some combination of both? The first issue in designing a distribution system is
that of distribution intensity: how many intermediaries will the manufacturer go through to
distribute its goods to end user consumers?
Many consumer packaged goods (CPGs) are distributed intensively. For example, many
brands of snack foods, personal care products, utility goods (pens, lighters, candles, newspa-
pers and magazines), and so forth, are sold in many kinds of stores: drugstores, supermar-
kets, discount stores, convenience stores, etc. Why?
1. First, as a consumer, consider how far you’d drive for a pack of gum (not very far)
because it’s a low-cost item and often an impulse purchase. Accordingly, to stimu-
late sales, gum needs to be widely available to consumers.
2. Second, given that CPGs are inexpensive, companies require big volume sales to
make big bucks, hence the extensive distribution.
3. These goods are relatively small, so it is easy for manufacturers to box up a lot of
units into a fairly small box, put many boxes onto a truck, and get the goods all over
the place to many various retail outlets.
4. Finally, these goods are simple: no sales force is required to explain to the consumer,
“Okay, this is how M&M’s work . . . .” So companies advertise directly to the con-
sumer, who pulls the goods from the manufacturer.
Figure 10.5
Channels and
Supply Chains
Manufacturer
Channel
Supply chainWholesaler
Retailer
Consumers
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166 Part 3 Positioning via Price, Place, and Promotion
In contrast, some goods and services are more complicated and expensive, both of which
mean the purchases seem riskier to the consumer. So the consumer needs a salesperson
to explain the purchase (e.g., choices among brands, features to select, etc.), and to reduce
their feelings of anxiety associated with the risk, hence inducing a greater likelihood that
they would buy. Salespeople can seem pushy, but, let’s face it, they’re useful. The guys at car
dealerships, or those working at electronic stores, or the guys in department stores selling
major household appliances probably know more than you about these SKUs.
For the consumer’s part, these more expensive purchases require information and delib-
eration. They aren’t typically impulse purchases, and they aren’t typically frequent purchases.
As a result, the consumer is probably willing to drive 5 or 10 miles to a dealership or to a
department store to buy some household appliance. Thus, the manufacturer doesn’t need an
extensive distribution system.
Every choice has pros and cons. It’s true that sales forces are useful, but they are also
expensive to maintain, so manufacturing companies can’t afford to staff many retail outlets
in a given geographic area. In addition, given that goods that require a sales force are ex-
pensive, customers don’t buy a lot of them. Without frequent repurchasing, there is only a
certain level of demand in any given area. Accordingly, such goods are usually available via
selective distribution channels (i.e., not intensive distribution).
While companies like these advertise to consumers, they’re really relying more on their
distribution partners to help push the goods to the buying consumer (so they advertise and
provide incentives to the sales force).
The intensity of distribution is a function of consumer convenience in access, informa-
tion search, etc. If the goods are simple, inexpensive, easily transported, etc., it’s typical that
they’re distributed widely and intensively. If the goods are complex (requiring assistance
in purchasing) and relatively expensive (therefore feeling like a somewhat risky purchase),
channels are often structured to be more selective.
Selectivity in channels offers additional benefits to the manufacturer. By definition, there
are fewer relationships to manage, which means that the manufacturer has somewhat more
control (e.g., over distributors engaging in price cutting), and costs of interactions are less
(e.g., trade discount deals to push new products need to cover fewer parties). The extreme
case of selectivity is the exclusive channel: e.g., a small city might have only a single Infiniti
dealership. Exclusive channels can be a little tricky because they can tend toward being
monopolistic (by definition, there is less competition), creating potential legal problems.
Bottom line: Channels are supposed to make access easier for customers, so think about
the customer buying behavior for your product category. Channel design is an integral part
of marketing, strategy, and positioning. If your SKUs are available everywhere, that says
something about you: We’re going to be there for you. If your SKUs are found only in select
outlets, that says something else: We’re special, and you’re going to have to make the effort
to find us.
The channel design needs to be consistent with all the other marketing elements.
Recall that certain positioning elements tend to go together: Wide distribution usu-
ally goes with heavy promotion, lower prices, and average or lower-quality products,
whereas more exclusive distribution accompanies exclusive promotional efforts, higher
prices, and higher-quality merchandise. For example, high-end hair products choose to
distribute exclusively through salons to reinforce their positioning and not show up in
Walmart.
The extensiveness of distribution channels is also related to the brand’s life cycle or to
the company’s maturity in the marketplace. The brand that comprises the sole offering of a
new firm is typically sold through very few channels—probably a website primarily. Beyond
that, it’s hard to convince a retailer to support an unknown brand. As the company matures,
it may go broader if doing so is consistent with the desired corporate and brand image.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
167Chapter 10 Channels of Distribution
10-2a Push and Pull
The terms “push” and “pull” refer to whether the manufacturer targets consumers or its
channel partners with its marketing communications. Consumers are said to pull goods
through the channel, whereas trading partners push the goods down the food chain. The
manufacturer can use any marketing mix variables to push to partners or encourage pull
from consumers, but you’ll see there are some common trends.
We’re very familiar with the many pull marketing strategies that assist marketers in en-
couraging consumer demand because we experience them as consumers (see Figure 10.6).
A marketer can temporarily reduce pricing or enhance size or quantity. A marketer can
offer trials (small sizes at low prices) or free samples (e.g., bundled onto a complementary
product). A marketer can offer coupons (money redeemed at point of purchase), rebates
(money redeemed post purchase), financing (e.g., buy now and don’t pay for 6 months), and
points toward rewards in loyalty programs. The marketer still must manage its relations
with distributors and retailers, but pull strategies are targeted to the end user to engage the
consumers’ awareness and loyalty.
Push marketing strategies involve manufacturers offering incentives to distributors
(dealers, wholesalers, retailers) to sell product to end users. Although the manufacturer
targets the channel member rather than the consumer, push marketing tools resemble those
of pull. For example, a marketer can offer the distributor or retailer temporarily reduced
pricing, an allowance to help cover marketing activities, a discount for purchasing larger
quantities (e.g., a twofer or a bogo [buy one, get one free]), financing a payment for several
months, spiffs (incentives for the sales force), etc.
The manufacturer may hope that the retailer will pass through to the end user some of
these incentives (e.g., price discounts), and the retailer may or may not. The value of that
retailer is still in what they do with the incentives; e.g., a price discount might not be passed
along, but the retailer provides more shelf or floor space to the manufacturer’s brands, and
the manufacturer might be perfectly happy with that result. In the end, the manufacturer
hopes that if they give the trade partners incentives, the partners will support the manufac-
turer’s goods and services and push them on to the final customer.
Figure 10.6
Push vs. Pull
Strategies
Wholesaler
Retailer
Consumers
Manufacturer
Pull
Push
How to Pull?
• Advertise to consumers
• Distribute widely
• No sales force
• sell small simple stuff
• Price discount
• Quantity discount
• Larger package
• Inexpensive trial
• Free sample
• Bundled product sample
• Upgrades
• Coupons
• Rebates
• Financing
• Loyalty points
How to Push?
• Advertise to partners (and
consumers)
• Distribute more selectively
• Employ sales force
• Usually selling more
complicated, more
expensive stuff
• Price discounts
• Quantity discounts
• Financing
• Incentives for sales force
• Allowances for marketing
activities
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168 Part 3 Positioning via Price, Place, and Promotion
10-3 POWER AND CONFLICT IN CHANNEL
RELATIONSHIPS
Whether you’re pushing or pulling, distributing intensively or selectively, you and your
channel partners want to see happy customers and enjoy profitability, but there are many
ways to achieve these goals. When channel partners differ in their opinions on how to do so,
conflict can arise. The question is whether strategies and tactical incentives can be designed
so that the goals of all parties are compatible. For example, a manufacturer usually desires
that a retailer stock their entire line, but a retailer can see that certain SKUs don’t sell well,
so they don’t want to waste shelf space or floor real estate with those unattractive items.
Channel members also frequently bicker over (i.e., negotiate terms on) prices and margins.
For example, suppliers will say that the retailers are charging the consumers too much;
hence demand is not as strong as it could be. Retailers will counter that the suppliers’ prices
to them are also too high, and they must pass along high prices to make a decent margin.
Types of Power
When channels marketing people talk about a powerful retailer or a powerful supplier, here’s what
they mean:
Type of
Power
Quick
Image
Definition Example
Coercive
power
Bully One party can make
another do something
by taking away benefits
or inflicting punishment.
“We’re Big-Retailer, and we won’t stock
your stuff until you give us a better trade
margin.”
Information
(expert)
power
Know-it-all One party gets
cooperation because
they have information
the other seeks.
“We’re Big-Online-Retailer and we won’t
provide you with your SKUs sales data for
your CRM database until you purchase
more advertising in our space.”
Legitimate
power
Great Dane
and a
Chihuahua
By size or expertise,
one party can make
claims and threats which
encourage the other
party to conform.
“We’re Big-Pharma-Supplier and we
will not supply you with more of Drug
X because it’s running into testing
problems.”
Referent
power
I want to
be like you
One party cooperates
with another because
the former seeks
affiliation with the latter.
“We’re Little-Guy and we cooperate
with Market-Leader because they have
a great brand name. We’re riding their
coattails as we establish ourselves.”
Reward
power
I have
goodies for
you
One party has the
ability to provide good
outcomes for another.
“We’re Big-Supplier and we do what we
want, but when Big-Retailer asked us to
make our package smaller, we did because
they’ll stock more and sell more for us.”
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169Chapter 10 Channels of Distribution
A little bit of conflict can be healthy. Just as people working together can have diver-
gent views, companies can also have diverse perspectives. The question is how conflict is
handled when it gets to be too much. In handling conflict, the differences can be useful
as motivation to find alternative solutions (e.g., system cost–cutting mechanisms) that
are both mutually satisfying and superior in optimizing goals than either party had first
considered.
Conflict can be quashed if one player is inherently more powerful than another. Perhaps
it shouldn’t be true that might makes right, but, indeed, power is usually defined by size and
it is effective; e.g., if you produce a few lines of a niche product and Walmart doesn’t like
how you’re doing something (your packaging, price points, delivery schedules, etc.), who do
you think will blink first? Or if you’re the big player and your partner is a little entrepreneur,
you similarly expect your “Jump!” to elicit the appropriate response—“How high?” Power
isn’t a great way to resolve conflict in the long-term, however, since the less powerful player
can feel resentful and look to leave the channel arrangement as soon as another opportunity
becomes available. Or, worse, they could create a competing product, with the knowledge
and technology learned from you! Similarly, sometimes conflict arises between two mighty
companies, and then a show of strength will be ineffective; it will be a standoff that just
generates a lot of hot air and noise.
Transaction cost analysis is a model that considers channel members’ production
costs and governance costs, both of which are ideally minimized. Costs of producing
and bringing products to market are often reduced by having intermediaries because
those channel partners operate with economies of scope and scale. Costs of governance
are the relational issues incurred by trying to coordinate the enterprise and control one’s
partners.
A concern is that all players will act selfishly and opportunistically, but a more contem-
porary view is that of transaction value analysis, a perspective that emphasizes the benefits
a company brings to its partners (beyond cost reductions). Marketers speak of all these
plays and counterplays using human relationship terms: They speak of the communica-
tion between a supplier and distributor, the trust between a distributor and retailer, the
satisfaction a retailer has with a supplier, etc.2 Just as with people, when a conflict arises in
channels, the best way through it is by talking to each other; communication enhances trust
and satisfaction. It’s also clearly important to deliver on one’s promises (e.g., meet delivery
dates, quantities, quality, etc.). Channel experts speak of trust as both the willingness and
the ability to deliver on promises.
Other ways that channel members have used to strengthen relationships is to exchange
some personnel for short stints to learn the perspectives and needs of the other party more
intimately. All parties need to feel that they’re being heard and that their needs are under-
stood and being met. Sometimes it’s helpful to remind all members of the channel net-
work that they have the mutual goal of customer satisfaction. Hence, occasionally, multiple
channel members may sponsor joint programs of marketing research in order to see just
what the customer values, so that the channel members can determine together how best
to respond to those requests.
Even when all these measures are insufficient, there are still other options, including me-
diation (negotiate through a third party who determines the two parties’ utility functions)
and arbitration (the third party makes a binding decision for the two). To preclude or abate
conflict, part of the communication is negotiation. Just as differential power affects pricing,
buyers and sellers rarely come to the table as equals when bargaining. Suppliers have more
power when their inputs are important to the buyer, when their services are differentiated,
and when there are no substitutes. Customers have more power when they’re large, when
they’re relatively few in number, and when they purchase large quantities.
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170 Part 3 Positioning via Price, Place, and Promotion
10-3a Revenue Sharing
Sometimes channel conflict can be about “r-e-s-p-e-c-t” and related issues, but it often
comes down to money; e.g., the retailer complains, “I want a bigger piece of pie. Look at the
great service my sales staff provides!” The manufacturer counters with, “But it’s my brands
that the customers are coming for, and while your service is nice and we appreciate it, it’s not
what they’re buying, so we should get more than you.” Let’s look at some of the money issues.
First consider the scenario that a manufacturer sells directly to the customer. A consumer
price is set, from which must be recovered the manufacturing costs (of producing the good
or providing the service) and the retailing costs. For this scenario, the manufacturer incurs
the various costs of interacting with the customer. So the manufacturer profit is a function
of the customer price, the manufacturing and retailing costs, and, of course, demand.
When the manufacturer goes through an intermediary, not surprisingly that player
wants to make some money too for the services they perform. There’s a markup (a profit to
be made) when the manufacturer yields product to the retailer, and there’s a second markup
(more to be made) when the retailer makes the product available to the consumer. If the
channel is not managed well, we quickly run into a situation where, in order to recover
these markup costs, we’d be tempted to set a rather high price to the end user consumer. In
fact, the price may become so high that demand would start to drop off, and then both the
manufacturer and retailer lose. This problem is called “double marginalization” because the
manufacturer wants a profit (a margin) and so does the retailer (hence two margins). So
what to do? You learned it in preschool: The channel partners must share.
Channel Profits
Channel profits: These terms summarize the discussion on “Revenue Sharing,” a means of negotiating
win-win channel relationships.
1. When the manufacturer sells directly to the customer:
manufacturer profit = ( p – cm – cr) × demand,
where
p = price to consumer
cm = costs to the manufacturer of producing the good or service
cr = costs of providing the retailer function, interacting with the customer, etc. (incurred
by the manufacturer)
demand = a function of price, quality, service, etc.
2. When the manufacturer goes through an intermediary:
manufacturer profit = (pr – cm) × demand
retailer profit = (p – pr – cr) × demand
where
pr = price to retailer (i.e., wholesaler price)
cm = costs to the manufacturer of producing the good (assume same as above)
cr = costs to the retailer of providing the retailer function
demand = a function of price, quality, service, etc. (assume same as above—just
different channel member providing this function)
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171Chapter 10 Channels of Distribution
Suppose you take the D2C scenario, call the manufacturer profit instead “total channel
profit,” and divvy up the profits in some portion (equitably agreed to by the manufacturer
and retailer). Then the consumer is not overcharged, the problem of double marginalization
is solved, and demand is such that both the manufacturer and retailer can make some seri-
ous money. The money is simply reapportioned.
If that was a wee bit abstract, consider an example. Figure 10.7 shows a direct and indi-
rect channel scenario on pricing to illustrate the impact of double marginalization. Say it
costs a manufacturer cm = $50 to make a designer sweater, and the costs to set up retail are
cr = $50 (for whoever incurs the cost). That is either the manufacturer if they sell direct or,
in a moment, the retailer when they sell indirectly. Say the manufacturer marks up $100. If
they sell it directly, the consumer would be charged $200.
If we’ve managed the channel properly, the customer shouldn’t see any difference in price, and
every player gets a piece of the pie. For example,
manufacturer profit when going direct =
manufacturer profit when going indirect + retailer profit in indirect channel
or:
(p – cm – cr) × demand = (pr – cm) × demand + (p – pr – cr) × demand
= [pr – cm + p – pr – cr] × demand
= [p – cm – cr] × demand
Figure 10.7
Double Mar-
ginalization:
The Problem
Manufacturer
cm (manufacturer) cost = $50
Manufacturer markup = $100
cm (manufacturer) cost = $50
Manufacturer markup = $100
So, selling price to retailer = $150
cr (retail) cost = $50
Retailer markup = $50
Selling price to consumer = $250
Total system costs = $100
Total system surplus = $150
Margin split 2:1
Manufacturer: retailer
cr (retail) cost = $50
Selling price to consumer = $200
Consumers
Manufacturer
Base (Direct) Problem
Retailer
Consumers
If instead of selling the sweater directly, the manufacturer hands it over to a retailer to
sell, pricing it at pr = $150 (which is cm = $50 and $100 manufacturer markup). Then the
retailer wants some margin too, say $50, so they mark it up, and the price to the consumer
is p = $250 (which is pr = $150 and cr = $50 and $50 retailer markup). Costs total $100,
and the surplus of $150 is split $100 for the manufacturer and $50 for the retailer. Say de-
mand is “okay”; some 500 sweaters are bought. That gives the manufacturer 500 × $100 =
$50,000, and the retailer 500 × $50 = $25,000.
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1
2
3
4
5
6
7
8
9
10
Anatomy of Airbus’
Channel Partners
1. Carson, California: Water engineering and plumbing
2. Irvine, California: Testing in-flight entertainment of 600 seat-back video monitors
3. Perth, Australia: Red clay with bauxite for aluminum to
4. Texas: Smelted into aluminum chunks “the size of mattresses,” then
5. Davenport, Iowa: 1.2-mile aluminum mill to make wing pieces, which are
6. Trucked to Baltimore, Maryland, and
7. Shipped to a factory in Broughton, North Wales (Plant can fit 12 soccer fields.)
8. Put on ship, made in China
9. Rendezvous soon with fuselage, built in Germany
10. Shipped to Bordeaux and driven by tractor trailer to Toulouse overnight
(French police close roads) for final assembly.
The final step in preparing the A380
is painting the aircraft for specific
customers. Among the airlines
purchasing the A380 are Emirates,
Quantas, Singapore Airlines, Air
France, Lufthansa, and Korean Air.
Fr
ed
rik
v
on
E
ric
hs
en
/d
pa
/p
ic
tu
re
-a
lli
an
ce
/
N
ew
sc
om
To give you a sense of size, the big A380 is in the foreground, and
the little toy in back is an A340, which is only slightly smaller than
the huge 747! The A380 assembly requires 18,000 suppliers in
30 countries, 1,000,000 aluminum fasteners.
The plane: houses 800 passengers, has a 260-feet wingspan,
has a tail seven stories high.
For more, see Peter Pae’s LA Times article, “Giant Passenger
Plane Requires Giant Supply Chain.” Thank you, Professor Mumin
Kurtulus (Vanderbilt U) for this suggestion!
©
IT
AR
-T
AS
S/
N
ew
sc
om
Da
vi
d
Va
rg
a/
Sh
ut
te
rs
to
ck
.c
om
Several engines are available on
the Airbus A380, from suppliers
such as Rolls Royce and Engine
Alliance, which consist of a
General Electric engine and
Pratt & Whitney fan.
Da
vi
d
Va
rg
a/
Sh
ut
te
rs
to
ck
.c
om
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
173Chapter 10 Channels of Distribution
Imagine the manufacturer proposes a 2:1 (or 67%:33%) split like before, then pr = 117:
the manufacturer makes $67, the retailer $33. These figures are less than before for both
parties (the manufacturer had made $100 and the retailer $50). However, let’s factor in
the pickup on demand, say to 800, and now the manufacturer would make $67 × 800 =
$53,600 and the retailer $33 × 800 = $26,400 (which is $3,600 more than before for the
manufacturer and $1,400 more for the retailer). If the demand is even stronger—say 1,000
sweaters are sold—then the manufacturer makes $67,000 and the retailer $33,000 (an in-
crease of $17,000 and $8,000, respectively).
If the manufacturer is feeling more generous and they propose a 50:50 split, and if the
price to the consumer is $200, with total costs at $100, the manufacturer and retailer each
would make $50. Then, with 500 sweaters sold, profits would be $25,000 (for both the
manufacturer and retailer); with 800 sweaters sold, profits would be $40,000; and for 1,000
sweaters sold, the profits would be $50,000. This profit level was achieved by the manufac-
turer when the sweater was selling at $250, but, because fewer sweaters are sold and because
the percentage shares favored the manufacturer, it’s twice what the retailer had made. This
move might “feel” generous on the part of the manufacturer, but in fact it can be used by
the manufacturer to buy a lot of goodwill. So, later, the manufacturer might make requests
of the retailer.
See? Spread the love around. Or at least the money.
10-3b Integration
Again, recall that channels aren’t about the parties involved as much as about the functions
they serve. So, if some channel relationship seems to be perennially bumpy, the make vs. buy
decision can be revisited. A company can outsource something it currently makes, or it can
bring back in-house something it had asked a partner to cover. For example, in the latter
Figure 10.8
Double Mar-
ginalization:
Solutions
cm (manufacturer) cost = $50
Manufacturer markup = $67
Selling price to retailer = $117
Solution 1
cr (retail) cost = $50
Retailer markup = $33
Selling price to
consumer = $200
Total system costs = $100
Total system surplus = $100
Margin split manufacturer: retailer 2:1
cm (manufacturer) cost = $50
Manufacturer markup = $50
Selling price to retailer = $100
Solution 2
cr (retail) cost = $50
Retailer markup = $50
Selling price to
consumer = $200
Total system costs = $100
Total system surplus = $100
Margin split manufacturer: retailer 1:1
Manufacturer
Retailer
1. Start here
2. Then go
here or here
Consumers
If the channel system could drop the price to the consumer to $200, demand would
presumably pick up, according to the sales of other comparably positioned, but lower-priced
sweaters. So lower the consumer’s price to p = $200, as depicted in Figure 10.8. The costs are
still the same, that is, cm = $50 and cr = $50, so the question is what are pr and the markups?
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
174 Part 3 Positioning via Price, Place, and Promotion
scenario, if revenue sharing annoys you, you’re tired of channel conflicts, and you’re a bit of
a control freak, you can vertically integrate.
A manufacturer could engage in so-called forward integration by opening its own retail
stores.
• For example, Sony and Apple computers used to be only in manufacturing; subse-
quently, they (partially) forward integrated, opening Sony and Apple stores.
• Ralph Lauren took its fashions forward in two retail channel formats; they have a
few select flagship stores to carry their entire line (thus offering more SKUs than
what they make available to department stores such as Bloomingdales).
• Perhaps the most popular means of forward integrating has been manufacturers’
providing their wares online for direct purchasing.
A manufacturer can also engage in backward integration by controlling some of the raw
material inputs.
• For example, Amazon no longer simply sells books—it also publishes them.
• Retailers backward integrate when they set up private labels (e.g., foods, fashions,
toys). Private labels offer a number of advantages: (1) If they sell well, they give the
retailer negotiating power with the manufacturers. (2) They can offer significant
margins. (3) They can help the retailer differentiate itself.
These moves introduce additional forms of competition. Where there was horizontal
competition between retailers of different types (e.g., pharmacy vs. discount house vs. de-
partment stores), there now can be vertical competition wherein the manufacturer finds
itself competing with its partners. For example, a manufacturer’s own branded retail store
can compete with an independent channel retailer, and the manufacturer’s brand may com-
pete with a retailer’s private label brand.
Sometimes it’s hard to keep track of all the players in the channel. While the prototyp-
ical channel structures in Figure 10.4 look simple, the real world is, of course, messier.
Companies that compete in one industry, even over one SKU, may collaborate in the pro-
duction and selling of others. Today’s network of companies and channel responsibilities
are complex and amorphous, given our globally interconnected world (see Figure 10.9).
3. Computer parts
1. Raw materials
(chunk of silicon)
2. Semi-conductors
Boeing, Ford,
Samsung, etc.
awaiting answers
From Japan to foundries
in Taiwan, assemblies
in China, then back
to Japan
4. Information
Worldwide,
labor and
computer
Chips treated, put
onto circuit boards,
ready to install in PCs
Figure 10.9
Global
Channels
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
175Chapter 10 Channels of Distribution
10-3c Retailing
A particular channel function that has generated a great deal of interest is retailing, in part
because it is the most visible element to the end customer, and so it can have the most direct
impact on image, positioning, and brand equity. Retailing has also been a topic of discus-
sion as it has been gaining power and momentum over the past 10 to 20 years. Marketers
reliably find that large, powerful retailers can make or break a new product.
Retail outlets are classified according to a number of criteria. They can be compared by
the extent of the manager’s ownership. Some are independent retailers (e.g., a local artist’s
gallery, the local florist, a village baker), and others are branded store chains (e.g., Clarks,
Timberland) or franchises (e.g., Sonic, Midas). Alternatively, we can categorize retailers by
their level of service, which tends to be positively related to their price points, from Costco
and SuperValu to Neiman Marcus and Macy’s.
Most frequently though, marketers and industry discussions classify stores by their
product lines. Specialty stores carry depth but not breadth; e.g., a store may carry only men’s
athletic shoes, but they do not carry table linens or children’s clothing. The product as-
sortment is broader at general merchandise retailers, such as department stores, which carry
shoes, linens, and kids’ clothes, but perhaps not as many brands of men’s athletic shoes as
the specialty shoe store. Other general retailers include the monster-sized mass merchan-
disers (e.g., discount warehouse clubs like Costco or Sam’s or hypermarkets), or smaller
general stores, such as convenience stores and drugstores.
Marketers and smart CEOs have long recognized the importance of the frontline em-
ployees as the primary connection between them and their customers. Unfortunately, some
backward CEOs think that their merchandise attracts customers, so retail staff should be
paid minimum wage. Clearly the merchandise is important, but so are the employees; they
are a salient representation of the brand to the customer.
A lot of research has demonstrated that there is a relationship between employee satis-
faction and customer satisfaction. If a retailer isn’t selective in hiring employees, and if the
employees are not trained or paid well, then the service they provide will be suboptimal, and
there are clear and immediate repercussions on customer dissatisfaction. Not surprisingly,
this situation isn’t particularly pleasing to employees either; they experience the stress of
role conflict, that is, they may want to please the customer but not be able to do so. Sooner
rather than later, they resign, and new workers are hired as replacements, and this churn ex-
acerbates poor service, since newbies rarely know how to do something in an organization.
If instead, the retailer has foresight, they’ll select good people, train them, pay them and
reward them well, and trust them enough to empower them to make on-the-spot decisions
to make customers happy.
Top Food Retailers
The top food retailers are:
In Europe: Schwarz (€69b), Tesco (€64b), Carrefour (€61b)
In the U.K.: Tesco (£64b), Sainsbury’s (£26b), Asda (£24b)
In the U.S.: Wal-Mart ($121b), Kroger ($59b), Costco ($44b), Safeway ($34b)
Does the concentration in Europe surprise you? How about Walmart in the United States?
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176 Part 3 Positioning via Price, Place, and Promotion
Retailing falls under the general rubric of services, and just as the employees are more no-
ticeable to customers, so are the operations elements, such as IT. A tool that marketers have
found useful is to draw a flowchart depicting the front-stage, meaning all the elements that
a customer sees, as well as the backstage elements of the service provision that the customer
does not see but that also must run efficiently to support the front stage. Since services—
such as a customer walking into a retail outlet, wandering around, picking up merchandise,
putting some back, considering what to buy, finally checking out—all unfold in real time,
the flowchart map can given the marketer a sense of the elements that need to be man-
aged: What parts of the process flow smoothly? What parts bog down quickly during peak
periods? What parts of the process might be streamlined or eliminated altogether?
One streamlining phenomenon that IT is facilitating is self-service. We take self-service
for granted in a number of industries: retail banking, check-ins at airports, checkouts at
hotels, etc. Internet retailing is also clearly a form of self-service; instead of flipping through
a catalog and calling an 800-number to place an order with a customer rep, we go online
and click, click, click. Beyond these forms, a number of retailers are experimenting with
self-service in areas like checkout. There are personnel, e.g., at grocery or hardware stores,
as backup in case the machines are too confusing and to discourage theft. IT has made
the checkout staffing needs more efficient (e.g., one person supervising six self-checkouts
instead of six checkers). It’s a development to watch.
Finally, a classic concern in retailing is the old mantra you’ve heard, “location, location,
location,” that is, how to identify an ideal site location for one’s store. Marketers are hired
to study environmental data such as population densities, income and social class distribu-
tions, median ages, and household composition if that is relevant to a particular store (e.g.,
placement of a toy store vs. a dance club).
Site location models essentially predict the likelihood of a successful outlet as measured by
predicted sales as a function of those density stats. If you’re Starbucks, it’s population density
and urban, upscale, high foot traffic. If you’re Walmart, it’s rural for the store’s footprint but
well placed with respect to car traffic, and average or downscale socioeconomic ZIP codes.
Once they’re succeeding, a retailer has multiple growth strategies available. First, a
retailer can expand by providing additional services to serve their current customers better.
For example, it’s not unusual for companies known for a particular core service (e.g., a
grocery store) to add peripheral services for the convenience of their shoppers (e.g., adding
banking, a florist, a drycleaner, etc.). Alternatively, the retailer can maintain their focus on
their current offerings but reach out to attract additional segments of customers.
Given the importance of location and channel access, another popular course of action is to
go multisite and open additional stores. While this strategy seems easy—after all, you already
know how to make one shop succeed—it can be a challenge to oversee quality control in
multiple locations. Companies face special risks when they expand too quickly. International
expansion is a form of multisite expansion, and it brings additional challenges in terms of tai-
loring one’s brand (and entire marketing mix) to the local markets. International approaches
include direct exporting, joint ventures, direct foreign investment, license agreements, etc.
Markup? Markdown?
Imagine you’re a retailer. You buy a piece of merchandise for $100. You sell it for $200. The markup
is ($200 − $100)/$100 = 100%. The margin is ($200 − $100)/$100 = 50%. Just depends on the
perspective.
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177Chapter 10 Channels of Distribution
In addition to setting up shop internationally, companies in other countries can serve
as very useful channel partners. An important form of international channel support these
days is global outsourcing. For example, outsourcing reliance on India is huge, for the tech-
nical training (engineers hired there are less expensive than comparable talent in the U.S.,
U.K., Germany, or Japan) and for skills in English, both verbal (call centers) and written
(software code and medical records transcriptions). In addition, India’s offerings are broad-
ening to include the provision of auto parts, chemicals, and electronics.
China’s role in outsourcing is also clearly huge because of the size and costs of its non-
union labor force. Employees’ roles are less versatile given the more recent heritage of En-
glish as a second language. Its capitalistic business environment is also less mature, and it
needs to redress its stance on copyright violations before playing with the global companies.
Finally, while its infrastructures are improving, they are still relatively weak.
Choices among outsource providers depend on the talent, costs, and size of the labor
pool, the existence of relevant infrastructures (IT, transportation, e-power, telecom), a hos-
pitable government stance on foreign investment (e.g., local taxation), costs of real estate
and travel, and local ethics (e.g., the country’s treatment of women). These less experienced
companies and countries are also more amenable and motivated to tailor their services to
the buyers.
Transportation, a.k.a. How to Move Stuff.
Transportation logistics are frequently estimated to be nearly 50% of distribution costs. The other
large components are holding and storing inventory. With regard to transportation, the choices are
really quite simple: Time is money.
Transportation Comments
Air freight Fast, reliable scheduling, expensive.
Trucking Pretty fast, pretty reliable scheduling, wide availability, somewhat
expensive.
Shipping Really cheap. Really slow.
Pipelines Cheap, but limited in applicability. Only liquids or gases (not furniture or
automobiles), and only certain kinds of liquids at that (oil, not orange
juice). Cable lines (urban and deep-sea) are important but also limited
(electric, phone, data, computing).
Anatomy of Airbus’ Channel Partners
1. Carson, California: Water engineering and plumbing
2. Irvine, California: Testing in-flight entertainment on 600 seat-back video monitors
3. Perth, Australia: Red clay with bauxite for aluminum to →
4. Texas: Smelted into aluminum chunks “the size of mattresses,” then →
5. Davenport, Iowa: 1.2-mile aluminum mill to make wing pieces, which are →
6. Trucked to Baltimore, Maryland, and →
7. Shipped to a factory in Broughton, North Wales (Plant can fit 12 soccer fields.)
8. Put on a ship that was made in China
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178 Part 3 Positioning via Price, Place, and Promotion
10-3d Franchising
Franchising is a unique format of multisite expansion. It’s a means for a company to
quasi-integrate; the company can retain some control without complete ownership or cap-
ital expenditure. Franchising systems offer benefits to both the franchisor (the company)
and the franchisee (the local frontline).
For the franchisors’ part, they receive some capital, they enjoy some scales of economy,
they know they have committed people in their franchisees, their expansion and invest-
ments are relatively reduced in risk, and, having put their franchises in good hands, they
can focus on their core functions, such as their expertise in product development. For the
franchisees, they immediately inherit a company with a well-known brand and some mar-
ket awareness, supplier relationships are largely intact, there are templates for training the
staffs they hire, and there is central firm support for many business concerns, including
marketing.
The two major classes of franchising are product franchising and business format fran-
chising. For product franchising, a supplier authorizes a distributor in some territory (a
prescribed geographic area) to carry its products, use its brand name, enjoy the efforts of its
advertising, etc. The biggest example of product franchising is the automobile dealership
(e.g., Ford dealers are meant to sell Ford cars and trucks). Other product franchises include
Coca-Cola bottlers, Dunkin’ Donuts shops, Subway restaurants, etc. Business format fran-
chising is an arrangement where the company offers a tried-and-true system in which to
conduct business, along with the marketing support, brand name, advertising, etc. to the
franchisee—i.e., the owner who will run the local arm of that business. Examples are fast
food outlets, some hotels, and a variety of other businesses, such as 7-Eleven convenience
stores, Supercuts hair salons, Senior Helpers, etc.
In either case, a franchisee pays an upfront fee to buy into the system and then continues
to pay royalties to the franchisor. In exchange, the franchisee enjoys an established brand
name, as well as corporate support on equipment, the training of personnel, and marketing
and advertising. Franchises are a low-capital, low-risk means of being an entrepreneur with
a safety net. Most owners have some business management experience, and they can see
the advantages of the economies of scale; the profits earned by all the outlets help finance
the operations of the entire system, e.g., marketing the brand name, advertising dollars,
operations, capital (buildings, land, equipment), etc. While initial franchise fees can seem
9. Rendezvous soon with fuselage, built in Germany
10. Shipped to Bordeaux and driven by tractor trailer to Toulouse overnight (French police close roads)
for final assembly.
The final step in preparing the A380 is painting the aircraft for specific customers. Among the
airlines purchasing the A380 are Emirates, Quantas, Singapore Airlines, Air France, Lufthansa, and
Korean Air.
Several engines are available on the Airbus A380, from suppliers such as Rolls Royce and Engine
Alliance, which consist of a General Electric engine and Pratt & Whitney fan.
To give you a sense of size, the big A380 is in the foreground, and the little toy in back is an
A340, which is only slightly smaller than the huge 747! The A380 assembly requires: 18,000 suppliers
in 30 countries and 1,000,000 aluminum fasteners.
The plane: houses 800 passengers, has a 260-feet wingspan, has a tail seven stories high.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
179Chapter 10 Channels of Distribution
steep, these networks provide access and support at a level that an independent entrepre-
neur typically cannot reach.
The franchise system has appeal to customers also because the brand name implies a
level of standardization and predictability in quality across the outlets; e.g., one Jiffy Lube
is pretty much like another, or, if you’re inside a McDonald’s, you would be hard-pressed
to identify which city you were in. Franchises are popular up and down the channel (for
the manufacturer or franchisor, the retailer or franchisee, and the customer), and hence
they continue to grow in many sectors, e.g., movie theaters, weight loss centers, ice cream
shops, etc.
10-3e E-Commerce
An enormously important channel is the Internet, and, if you can believe it, its impact is
still in its infancy. Retail sales online are about $180 billion, growing by about 10% a year,
but that’s still only about 11% of total retail sales (www.census.gov/retail).
Who’s buying all these books, music, DVDs, and, well, just about SKU? First, in terms
of demography, those online still tend to be younger and more affluent, but gaps are closing
toward being representative of general markets. Second, the U.S. dominates, but not by
much or perhaps not for long. The countries with the next largest Internet presences are
Japan, Germany, the U.K., France, and Korea. China’s population is around 1.3 b, with only
400 mm online. India’s population is right behind (1.2 b), with fewer online users (fewer
than 100 mm). Obviously, both China and India have a huge potential for growth. Figure
10.10 presents the largest Asian countries (by population) and their Internet percentage
penetrations. With the exception of Japan, the largest countries have the least penetrations,
signaling obvious opportunities.
The Internet is frequently characterized as a tool to empower customers. Figure 10.11
shows the increasing variety of channels through which a consumer might view enter-
tainment programming. Price points and access durations vary, and the business models
are still shaking out. As always, it’s important to consider the target customer segment(s)
Figure 10.10
Asian Internet
Penetration
Percentages
P
er
ce
nt
ag
e
of
P
en
et
ra
tio
n
0
10
20
30
40
50
60
70
80
90
100
S
ou
th
K
or
ea
Ja
p
an
M
al
ay
si
a
C
hi
na
V
ie
tn
am
P
hi
lip
p
in
es
Th
ai
la
nd
In
d
on
es
ia
In
d
ia
P
ak
is
ta
n
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
180 Part 3 Positioning via Price, Place, and Promotion
when designing or choosing channels: Different channels appeal to different individ-
uals and customer segments. Increasing consumer choice is a central manifestation of
empowerment.
In addition, e-commerce offers convenience and sometimes even smarter shopping. For
example, the online services of “my lists” and order histories make reorders easier (e.g.,
Amazon’s wish list, NetGrocer’s last list, Netflix’s ratings), etc. Web hosts’ recommendation
agents seem to enhance purchasing (but perhaps not lock in continued patronage).
10-3f Catalog Sales
The hard-copy predecessor to e-commerce was the direct-to-consumer catalog. The top 10
catalogers are B2B companies, including Dell, Thermo Fisher Scientific (lab supplies), IBM,
Staples, and the like. The biggest B2C catalogers are Sears, JCPenney, Williams-Sonoma,
L.L. Bean, Fingerhut, and Doctors Forster & Smith (pet supplies).
The advent of any new medium (e.g., the Internet) brings excitement and also naturally
some concern that it will displace existing media (e.g., catalogs). But no worries: According
to Multichannelmerchant.com, 80 of the top 100 catalogers continue to see sales growth.
While conducting business via the Internet is dirt cheap, many costs for cataloging, such as
color printing, have come down also (however, postage costs occasionally rise).
Marketers have shown that, while the Internet is very well suited for a search, catalogs
still dominate when customers are browsing. In addition, the photography in catalogs is
beautiful and sensual. Catalogs serve as a prompt, stimulating a customer to go to a website
more frequently. Thus, these channels are complementary and not competitive.
The channel synergies extend to retail stores as well. Marketing researchers describe
the strengths of each: The Internet is great for the search experience (it’s convenient, the
information is vast, and comparisons between products and prices are facilitated). Catalogs
are great for the enjoyment of the browsing experience, and retail dominates for pre- and
post-purchase service.
While a hard-copy catalog is, of course, fixed once printed, catalogers are also using
technology and customer transaction databases to customize their printed offerings.
The types of products and SKUs to include in one customer segment’s catalog versus those
that are sent to another can be modified, as can the frequency of the catalogs sent, the
promotional incentives offered, etc. Catalogs can be used to yield sales directly and also to
drive online or retail traffic. Increasingly, these promotional efforts are tracked, as when a
catalog insert coupon is printed with an individual barcode, with the coupon redeemable
at point-of-purchase. The redemption data further contribute to the database, not only to
enhance subsequent personalization efforts, but also to continue to test the effectiveness of
marketing offers.
Figure 10.11
Channels
Provide Con-
venience and
Flexibility to
Consumers
$99/year for “Prime”
membership ($8.25 per month)
$7.99 per month
$2.99 for an episode, $39.99 for a
Season Pass
$8-9 per month
Source: Amazon.com, Inc.
Source: Hulu
Source: 360b/Shutterstock.com
Source: scyther5/Shutterstock.com
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181Chapter 10 Channels of Distribution
10-3g Sales Force
We’ve talked about machines (the Internet, self-service IT systems) as a channel and about
frontline employees at retail shops as channel representatives, but another human element
of a channel is a company’s sales force. For the companies high on push, such as many
B2B channels, the sales force is an enormously important part of the corporate system
and contributor to the bottom line. If we look at the performance of highly trained sales
teams in industries such as shipping and metals, we see that the highest-educated and
longest-tenured sales teams have growth rates in the mid-20% range. Particularly for more
undifferentiated products, the quality of the sales force is often the single most significant
means of differentiation. Stated another way, for these products, a company’s sales force is
its most important driver of performance.
The issues regarding sales forces are two: First, how many salespeople should we have
(and where will they be deployed)? Second, how should salespeople be compensated for
their efforts? The determination of the size of a sales force is usually done via some estima-
tion of expected workload. We’d solve for the optimal number of salespeople by factoring in
how many customers we must serve, how frequently we must call on a customer throughout
the year, the average amount of time necessary to spend with each client, etc. For example,
a particular SKU is sold to 100,000 drugstores and convenience stores, and the brand man-
ager wants each salesperson to visit each account at least once a month, or 12 times a year.
Say each visit lasts 30 minutes. The average number of hours worked a year would be 2,000
(50 weeks × 40 hours a week), but not all 2,000 will be face-to-face time with clients. Let’s
say that travel and administrative duties take away 500 hours. Then the minimum number
of salespersons we’d require for this coverage would be
(100,000 accounts × 12 visits per year × 0.5 hour)
= 400 sales people
1,500 hours
Naturally this number and the kind of salesperson most useful to the company will vary
with the brand and corporate life cycle: Newer brands and companies might well take ad-
vantage of current selling partners. As the brand grows, the sizing issue is easier to clarify,
and the salesperson’s roles are beginning to be defined and specialized. As the brand ma-
tures, the salespeople need to be generalists in order to cover multiple products. And with
the brand in decline, the sales force might be cut; indeed, the company might return to the
use of selling partners.
Each company develops its policies to train and evaluate its salespeople. Sales managers
are motivated by the criteria set for their performance reviews, to which their compensation
is tied. Sales compensation is salary plus bonuses, but the question is a matter of proportion.
The bonuses can be cash, trips, or chunks of wood (plaques).
Work performance criteria need to be clear from corporate so that the sales reps don’t
get frustrated that their work is for naught, and transparency is important for morale and
feelings of fairness throughout the company. Numerous inputs can serve as components of
performance evaluations, including sales data, perhaps by segment (e.g., client size) or by
product line (e.g., pushing a new line), or improvement (e.g., sales compared to last year’s or
last quarter’s sales). In addition to these outcome-based measures of conversion, there can
be effort measures, such as time spent with clients, apparent expertise and product knowl-
edge and training, the salesperson’s attitude, or time-clock inputs such as number of days
worked, number of calls placed, keeping selling expenses down, etc.
Just as the frontline in retailing is part of the brand image to the consumer, the sales force
is part of the brand to the B2B customer. Here are the three biggest complaints by B2B
buyers about salespeople: (1) “The sales person isn’t following my company’s buying process.”
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182 Part 3 Positioning via Price, Place, and Promotion
(2) “They didn’t listen to my needs.” (3) “They didn’t bother to follow up.” Avoid these
problems, and the account is yours!3
10-3h Integrated Marketing Channels
As the number of channels proliferates, increasing care must be taken to coordinate and
integrate efforts, data, customer touch points, etc. Companies are trying to understand
customer behavior in order to see what channel attributes are important and what impacts
customer choices. Companies are also trying to be strategic, considering how an addition-
al channel would impact sales and profits and therefore how to allocate resources across
channel options.
As always, when the decisions seem overwhelming, simplify and remember that the key
to marketing is to think about the customer. From a customer focus, the marketer can design
effectual distribution channels for the target segments to optimize the benefits they seek.
B2B ad: We can
accommodate
your company
conferences
and retreats.
MANAGERIAL RECAP
Distribution channels are important to marketers because they’re the link from the manufacturer to the customer.
• Numerous thoughtful decisions must be made in designing channel networks of partners, including the choices of intensive vs.
selective channel partners.
• Channel entities are independent yet interdependent organizations; thus, from time to time, conflicts may arise. These are best
addressed by employing good communication and trust, revenue sharing, or greater vertical integration.
So
ur
ce
: R
ad
is
so
n
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183Chapter 10 Channels of Distribution
Chapter Outline in Key Terms and Concepts
1. What are distribution channels and supply chain
logistics, and why do we use them?
2. How to design smart distribution systems: inten-
sive or selective?
a. Push and pull
3. Power and conflict in channel relationships
a. Revenue sharing
b. Integration
c. Retailing
d. Franchising
e. E-commerce
f. Catalog sales
g. Sales force
h. Integrated marketing channels
4. Managerial recap
Chapter Discussion Questions
1. Go online and compare three franchises (e.g.,
franchise.org, americasbestfranchises.com, or
whichfranchise.com). Choose two franchises in
the same industry (e.g., fast food) and the third
franchise from another industry (e.g., hair cutting).
Make a table to report the fee structures (upfront,
continued licensing), as well as benefits touted for
franchisees of each franchise system. What would
tempt you to pitch in with some friends and buy a
franchise when you finish your degree?
2. If you were to take your company global, which
3 countries would be your first targets and why?
What kinds of strategies and products fit with
those countries’ segments of customers?
Video Exercise: Taza Chocolate (6:55)
Following the Mexican chocolate-making tradition, Taza Chocolate, based in Somerville, Massa-
chusetts, manufactures a unique, stoneground chocolate with a very coarse texture and a very
intense flavor. Making its chocolate from scratch (like, bean-to-bar), Taza produces chocolate bars,
Mexican-style chocolate disks, and chocolate-covered nuts. Taza’s products are carried in specialty
and health food stores around the nation and on the company’s website. Given the nature of the product, dis-
tribution is a critical element of Taza’s marketing program. Taza markets its products through three distribution
channels at different price points. As a manufacturer, Taza must produce a large volume of product in order to be
cost-effective; the bulk of Taza’s output is sold wholesale. The wholesale channel is an intermediate price point. A
second channel occurs through distributors, and this pricing is below wholesale. A third channel is through direct
retail, which has the highest price point; most of Taza’s direct retailing occurs through the company’s website,
although it is working on opening a factory store.
Video Discussion Questions
1. What distribution channels does Taza Chocolate use, and what do they contribute to the company’s overall
marketing efforts?
2. Taza Chocolate prices its products differently based on the channel that is used for distributing them. Does
this approach make good managerial sense? Explain your answer.
3. How does the concept of integrated marketing channels apply to Taza Chocolate’s product distribution system?
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184 Part 3 Positioning via Price, Place, and Promotion
MINI-CASE
Starbucks Fair Trade Line
Like a lot of massively successful consumer companies who want their customers to see they have big hearts,
Starbucks offers a line of coffees for purchase made from small growers who meet certain economic and ethical
standards. A challenge for Starbucks is that none of these such coffee growers are on a scale that offers any econ-
omy to the company for shipping, pickup, and processing. As a result, the costs to Starbucks are higher than for
the mass suppliers of their standard coffees. Starbucks typically passes along some of those higher costs in higher
prices to customers, reasoning that customers who care about such matters will happily pay for the extended
benefits and feelings of goodwill.
Costs to growers continually rise, sometimes modestly, sometimes sharply. It’s getting to the point where Star-
bucks wants to take a number of the pricier growers back to the table to negotiate better deals (for Starbucks), and
of course, Starbucks holds the threat over their heads that the supplier will be dropped.
Case Discussion Questions
1. What kind(s) of power does Starbucks hold over their suppliers in this case?
2. Use the double marginalization problem and solution guides to structure two alternatives: one in which
prices to consumers are maintained and profits are split 3:1 in favor of Starbucks, and one in which prices are
raised 25% and profits are split 2:1 in favor of Starbucks. Assume the following: current price is $8.00 for a bag
of this coffee, manufacturer costs have been $2.00, their mark-up has been $2.00 (and they’re seeking more),
retailing costs have been $1.00 and mark-up has been $3.00. What are the resulting mark-ups for the
manufacturer and retailer (Starbucks) under each scenario? How will suppliers and consumers respond to
either scenario?
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185
ADVERTISING MESSAGES AND
MARKETING COMMUNICATIONS
Many a CEO has wondered, “Has the money we’ve been spending on advertising been
effective?” It’s fair to raise the question of accountability, as long as the CEO does so
thoughtfully. Let’s see why such ROI questions are a little simplistic.
First of all: What is the advertising supposed to be effective at doing? What is the goal
of the advertising campaign? Just as a fuller marketing plan must begin with a goal, so too
should advertising begin with a clear understanding of what the campaign is supposed to
achieve.1 Typical goals include an increase in near future sales or a longer-term goal of an
enhanced brand reputation. To be understood, an ad message needs to be simple, and so it
is best focused on achieving a single goal. Most advertising cannot achieve multiple goals
(any more than a single ops line, a single financial instrument, etc.).
In addition, advertising effectiveness can be very difficult to measure. That’s okay; we
marketers are held to a very high standard and CEOs want to know whether our marketing
actions achieve their goals.
In particular, much of marketing is a long-term game; it is not intended to pay off imme-
diately. If the goal is to strengthen a positive brand image, then a measure needs to be devised
to capture whether that goal was attained. A marketing research project could easily measure
the pre- and post-advertising attitudes in the relevant target segment to see whether they’ve
improved. But, when the goal is to strengthen the brand image, the CEO cannot be flipping
through this quarter’s sales figures, hoping to see an increase. That is a mismatch between
the goal and its assessment, and it would be unfair to whine that advertising wasn’t working.
So what is advertising? Why do we need it? And how do we do it well?
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
How can Advertising Meet Marketing Goals?
What Kinds of Ad Appeal are there?
How is Advertising Evaluated?
Managerial Checklist:
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
11
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Two beautiful people.
One pair of staring eyes,
as if ‘caught in the act’
Showing a lot of skin
Image-based message to women:
“If you wear this perfume, you will be
irresistible.”
Emotion/Image A
ppeal
Lots of text to convey
technical information.
Rational-based message:
“You’re smart if you choose our
brand. Here are all the reasons why
we’re better than the competition.”
Image ads are ver
y popular for perf
umes (companies
can’t claim their fl
ower-infused wat
er is better than
another’s) and ca
rs (when the vehi
cle is seen as a
commodity, all th
e brand manager
can do is point to
the lifestyle it ena
bles).
So
ur
ce
: C
al
vi
n
Kl
ei
n
Anatomy of Ad Content
Cognitive/Rational Appeal
So
ur
ce
: B
ar
ga
in
te
er
s
LL
C
Cognitive ads are very popular for high-tech, such
as laptops, tablets, and smartphones. These can be
expensive purchases, and most consumers know
they are not experts and wish to be assured that what
they’re buying is state-of-the-art.
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187Chapter 11 Advertising Messages and Marketing Communications
11-1 WHAT IS ADVERTISING?
Advertising is the primary means by which a company communicates with its customers
about its products, brands, and position in the marketplace. Product, price, and place also
signal a brand’s positioning, and certainly all these signals need to tell a coherent story. If
ads claim that a brand is an exclusive, premium brand, the product needs to be of high
quality, priced relatively high, and distributed relatively exclusively. But while the rest of the
marketing mix is important, advertising is the most direct communication link.
For many people, the word “advertising” connotes television commercials, and certainly
this is a fun form of advertising. TV commercials and print ads (in magazines, billboards,
online banners) represent much of the typical advertising budget. But companies adver-
tise their brands in everything they do, including event sponsorship, the packaging that
encloses their products, the price points for those products, etc. Thus, many advertising
gurus prefer the more general phrase “Integrated Marketing Communications” (IMC),
which is broad enough to include other media (e.g., public relations, direct marketing). It
reminds the marketer to be sure that the message has a holistic nature and that it is consis-
tent and complementary across all media choices and executions. In this chapter, we focus
on the content of the message being expressed in the ad, no matter where that ad is placed.
11-2 WHY IS ADVERTISING IMPORTANT?
First, advertising facilitates customers’ awareness. The company has segmented the market
and selected a set of target customers. The company now wishes to provide information to
those target customers because the company thinks they will be intrigued by their brands.
Second, advertising attempts to persuade potential customers that the featured brand
is superior to competitors’ market offerings. A company expresses its brand positioning by
emphasizing a feature or benefit that makes it seem better than any other options.
Advertising has both short-term and long-term effects. By “short-term,” we mean not
only that the effect occurs immediately or very shortly after the ad exposure but also that
the effect is of short duration or short-lived. Several short-term effects can be shown. For
example, customers’ memory of ads and brands and attributes are easily measured. Atti-
tudes are also easily surveyed and may be compared to prior attitudes (measured previously)
to assess any change in valence.
Not unreasonably, advertising is expected to generate sales and profitability, but demon-
strating this effect on the bottom line is rather complicated. Occasionally, increases in
short-term sales can be observed during an advertising campaign. But marketers have
learned that, if your goal is only to increase sales, nothing’s quicker than a price promotion.
The financial impact is difficult to assess because advertising is complicated and thought
to operate in a longer-term manner. By “long-term,” we mean both that the effects of the
ad might not appear immediately and also that the effects are sustained long after the ad
What Type of Ad Should We Run?
We can decide, “What type of ad should we run?” once we know:
→ “What’s our advertising goal?” which requires that we know
→→ “What’s our marketing goal?” for which we need to know
→ → → “What’s our corporate goal?”
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188 Part 3 Positioning via Price, Place, and Promotion
exposure. Advertising effects might not appear immediately because they are cumulative and
therefore difficult to attribute to a single ad campaign that was run five years ago. Ad results
are sustained because, when used in this manner, the role of advertising is to strengthen brand
awareness, positive attitudes, perceptions of brand equity, and so on. In turn, these enhanced
attitudes become manifest in behaviors: more purchases, more expensive purchases, more fre-
quent purchases, and word-of-mouth among the target customers. So, even though a CMO
typically does not see an immediate sales bump from an ad campaign, everyone “knows” that
advertising works and that the brand needs it. So we keep investing in advertising.
We next consider the content of the advertising message. Advertising has rich commu-
nication potential; ads can convey rational information as well as emotional imagery. To
choose among the many types of ad formats, we have to know our marketing and adver-
tising strategic goals. Again, we have to assess the ad’s effectiveness, and we must measure
effects against those goals. For example, if the goal is to increase awareness, we might run
an ad chock-full of information and then measure customers’ memory for the ad, brand,
brand attributes, etc.
So, on to the “how” of advertising messages…
11-3 WHAT MARKETING GOALS ARE SOUGHT
FROM ADVERTISING CAMPAIGNS?
Advertising can be used to address many goals. One popular model of goals is called AIDA:
Attention, Interest, Desire, Action. The flow goes like this: We first get the ad recipients’
attention, then pique their interest, see if you can get them to be attracted to the brand, and
then induce a purchase or intention to purchase.
Other advertisers have other models: Some describe the flow of the ad recipient from a
level of awareness to greater knowledge, to more liking and preference, to a sense of brand
conviction, and then to purchasing. Another variant goes from awareness to interest to
brand evaluation, to trial and adoption. Another model describes the process as one going
from an ad exposure to receiving the message to a cognitive response to a change in attitude
to intention to buy and finally to the behavior of buying. It is currently fashionable to go still
further and add levels such as brand affinity, attachment, connection, ambassador, zealot, etc.
Choose whatever model that suits you, but, as depicted in Figure 11.1, these goals largely
fall into one of three camps:
1. Cognition: Increasing awareness and knowledge about our brand
2. Affect: Enhancing attitudes and positive associations about our brand
3. Behavior: Ultimately encouraging more buying of our brand
Cognition
Awareness
Knowledge
Interest
Affect
Attitude
Desire
Preference
Behavior
Intention
Trial Purchase
Repeat, WOM
Time
AIDA: Awareness Interest Desire Action
Figure 11.1
The Goal of an
Ad Campaign:
To Affect Con
sumer Deci
sion Making
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189Chapter 11 Advertising Messages and Marketing Communications
In advertising, we wish to affect consumers’ cognitions, emotions, or behaviors. We want
to grab our customers’ heads, hearts, and pocketbooks.
These goals are correlated with the product life cycle:
• Early in a brand’s life, the job of an ad campaign is to get the word out and to
inform the consumer of this new or improved market offering: “Here is the brand,
here are its features, here are its points of differentiation from the competition.”
• When the brand is growing, awareness is already strong, and ad campaigns are devel-
oped to enhance the positivity of the target segment’s attitudes about the brand.
• At brand maturity, awareness has pretty well permeated the market, and customers
have pretty set attitudes. Some people don’t care for the brand, but hopefully many
people in the target segment do. At this point, ads are intended to be reminders,
“Hey, we’re still here” or “We’re offering a twofer.” Advertising hasn’t dropped off
yet, but sales are strong; so a smaller ad budget (as measured by percentage of sales)
is required to maintain a steady presence (sales, market share, etc.).
• Finally, when a product is in decline, ad spending is usually reduced greatly, and the
poor brand slips into a coma and eventually is pulled from the market.
Of course, it’s best if the elements of marketing are integrated. Thus, if a brand man-
ager can keep the product fresh, the advertising would always have something new to say.
For example, a laundry detergent might morph from powder to liquid to detergent with
built-in fabric softeners. Then the ads follow the product changes and continue to inform
consumers.
As you might imagine, these goals aren’t equally easy to achieve. Increase awareness? No
problem. Enhance attitudes? Can do. Encourage more buying? Uh, well . . . .
If you need convincing, here’s a thought experiment. Say you’re online and a banner ad
pops up and it’s about a new movie that’s about to come out: “Star Wars 14!” You’d think,
“Oh, I hadn’t heard about that yet.” With that one simple message, the communication has
achieved the goal of informing you, of offering you awareness about a new product. You
now know something you hadn’t known just a moment before. Awareness? Check.
Let’s say the banner ad continues with a picture and a few lines like, “Just as fun. Same
Stormtroopers. Same awesome F/X. Saving the world again!” You might think, “That
sounds pretty good.” So the ad succeeded in making you think positively about the movie.
Enhanced attitudes? Check.
Finally, say the banner ad closes with the tagline, “Click here to buy a ticket for this
Friday, now!” Will you? Who knows? But you probably won’t. Even if it sounds like a fun
movie, maybe you’re busy Friday, or maybe you prefer watching movies on your computer
rather than at the theater. Your response doesn’t mean the advertiser didn’t succeed. You
might add the movie to your mental must-see (eventually) list. That is advertising success,
but it is pretty tough to measure.
AIDA
A = Attention: Do customers know about us?
I = Interest: Would customers consider us?
D = Desire: Do customers want us and look for us?
A = Action: Do customers buy us, talk and post about us?
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190 Part 3 Positioning via Price, Place, and Promotion
In general, the goal of getting the consumer to purchase is not easily achieved or mea-
sured, but that doesn’t necessarily render an ad ineffective. Even though a product may be
simple (familiar, inexpensive, etc.), most purchases are complicated. A simple ad message
cannot easily propel a customer to go buy. In addition, many product categories show buy-
ing inertia, and many of our purchases are so-called low involvement; that is, we just don’t
care about the product or the brand choice. We buy whatever we typically buy, and we
don’t even “see” ads for other brands, much less spend any cognitive effort in processing the
messages. As this example illustrates, there are a zillion (well, at least several) factors that
go into even the simplest purchase decision.
11-4 DESIGNING ADVERTISING
MESSAGES TO MEET MARKETING
AND CORPORATE GOALS
Advertising is a means of communication. A company says to its potential customers, “Buy
our stuff!” “We have a new service!” “Look at our low, low prices!” “We’re better than the
competition!” As a result, marketers must understand the basic model of dyadic communi-
cation. In the classic model, there is a source (e.g., the firm), a message (e.g., the ad), and a
receiver (e.g., customer). The source intends to send out certain information, which is en-
coded (i.e., expressed in a certain way) and then transmitted. The receiver then decodes the
message. Hopefully, the receiver interprets the content of the message in a manner similar
to what the sender had intended. But there can be errors along the way. Think of commu-
nicating with a friend. You might intend to say something, but it comes out wrong, or you
say it right, but your friend takes it the wrong way. All of that can happen with advertising
as well. That’s why copy testing (marketing research examining the content of the ad) is
important before launching the full ad campaign: to learn whether the intended target
segment understands the message as the company intended.
There are many kinds of ads, or ways to communicate, and most may be mapped pretty
cleanly onto one of the first two goals of advertising; the message can be primarily cogni-
tive (e.g., increasing awareness and knowledge) or emotional (e.g., enhancing attitudes and
preference). Cognitive, or rational, appeals (or approaches) can be further distinguished
into arguments (one-sided vs. two-sided, comparative vs. non-comparative ads), product
demonstrations, and dramas. Emotional ads tend to use one of these elements humor, fear
appeals, so-called subliminal ads, image appeals, and endorsements.
M&M’s
If marketing is said to be the 4Ps, here are the 6Ms of advertising:
1. What is the Market being addressed?
2. What is your Mission; the objectives of the advertising campaign?
3. What is your Message to be communicated?
4. How much Money will be spent?
5. What Media choices will be implemented?
6. How will the effectiveness of the campaign be Measured?
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191Chapter 11 Advertising Messages and Marketing Communications
11-4a Cognitive Ads
A cognitive, or rational, appeal engages the consumer’s brain. The ad gives the consumer a rea-
son to buy the product that is practical or functional. It’s a utilitarian (as opposed to hedonic)
appeal. The ads tend to be informative, featuring the product’s attributes and their benefits.
A one-sided argument means that the company focuses on expressing the benefits of its
product to the consumer. This approach is a common one among advertisers; many examples
exist, for example, a recent Brookstone features a “motorized grill brush with steam cleaning
power!” as an ideal Father’s Day gift with the pitch, “The ultimate power tool for your grill.”
One-sided ads are straightforward: they offer an explanation of the anticipated benefits.
In a two-sided argument, the company describes the pros and cons of its brand. Two-
sided arguments are used when your target customers already know that your brand
has some weakness. Thus, you might as well acknowledge it (and earn some points
for honesty) and then go on to argue why your brand is nevertheless excellent. For exam-
ple, direct-to-consumer ads by pharmaceuticals companies make claims for drugs that will
help alleviate symptoms, but possible side effects must be acknowledged. (In contrast, if
customers do not know the product’s weaknesses, companies don’t usually point them out
via this kind of ad.) There are two benefits to two-sided arguments: (1) They stand out.
Most ads are one-sided, with everyone claiming their brand is great. Two-sided arguments
get attention because they are different. (2) Two-sided ads are seen as more objective or
neutral because you’re getting the pros and cons; hence they seem more credible.
In a non-comparative ad, a brand is mentioned, and its features, attributes, image portray-
al, etc. are conveyed. The ad features a single brand (see Figure 11.2). The brand’s benefits,
imagery, and positioning are highlighted, and no competitors are featured or implied.
Nonprofits
Nonprofit marketing people talk explicitly about winning “hearts and minds.” They know the
pocketbooks will follow.
Figure 11.2
A Non
comparative
Ad: one brand
featured; very
popular
ja
nn
oo
n0
28
/S
hu
tte
rs
to
ck
.c
om
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192 Part 3 Positioning via Price, Place, and Promotion
In a comparative ad, the featured brand name is mentioned, as is the brand name of
a competitor (see Figure 11.3). This sounds a little insane: Why would you pay to
advertise for the competition? Here are the rules of thumb: if you’re the big player (i.e.,
the market leader), you treat your competitors as irritating little gnats that you wouldn’t
bother to acknowledge in an ad. However, if you’re the little guy with a new brand, you
might mention the big brand in your ad in order to gain an association with all the
good qualities that consumers seek when they purchase the market leader’s brand.
So, for example, the use of comparative ads is asymmetric in that Mercedes would
never mention Acura, but Acura ads for their luxury car might liken the car to a Mer-
cedes. However, Acura needs to be careful about actually mentioning Mercedes. It
has been reliably shown that, if you’re the small player and you use a comparative ad,
your ad budget helps you, but it also helps the comparison brand. (To the victor go the
spoils.)
Where would the advertising industry be without product demonstrations? Whether
an ad shows a laundry detergent that can clean kids’ mud-caked clothes or Dan Akroyd
pulverizing a fish in a Bass-o-Matic on SNL, we love to see stuff in action. Demonstra-
tions are vivid, and they make our expectations clear. We see precisely what we’d get
for our money. All ads try to persuade us that the product is great, but demo ads show
the product, and consumers can decide on the validity of the claim for themselves (see
Figure 11.4).
A TV commercial is often a narrative drama or a slice-of-life vignette. Often a prob-
lem is depicted, and the brand is featured as the perfect solution. For example, a guy
finds dandruff flakes on his shoulders, buys the right shampoo, and then all the women
in his world think he’s hot. A nice by-product of story-based ads is that they are easy to
communicate from the advertiser to the viewer, as well as from the viewer to friends via
word of mouth. Dramas are more memorable than sheer listings of product features and
claims. The stories give the brand a context and show the viewer how the brand could be
helpful in their lives.
Figure 11.3
A Comparative
Ad
So
ur
ce
: V
er
izo
n
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193Chapter 11 Advertising Messages and Marketing Communications
11-4b Emotional Ads
Another type of ad that elicits emotions uses humor. Ad execs count on humorous ads to
break through the noisy media clutter (see Figure 11.5). Humorous ads are popular because
they’re fun, and they win a lot of awards in the advertising industry because they’re seen as
clever.
Unfortunately, humorous ads are not all that effective. Part of the problem is that people
remember the joke, but they don’t necessarily remember the brand being advertised. In ad-
dition, not everyone has the same sense of humor, and it is easy to insult some people with
an ad that other people think is funny.
Figure 11.5
A Humorous
Ad
Figure 11.4
A Product
Demonstration
Ad
So
ur
ce
: S
. C
. J
OH
N
SO
N
&
S
ON
, I
N
C.
So
ur
ce
: p
ho
to
bu
ck
et
.c
om
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194 Part 3 Positioning via Price, Place, and Promotion
The final major problem of humorous ads is inherent in humor itself; humor is based
on the element of surprise. Once you know the joke, the second time you see the ad, you
already know the punch line. Pretty soon, you begin to ignore the ad and the message.
Thus, humorous ads inevitably wear out quickly (the ad campaign can’t last long because
the audience becomes bored quickly). If you couple an ad’s short life with the fact that ad
creation and media placement is expensive, then it quickly adds up that funny ads just aren’t
cost-efficient.
Yet the life of a funny ad can be extended, if the ad execution varies, e.g., the GEICO
insurance company’s talking gecko appears in different scenarios. People also enjoy sharing
humor. So the ad may generate buzz, be posted online, etc., thereby perpetuating free word-
of-mouth communication.
Fear and embarrassment are negative emotions that have been used to sell both products
and social marketing ideas: “Buy this deodorant (or mouthwash) so that you won’t smell,”
“Stop smoking so that your lungs won’t turn black.” The problem with negative emotions,
and with fear in particular, is that its effect is non-monotonic. That is, the ad might overdo
it and be seen as so fear-inducing as to be creepy or horrifying. We cope with that kind of
message by blocking it out, and therefore the ad has no effect on propelling the consumer
to the desired behavior. For a fear appeal to be effective, the ad must provide a solution to
reduce the consumer’s fear, resolving both the problem and emotion by the end of the ad
(see Figure 11.6).
Subliminal ads have long been a curiosity. Long ago, a print ad for an alcoholic beverage
featured the bottle and some of its contents poured over ice in a glass. The ad was claimed
to contain the letters s, e, and x embedded in the ice cubes. The thought was that on some
subconscious, precognitive level, people would be turned on and therefore favor this brand,
Figure 11.6
A FearAppeal
Ad
So
ur
ce
: A
re
na
C
om
m
un
ic
at
io
ns
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195Chapter 11 Advertising Messages and Marketing Communications
and go buy it. About the same time, movie theater owners experimented with flashing ads
at millisecond speeds on the screen during the movie with messages like “Go buy popcorn!”
The messages appeared so fast that no viewer could detect the moment of having explicitly
seen the message. Yet the message was thought to have an effect on the subconscious, pro-
pelling the audience member to mindlessly go to the lobby and buy a bucket of popcorn.
(Most marketers believe this was an urban legend.)
These mind games were thought to be quite disturbing and unethical, and they are
banned. The odd thing is that they were never shown to be effective. Indeed, more than
one cynic in the advertising industry has remarked, “We don’t use subliminal ads not
because we’re not supposed to. We don’t use them because they don’t work.”
Yet it’s a fine line. Many retailers play nondescript background music to set an ambience.
It’s known that music with a faster tempo seems to induce more energy and excitement,
and people buy more. The music is audible so that it is not subliminal, but the effect is sort
of sneaky. Some product placement in movies is rather overt; e.g., an actor drives a particu-
lar brand of car or uses a Samsung or Apple smartphone. But much product placement can
be subtle. The question is whether the brand leaves an impression that can affect a viewer’s
subsequent purchasing. The brand is visible, not subliminal; so, strictly speaking, the prac-
tice is not forbidden.
11-4c Image Ads
When advertisers talk about “emotional appeals”, they often mean that the ad conveys an
image. The ad message is more abstract than a list of features and attributes (see Figure 11.7).
Usually these are feel-good portrayals: “Use this brand, and you’ll be more attractive” “Buy
this, and you’ll be able to emulate this cool person’s lifestyle.”
Many products in many purchase categories are seen as nearly commodity-like in the
eyes of customers, and the category is so competitive that firms struggle to distinguish their
brands from one other. Image is closely tied to branding; e.g., all soft drinks are sweet and
bubbly, but this is the one for young people. Every restaurant has tasty food, but this one is
family friendly. Every theater shows a variety of films, but this is the arts theater.
Image is about perceptions, and advertising imagery is extremely malleable among the
marketing mix variables for creating perceptions regarding a product’s positioning. Ele-
ments of the product itself, its price, and its distribution outlets all certainly contribute to
perceptions of a brand’s image. But advertising is the most amenable vehicle for convincing
customers and potential customers of a brand’s relative strengths.
The American Marketing Association’s Statement of Ethics speaks to several issues regarding advertising. Here
are two professional standards:
1) Honesty: A company should honor its explicit and implicit commitments and promises to its customers.
2) Fairness: A company should represent its products in a clear manner, and avoid false, misleading, and
deceptive promotions.
Here’s a thought question—is it misleading to claim that a piece of clothing is “Made in the U.S.A.”? What
does it mean to say that—the garment was assembled here, but comprised of imported cloth; that the pieces
were cut here but sent abroad for sewing; that the cotton was grown here or knitted here? It’s a complicated,
inter-connected world . . . .
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196 Part 3 Positioning via Price, Place, and Promotion
11-4d Endorsements
Endorsements are ads that feature a spokesperson on behalf of the brand (see Figure 11.8).
These ads can feature celebrities or experts or even seemingly regular people offering testi-
monials as satisfied past customers.
Figure 11.7
An
ImageBased
Ad
So
ur
ce
: G
uc
ci
AP
Im
ag
es
/P
op
ch
ip
s/
Re
x
Fe
at
ur
es
Figure 11.8
An Endorse
ment Ad
When a celebrity is used to endorse a product, the hope is that the positive associations
attached to the celebrity would transfer to the brand. (This is literally known as “affect trans-
fer” or “association transfer.”) The star’s endorsement basically says, “This brand is cool. Be
like me!” The celebrity is typically attractive and successful, and the idea is that a regular con-
sumer can achieve part of the celebrity’s appeal and lifestyle by purchasing the item in the ad.
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197Chapter 11 Advertising Messages and Marketing Communications
As with pretty much anything in life, there are risks associated with using a celebrity en-
dorser. We’ve all seen when a celebrity goes a little wonky, and then the brand they’ve been
endorsing can be affected by those new, bad associations. As an alternative, some brands
have spokes-characters, like the Jolly Green Giant who looks over his vegetable garden, or
Buzz, the Honey Nut Cheerios spokes-bee, and so on. These characters bring the brands to
life, and you will never catch them doing bad things (at least not in public).
Experts who are not celebrities frequently serve as spokespeople for high-tech products,
such as computer equipment or pharmaceuticals (e.g., doctors recommending drugs). Here,
we don’t expect mere transfer of positive affect, but rather a signal that the expert is offering
credible information. So this otherwise possibly risky purchase for the consumer is made to
seem less risky by the endorsement of some knowledgeable person.
Regular people sometimes provide testimonials. They’re not celebrities, and they’re not
experts. They’re just satisfied customers with the claim that, if the product worked well for
them, it will for you too. These representatives tend to convey credibility too, due to their
similarity to us, the target audience of regular people. In addition, we know celebrities are
lending their names to products for cash. In fact, doing so can hurt their persona-brand
(that they’re money-grubbers), which explains why many celebrities are more likely to do
endorsements abroad but not in their home markets. In contrast, even if “regular peo-
ple” providing testimonials are paid, we can guess they’re not paid as much as celebrities;
plus, something about their being like us makes their voice sound more authentic and
trustworthy.
There are several conceptual ideas about how endorsements (and a lot of other adver-
tising tactics) work. One theory, called ELM (elaboration likelihood model), basically posits
that there are two ways into your brain: a central path or a peripheral path.2 An ad’s central
message is thought to be the content of the persuasion itself. The target segment processes
the content because these customers are highly involved in the brand and product category,
so they are motivated to process all the details of the information in the ad. In contrast,
other information is classified as peripheral cues, including the celebrity endorser, their
attractiveness, their credibility to be speaking on behalf of the featured brand, the style of
the ad, etc. Peripheral clues can be pretty much anything that is not the central ad argu-
ment. Both sorts of information may be processed. If the central message is complicated,
people who don’t care that much about the brand may just look to the peripheral cues when
judging the ad or brand.
Another theory is called source credibility, which means the consumer interprets the mes-
sage as the most important piece of information but also processes the credibility of the
source as a cue to the likely validity of the message. So a doctor touting pills sounds credi-
ble. They’re a convincing source of information. (But note how often we’ve been fooled even
with the disclaimer, “I’m not a doctor, but I play one on TV.” We believe them anyway!) But
a super model praising the technology in a new computer, well . . . .
One more theory (the last for now, I promise) describes the so-called sleeper effect,
whereby a piece of information is conveyed by some source; it may be a celebrity, an expert,
a friend, something you read in The Wall Street Journal, or even in the tabloids. Over time,
we forget the source of the information. So, whether the original source was credible or
not, it doesn’t really matter. We encoded the information but disassociated it from the
source. As a result, even if the cute actor or actress couldn’t possibly know anything about
the product they’re touting, the consumer is affected by positive associations with the
good-looking famous person.
There are many kinds of ads, and we’ve been discussing just the major classes. The one-
or two-sided ads, comparative or non-comparative ads, product demonstrations, and dra-
mas tend to be rational in content and are processed cognitively. In contrast, emotional
responses are triggered by humorous ads, fear appeals, image ads, endorsements and even
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
198 Part 3 Positioning via Price, Place, and Promotion
so-called subliminal ads (because they don’t quite reach cognitive processing). Different
combinations are possible; e.g., a humorous product demonstration. Different content (e.g.,
comparative or image) may also be mixed with different executional styles (e.g., drama or
humor).
In most industries, different players try to attract their customers with different appeals
that are consistent with their distinct position. However, in some industries, all the players
use the same kind of appeal, e.g., product demonstrations show how fast or roomy a car is,
and experts are used as spokespeople in ads for investments.
The choice among these options is facilitated when we return to the question: What is
our advertising, marketing, corporate goal?
• For example, companies trying to increase awareness and create positive attitudes
and buzz about a brand extension need to express the new features and benefits
clearly in an ad. That goal might be less achievable in a humorous ad than in a
straightforward, one-sided, non-comparative ad.
• Companies pulsing out reminder ads to reinforce its target customers’ attitudes
might wish to get their attention via an emotional appeal.
• When a competitor initiates a price war, instead of meeting the price cuts, a
company would be better off to launch comparative ads to show the benefits of its
(higher-priced) brands.
Finally, ads are likely to change throughout the product life cycle, with comparative ads used
to launch a new product and mature brands advertised via image-based communications.
11-5 HOW IS ADVERTISING EVALUATED?
Whether the strategic goal of an ad campaign is cognitive (awareness, knowledge), affective
(image, preference), or behavioral (trial, repurchase), there are methods for measuring the
results. For cognitive tests, the primary consideration is memory. Advertising researchers
call random samples of households and ask first a recall memory test (“Which brands do you
remember seeing advertised last night on TV?”), and they note which ads are mentioned. In
the advertising industry, this test is called day-after recall (DAR), and it is a stringent test:
Did the ad make enough of an impression that the consumer remembers it, unprompted, a
day later? DAR scores are a particularly big deal the day after the Super Bowl or any other
huge event, during which air time is charged at high rates, as an assurance or test that the
ads did as well as anticipated.
When the respondent can think of no more ads, the advertising researcher turns to
memory tests of recognition (“Do you remember seeing an ad for Ford last night?”). Recall
and recognition tests of memory can also be applied to assess the impact of online banner
ads or magazine or billboard advertising (“Which brands have you seen advertised online
during the past week?” or “What ads have you seen on the Metro recently?”).
Traditionally, marketers and advertisers have believed that, while memory is not the
same as persuasion, it’s a necessary starting point. That is, the assumption is that an ad
can’t affect your attitude if you can’t even remember having seen it. That assumption
seems sensible, but recently it has been under question. The recent thinking does not
negate the very likely effective path of memory to persuasion to buying, but now it is
suggested that perhaps cognition and persuasion could also function implicitly. That is,
even if consumers can’t quite remember having seen an ad, it doesn’t mean they didn’t see
it. And it doesn’t mean that the ad won’t impact their attitudes and possible subsequent
buying patterns.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
199Chapter 11 Advertising Messages and Marketing Communications
Conceptually, this implicit processing is thought to work along the lines of what’s
called mere exposure. The idea is that sheer familiarity due to repeated exposure to a brand
name or logo or ad will in time enhance the viewer’s favor of the ad and brand. Billboards
are thought to operate in this manner. No one really wants you reading these signs while
you’re driving. But every day, to and from work or school, you see a picture, a brand name,
maybe a brief message, and, with time, the sign is part of your life, and it gains some
positivity. The same principle operates for the ads in the frames of websites; we don’t even
know they’re having an effect.
While the cognitive goals (awareness, knowledge) are tested primarily via memory mea-
sures, testing whether affective goals (image, preference) have been achieved is done with
numerous measures of attitudes and behavioral intentions. Tests of the persuasive powers
of the ad are usually done prior to launching the ad campaign—to tweak the content or ad
execution details. Creative types (in ad agencies) will say that you cannot tell a priori which
ads will do well. That’s nonsense; they just don’t like having their work evaluated (in part
because the feedback will involve at least a little tweaking to what the creative had consid-
ered “art” and also because creative types are more interested in the creative, not strategic,
aspects of advertising). Ad copy testing is done in two stages: First, the overall concept is
tested, and, second, the preliminary flow of the ad is tested.
Ad concept testing is usually conducted in a focus group setting. Focus group facilities
recruit eight to 10 consumers who may be screened on criteria such as relevance to the
target segment or usage in the product category but who are otherwise selected randomly.
The ideas underlying the ad are explained, and illustrative props show the basic idea of
the ad.
Rarely are completed ads shown and tested at this stage (they’re too expensive,
~$500 k). Instead, the ad is somewhere in preliminary development ($10–20 k). It can
be mocked up as a drawing like a cartoon strip—storyboard style—with each scene
and possible dialog unfolding. Or the ad may consist of animated graphics shown on
a computer.3 Research has shown that an audience’s reactions to the ads even in their
rougher, proposal stage are correlated with real, completed ads. The consumers respond
to the ad, to the brand, and to whatever else the company asks the focus group mod-
erator to cover in one-and-a-half hours. After three or four focus groups concur that
the ad agency is heading in a good direction, the ads are further developed and copy
testing begins.
Copy testing is usually conducted via surveys. Larger random samples of consumers are
recruited by advertising researchers to attend a “screening for possible new television pro-
gramming.” That’s the typical cover story, and it’s a load of hooey. The consumers travel to
a relatively central location, such as a hotel near the city’s airport. The supposed pilot TV
series is shown, with several ads aired in natural TV show breaks. After 30 minutes, the
attendees fill out dozens of pages of questionnaires asking about the TV show, the ads,
their buying habits, and the like. Increasingly, copy testing is done online, with invites sent
over email, requesting participants to go to a website to view the materials and answer the
questions.
The survey items include measures of attitudes on stimulation (the ad made me curi-
ous or enthusiastic), information (gave me useful, credible info), negative emotion (the ad
irritated me), transformation (the ad gave me enjoyment or gave me a pleasant, satisfied
feeling), identification (I recognized myself in it, I felt involved with it). An ad’s scores on
these measures is compared to the ad agency’s extensive database to determine how well the
current set of ads might do, since the agency has other data indicating how well previous
ads had done. Any ad must surpass certain basic scores: Does the ad evoke positive feelings?
Is the ad remembered for the correct brand?
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Sends creative brief (outline
of what client wants).
Coordinates for IMC.
Relies on research group
for customer feedback.
May outsource to
boutique agencies.
Initiates media
planning.
Sends
approved
idea.
Feedback used to
tweak concepts
and execution.
Anatomy of Ad Creation
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
201Chapter 11 Advertising Messages and Marketing Communications
11-5a A
ad
and A
brand
In evaluating ads, marketers measure two basic attitudes: attitude-to-the-ad (Aad) and atti-
tude-to-the-brand (Abrand). A company and ad agency can pride itself on creating cool ads,
ads that customers like, and ads whose scores on Aad are strong and positive. But marketers
care (and if the ad agency wants a long-term relationship with the marketing company,
it should care too) that the ad is effective in making strong positive brand attitudes, the
Abrand. And, of course, most marketers believe that the brand attitudes trigger sales, that is,
ultimately Aad → Abrand → likelihood to purchase.
Another sort of measure of an ad’s impact on a viewer is the dial procedures intended
to capture moment-by-moment processing. In an ad copy test, a viewer is given a dial (or a
mouse) to indicate response while continually viewing the ad. Turning it to the left means
“I hate this,” and turning to the right indicates “I think this is great.” This idea is useful in
editing ineffectual sections of an ad and in identifying which positive sections might be
played up. Critics say that viewers’ reactions to an ad have a natural lag, Therefore, measures
taken after the ad or by accumulating and integrating all the moments over the course of the
ad are better predictors of ad and brand liking than those taken at any particular moment.
The technique is in its infancy, and, given its potential, perhaps the kinks will be worked out.
If advertising is intended to address the heads, hearts, and wallets, we can check diag-
nostics that measure these objectives. In Figure 11.9, the data for the bank indicate that
there is a problem with awareness, at only 25%. But of the aware customers, a full 80%
like the brand. Generating awareness is an easy problem to fix via advertising: Spend more
money, and choose media that reach more broadly.
The hotel has a different story. Most people are aware (80%), but only 37.5% of them
have positive attitudes toward the hotel brand. If the hotel itself is not great, then the atti-
tude measure will be sticky. Otherwise, advertising can help the hotel by generating more
favorable attitudes via more positive and more persuasive advertising.
The car scenario is different still. Awareness is strong. Attitudes are favorable. But the
proportion of favorable attitude among those who have taken the car for a test drive is only
0.90 × 0.83 × 0.27 = 20%. This problem might not be one that advertising can resolve. The
product might be priced out of reach (think Ferrari), or perhaps it’s a channels issue (e.g.,
few dealerships).
The cruise scenario is one in which awareness is high, and attitudes are positive. There
is good trial, but people aren’t coming back. This profile might suggest a problem with the
product itself. If that’s the case, we can advertise till we’re blue in the face, but we have to
deliver on our promises. There are limits to what advertising can do. On the other hand, for
cruises, customers may simply wish to try something different for their next holiday. In such
a scenario, the company would need to extend its product line.
Conditional probabilities of customers in
the marketplace (e.g., 80% of customers
who are aware of the bank brand have
positive attitudes toward it).
25%
80%
90%
90%
Bank
Hotel
Car
Cruise
80.0%
37.5%
83.3%
83.3%
100.0%
83.3%
26.7%
66.7%
75.0%
80.0%
75.0%
50.0%
Awareness Attitude Trial Repeat
Time
Figure 11.9
Marketing
Diagnostics
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202 Part 3 Positioning via Price, Place, and Promotion
Chapter Outline in Key Terms and Concepts
1. What is advertising, why is it important, how can it
be used to achieve marketing goals?
2. Ads can be cognitive, emotional, image-based,
celebrity endorsement
3. Advertising is evaluated via memory and A
ad
and
A
brand
4. Managerial recap
Chapter Discussion Questions
1. Rip up your favorite magazine, and classify any 5
ads according to whether you think they’re aiming
to achieve a cognitive, emotional, or behavioral
goal. Which ad do you like the most? Did any stim-
ulate you to learn more about the brand?
2. Imagine you were designing an ad for a (choose
one): car, laptop, health clinic. What would your
ad look like if you were targeting: a) old people, b)
kids, c) super rich people, d) What celebrity would
you have endorse your brand? Why?
3. If you had to reach a customer segment of
“tweens” (kids between 8 and 13), which medium
would you choose? What about for men in their
30s? Men in their 60s? In which medium would
you advertise if you ran one of your city’s perform-
ing arts centers?
MANAGERIAL RECAP
The key concepts of advertising communications messages are these:
• Goals must be set before ads can be evaluated.
• There are several classes of advertising communications messages.
� Rational or cognitive ads include one- and two-side arguments, comparative and non-comparative ads, product demonstrations,
and dramas
� Emotional ads include humorous and fear-inducing appeals, image, and endorsements
• Advertising is tested via concept testing and copy testing. The content of what is measured depends on the corporate strategic goals of
the ad campaign, and those assessments can include:
• Memory tests (recall and recognition)
• Attitudinal tests (enhancement of the favorability of the product and brand)
• Behavioral measures (likely to purchase the brand or generate positive word of mouth)
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
203Chapter 11 Advertising Messages and Marketing Communications
Video Exercise: Ogden Publications (7:48)
Ogden Publications, a publisher of a variety of magazines, uses integrated marketing communi-
cations to coordinate and achieve consistency across all aspects of its marketing efforts. Ogden’s
marketing department—consisting of a circulation team, a creative services team, a merchandise
and events team, and a public relations team—searches for ways to collaborate more effectively
with each editorial team so that there is consistency of key brand imagery and marketing messages across the
company’s various magazines, websites, and marketing materials. The circulation team is responsible for man-
aging overall readership by using touch points such as direct mail, magazine insert cards, email campaigns, and
newsstands. The merchandise and events team is charged with developing new products and identifying new
events to attend. The creative services team provides creative development for marketing as well as for the rest
of the company. The PR team is responsible for gaining media exposure for Ogden. The overall message across
Ogden’s various magazines is that Ogden provides “cool information that is relevant.”
Video Discussion Questions
1. What are some of the key customer touch points for Ogden Publications?
2. How does Ogden Publications use integrated marketing communications to provide a consistent message
across these customer touch points?
3. How does Ogden Publications benefit from using integrated marketing communications?
MINI-CASE
CelebRelief
John Russell, who goes by Jack, is a busy executive by day, but he likes to volunteer at a local, no-kill animal shel-
ter at least one weekend a month. He helps by walking dogs and feeding them, and, given his business acumen,
the shelter calls on him to do more administrative tasks as well, anything from animal intake to giving the shelter
advice about their website. At the shelter’s board meeting six months ago, Jack was asked to propose a low (very
low) budget advertising campaign. He’s supposed to present his proposal next week.
Jack’s been thinking about how to pull off an ad campaign on a shoestring budget. It helps that animal shelters
tend to be local businesses (and every locality having one or more of its own). So far, his proposal includes two
billboards: one to be located on a highway downtown that runs north-south, the other on one that runs east-west.
He hopes they can afford two or three radio spots of advertising. But if the shelter can’t pop for the radio ads, he
might at least be able to use one or two of their upcoming events as an opportunity to get PR announcements on
the radio. The main part of the campaign would be the development and dissemination of brochures about the
shelter’s good works that would be sent to homes as direct marketing and posted in local grocery stores and other
high-traffic venues, as their respective managers permit.
In terms of the content of the campaign, Jack was flipping through a recent issue of Newsweek and noticed an
article on how many stars lend their names to causes, from George Clooney shedding light on genocide in Dafur,
to Sean Penn helping to rebuild Haiti, and, of course, Bono’s perennial fight against world poverty. Jack thinks the
same principle could hold here. Next week, Jack Russell will propose to the shelter’s NPO (a nonprofit organization)
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
204 Part 3 Positioning via Price, Place, and Promotion
board that a celebrity become their spokesperson. One question is which celebrity would make sense? He has
several slides, listing several options.
Case Discussion Questions
Which option(s) make sense?
1. Jack wants to reach out to a star of Clooney’s or Penn’s or Bono’s status. It would be cool.
2. Another option might be the shelter’s manager-in-chief.
3. A third option is the town’s mayor.
4. A fourth option is one of the state’s representatives.
5. A fifth option is a guy named Alex Green, who graduated from a local high school and went on to be really
successful and who has given money to local charities since making it big.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
205
INTEGRATED MARKETING
COMMUNICATIONS AND
MEDIA CHOICES
Advertising is about shaping a message and getting the message to the target audience via
some optimal combination of media.1 This chapter focuses on the media decisions. Many
media choices are available to the marketing manager, and each can optimize the achieve-
ment of different kinds of goals. Ad budgets are usually fixed, so choices must be made, and
the resource allocation across media can be complicated. With the proliferation of media
came the notion of IMC, integrated marketing communications: the idea that marketing
planning should ensure that a company’s various advertising efforts send a coherent story
across the different customer touch points.
12-1 WHAT MEDIA DECISIONS ARE MADE
IN ADVERTISING PROMOTIONAL
CAMPAIGNS?
There are several media questions to answer: (1) How much do we spend? (2) What’s the
schedule of expenditure? (3) Which media do we use as channels of our communications?
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
What media decisions are made in promotional campaigns?
What is integrated marketing communications (IMC)?
How is the effectiveness of advertising media measured?
Managerial Checklist
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
12
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
206 Part 3 Positioning via Price, Place, and Promotion
Take the first question: How big should the ad budget be? The amount of most companies’
entire communications package (i.e., advertising in all its various forms, including the pur-
chase of the necessary media) is determined by one of three methods:
1. The advertising budget as a percentage of last year’s sales
2. Approximately what the company believes is parity with competitors
3. Working backward from the company’s strategic advertising goal (e.g., enhance
awareness or positive attitudes) to calculate the necessary expenditures.
The first method is easy. The only challenge is arriving at the actual percentage value:
7%, 10%, 15%? Most companies would begin with their past numbers or an estimate of the
industry norm and then adjust: If the marketing goal is merely to maintain brand share,
then roughly the percentage that they (and competitors) spent last year should suffice. If
the company has done something newsworthy with the brand, an increase in advertising
monies is necessary to get the word out. If the company is seeking to milk the brand and
redirect funds to their other brands, the percentage would be adjusted slightly downward.
The second method is also relatively easy. There are service providers (e.g., Schonfeld,
Saibooks) who keep tabs on how much companies in various industries tend to spend (e.g.,
beer companies spend 8–10%). If every competitor spent approximately the same percent-
age on advertising, then their market shares would be proportional to their ad spending
shares; indeed, the ratio for each company of the proportion of ad spending to their market
share proportions would be approximately 1. As you can see in Figure 12.1, the market
leader usually spends the most on advertising and has the greatest sales; the other brands
spend less and their sales are less. Somewhat surprisingly, in many industries, the companies
fall along a line, indicating a fairly constant proportionality between their spending and
their incomes. A particular brand or company can break out of this pack if there is reason,
e.g., spending disproportionately more ad dollars to try to move up the market share food
chain, or spending less because they’re a niche brand with a cult-like following, rendering
traditional advertising less necessary, etc.2
Although these methods are easy, they are a bit simplistic. When sales decline (for
reasons of a soft economy or a decrease in the brand’s popularity), each approach would
S
ha
re
Ad Spend
VW
Honda
Ford
Toyota
GM
$3,400
mm
$2,100
mm
$700
mm
$418
mm
20%
10%
$2,900
mm
Figure 12.1
Proportion of
Ad Spending
to Sales
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
207Chapter 12 Integrated Marketing Communications and Media Choices
suggest cutting the ad budget. Smaller ad budgets would mean less presence in the market-
place, thus perpetuating a cycle of decreased sales.
A third approach is to be more strategic and treat advertising expenditures as an investment
(in the brand and company), with the expectation that an investment should return sales and
profits. This approach can be somewhat challenging because advertising effects are difficult
to measure, and often they are intended to produce long-term effects such as brand building.
To set an ad budget, we need to understand how advertising exposures are measured. Then
we set our exposure goal, and then we can estimate how much to spend to achieve that goal.
12-1a Reach and Frequency and GRPs
First, let’s get the jargon down. Advertising agencies work with a unit called GRP (gross
rating points). Whether we’re talking about placing an ad on TV or in a magazine or on the
side of a bus, a GRP is a simple function of reach and frequency:
• Reach is defined as the share (percentage) of your target audience that has seen your
ad at least once.
• Frequency is the average number of times your target audience saw the ad (within
some set duration, say the three month period during which the ads were in circu-
lation, or a three-month testing period within a longer ad showing).
• GRPs, then, are defined as the simple product:
GRP = Reach × Frequency
For example, if your ad reached 25% of your target audience, on average 3 times, the ad
is said to have delivered 75 GRPs. If your ad reached 75% of your target, on average once,
the ad would have delivered 75 GRPs also, but the results look different. For the first, the
frequency is greater, so we’d expect the small portion of the target who saw the ad to be
really familiar with the brand. For the second, the reach portion was bigger, and, while we
might have hit a basic level of awareness, one ad exposure probably was not hugely effective
in changing attitudes, if that was a goal.3
So, if the marketing goal is (at least minimal) awareness among a larger segment (i.e.,
greater reach than frequency, as in the second scenario), the ad would have to be run during
a highly viewed TV show (for example), which would likely be quite expensive. If the goal
is deeper knowledge and more favorable attitudes in the smaller segment (i.e., greater fre-
quency than reach), the ad could be run three times during a specialized TV show with a
smaller viewer audience (which would also likely be less expensive).
For reach, the goal is to expose as many of the target customers as possible to the ad. The
challenge is to find the media that are most cost-efficient for finding as many of those cus-
tomers and primarily only those customers.
For frequency, the rule of thumb used to be that an ad needed to be seen and processed
three times for it to be persuasive. This notion that three repetitions is a magic number is
Big Ad $penders
Who spends the most on ads? Cars ($2 b), movies ($1 b), pharma ($500 mm), and big banks (on credit
cards, $350 mm).
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208 Part 3 Positioning via Price, Place, and Promotion
now recognized as simplistic. The good news is that sometimes seeing an ad once or twice
can be sufficient, and the bad news is that sometimes a customer needs even more expo-
sures than three. The fundamental question comes down to the usual one: What’s the goal?
Awareness and memory can probably be attained with fewer ads. Persuasion might take
longer, particularly if the product is complicated or the viewer is unfamiliar with it. In addi-
tion, sometimes more is not better. If the product and ad are pretty readily understood, then
subsequent exposures to the ad can lead to so-called wear-out and reduced effectiveness.
People start disassociating from the ad, thinking random thoughts, and attitudes toward
the advertised brand start to drop.
In general, regardless of the budgeting method, it is important to acknowledge that, al-
though working on ads can be great fun, they can be very expensive. The cost to produce a
finished (and fairly simple) 30-second television commercial is at least $500,000. Compa-
nies spend this money because they believe in advertising and know its value as a commu-
nications tool. Research has shown a positive relationship of the levels of advertising and
promotional spending to the market value of the firm. However, of course, the direction of
causality is unclear: Do the heavy levels of ad spending by these companies ensure their
continued success? Or are these companies the only ones with pockets deep enough to
advertise a great deal?
Different Media
Marketers have lots of fun media choices:
1. Celebrities: whenever it’s announced that another celebrity has struck a deal to be paid mega-
bucks to endorse some brand, it raises eyebrows—can the celebrity possibly be worth it?
Research suggests yes, at least for sports stars. When the athlete signs on, there is a boost in
sales in an absolute sense and relative to competitor brands. Furthermore, there are lifts in sales
and stock returns every time the athlete meets some major achievement. The effects on stock
enhancements seem long lasting, but sales bumps begin to decline over time. (See Elberse
and Verleun, “The Economic Value of Celebrity Endorsements” in the Journal of Advertising
Research.)
2. Sponsorship: speaking of athletes, let’s consider the prices of the real estate of soccer
jerseys. The cost of renting these human billboards ranged from $40.9 mm for FC Barcelona
and $35.7 mm for FC Bayern Munich to $3.5 mm for LA Galaxy and, well, $0 so far for
Colorado Rapids. Is it worth it? Brand exposure in the presence of such adrenaline and
excitement, you bet. (See the Bloomberg Businessweek article “Full Frontal Sponsorship” by
Roger Bennett.)
3. Product placement: The product types that use TV and movie placement the most are cars
(especially Mercedes, Chevy, BMW, Cadillac), beer (Miller), and soft drinks (Coke, Pepsi);
placements for liquor have declined. In video games, Pepsi, Siemens, and Burger King rule.
When the content of the TV, movie, or video game programming is coded as being positive,
neutral, or negative in tone, product placement is split almost perfectly at 33% across the
board. Strange—wouldn’t you expect that the product placement dollar would specify a
positive context? When the product presentation is coded as full-frontal vs. partial product
displays, the full-on dominates, but only 2:1. (See Galician’s, Handbook of Product Placement in
the Mass Media.)
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
209Chapter 12 Integrated Marketing Communications and Media Choices
12-1b Media Planning and Scheduling
Marketers have long tried to answer questions regarding ROI or ROMI (return on market-
ing investments), essentially estimating a breakeven for an advertising expenditure. Again,
with the caveat that no measure is perfect, here’s how to approach this estimation.
In Figure 12.2 we see a number of television shows, plotted by their ratings or their
popularity with the viewing audiences and by the costs for 30 seconds of airtime during the
shows. There is naturally a positive correlation between these two indicators; you pay more
to get more. But the relationship is not perfect. Some TV shows are bargains, delivering
more audience exposure than they charge, and others are a little costly, charging a bit more
than they’ll deliver in terms of audience viewership.
Let’s say you advertise during the show Big Bang Theory. That show’s rating is 5.6, which
translates to 6.3 million TVs tuned in to the show in the marketplace households. (One
rating point is 1% of all households with TVs. Currently the number of U.S. households
measured is approximately 112,000,000, so 1%, or 1 rating point, is 1,120,000.) The show
charges $328,000 per 30 seconds. If you’re McDonald’s and you’re trying to encourage
people to go pick up breakfast tomorrow on their way to work, how many meals would
you have to sell to make the advertising charge worth it? If a meal contribution is $0.50,
then you’d need $328,000 ÷ 0.50 = 656,000 purchases (tomorrow, this week, whatever
your timeline). That number is only 10.4% of the viewers who had been exposed to the ad
(656,000 ÷ 6.3 million). It seems achievable.4
In terms of timing, or media planning, there are basically three kinds of media schedules:
continuous, occasional, or seasonal. For continuous schedules, the ad exposure is regular; it
doesn’t have to be a perfectly predictable schedule (e.g., every Friday, a half-page in The New
York Times) or even all that frequent, but the idea is that you’re fairly constantly reminding
the consumer that you exist. The periodicity depends on the length of the buying cycle
(advertise frequently for soft drinks, less frequently for tires). You want to advertise a little
more frequently than the object is purchased, to keep it in consumers’ minds, but not so
much as to risk overexposure and boring your customers (not to mention overspending on
advertising).
In occasional media scheduling (sometimes called flighting or pulsing), you are not omni-
present, but you pop up from time to time. Given that you’re advertising less frequently, this
5 10
P
ri
ce
(3
0
se
c.
)
Prime Time Ratings
Sunday
Night Football
The Blacklist
Big Bang Theory
Gotham
$700 k
$350 k
Figure 12.2
Advertising
Time Costs
More During
Popular TV
Shows
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
210 Part 3 Positioning via Price, Place, and Promotion
approach will be less expensive and therefore possibly more cost-effective. Obviously, one
should advertise in synch with purchase cycles. During times when ads aren’t aired, competi-
tion can swoop in, but you’re probably doing the same to them during their downtimes. Fur-
thermore, if you’re building brand image, you’ll be less vulnerable to competitors’ poaching.
Seasonal ads are infrequent and focused on the preterm season for the product (e.g.,
school supplies advertised in August, candy advertised before Valentine’s Day and Hallow-
een, outdoor grills advertised in April and May). Advertising outside the season is not done
because it will not induce additional purchases.
Media scheduling goes beyond simply counting the number of times an ad was aired
in a household whose TV set was on and tuned to the appropriate channel. Advertising
agencies are savvy about capturing the psychological processes of advertising effects. For
example, agencies factor in the recency of the ad exposure when examining subsequent
purchase behavior (reasoning that ads viewed last week will have less of an impact on the
contents of grocery cart than an ad you saw last night).
12-2 INTEGRATED MARKETING
COMMUNICATIONS ACROSS MEDIA
With a sense of how much to spend and when to schedule the advertising, we face next the
choice of communication outlets. This choice used to be among TV, radio, newspaper, mag-
azine, and billboard. Now, the choice is even more complicated with so many more media
(e.g., more TV stations, radio stations on XM, the Web), and audiences are fragmented
across those many media and using technology to zip past ads.
To try to capture these splintered audiences across the varied media that engage them,
marketing gurus have encouraged the strategy of integrated marketing communications (IMC).
To make informed choices and select the appropriate media outlets, the marketing manager
needs to understand the strengths of the various individual media available. It is ultra im-
portant that the marketing messages are seamlessly integrated across the media selections.
The philosophy underlying IMC is totally logical: Keep in mind the company’s overar-
ching strategy, and ensure that all marketing activities send a consistent message, beginning
with the communications (i.e., consumer and trade advertising and promotions, product
placements, personal selling, direct and database marketing, etc.) and including other mar-
keting mix elements (e.g., product design and packaging, pricing, channel availability).
Types of TV Shows
ESPN Research identified four personalities of TV channels:
TV Channel Personality TV Channel Exemplars
Integrity and information History Channel, Discovery
Relevance and involvement Lifetime, HGTV
Entertainment and fun HBO, NBC, ESPN
Personality and rapport Lifetime, ESPN
And P.S., viewers liked the ads most on these channels: ESPN, Lifetime, HGTV
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
211Chapter 12 Integrated Marketing Communications and Media Choices
Research suggests a positive relationship between IMC practices and good brand out-
comes: high levels of awareness, brand loyalty, and sales. Yet, even if the IMC goal sounds
great, it’s not that easy to execute in practice, in part because traditional advertising agencies
aren’t that good at PR, direct marketing, or certainly nontraditional advertising tactics, such
as when they are using social media. To resemble full-line service providers, some ad agen-
cies acquire smaller, specialized agencies, and others outsource part of their overall IMC
plan. Ultimately, regardless of how it is achieved, the integration across media is the respon-
sibility of the marketer and brand manager.
Early suggestions were that, to effect a common strategy, all the IMC messages across
all the media should be the same. More recently, marketers recognize that while some ele-
ments should be consistent (e.g., the brand name, logo, general flavor, and positioning), the
varied media have varied strengths, and the message should play to the medium’s strengths.
For example, a TV ad is vivid and dramatic, but the message needs to be kept simple,
whereas complicated products can be explained better in print (magazines, online, direct
marketing). The goal is consistency in the general positioning, but the different media offer
supplemental information.
Creative Communications
International football sponsors:
Qatar Foundation pays $41 mm to have its name on the FC Barcelona jerseys.
Aon spends $33 mm to decorate the chests of the Manchester United players.
Flashmobs took off with T-Mobile’s train station events, choreographed to look spontaneous, with
the tagline, “Life is for Sharing.”
Whirlpool donated appliances for houses built by Habitat for Humanity.
To get in better touch with Hispanic consumers, Kleenex sponsored a contest for amateur artists
to submit ideas for package designs. Winners received cash prizes, and the top three designs were
in distribution during National Hispanic Heritage Month.
Media Synergies
Research suggests there are indeed synergies across media in IMC advertising campaigns. For example,
websites haven’t made catalogs obsolete; instead, their roles are changing.
Online shopping is:
Easy for purchasing.
Efficient for search.
Suited toward goal-oriented purchasing.
Direct mail catalogs:
Are colorful and vivid.
Facilitate browsing.
Drive consumers to the website!
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
212 Part 3 Positioning via Price, Place, and Promotion
IMC gurus say that 1 + 1 can equal 3. Advertising in a consistent yet complementary
manner across two or more media can have the impact of having spent even more in a tra-
ditional single-medium budget.
12-2a Media Comparisons
Figure 12.3 indicates the relative strengths of popular media—TV, radio, newspapers, mag-
azines, billboards, the Web, and direct mail—on business criteria. TV ad spots are by far the
most expensive (e.g., $5–100 k for 30 seconds during prime time). Yet even with today’s TV
channel fragmentation, this medium still yields the largest reach numbers (sheer audience
size). While reach is strong, frequency can be challenging to achieve because of the expense.
In addition, reach via the mass media is relatively broad, not targeted.
Traditional TV is considered a mass medium, but special TV and cable channels serve
more focused audiences. Similarly, some magazines have broad appeal, but others can hit a
target segment quite efficiently (i.e., with little excess expenditure). Radio spots and news-
papers are often planned and purchased nationally, but, alternatively, each can also certainly
be planned and purchased for local markets. These media can capture known segments,
such as radio by genre or in-flight magazines for the flying audience. Billboards and other
urban methods (e.g., subway ads, ads on buses, ads before previews in movie theaters) are
relatively inexpensive but are effective in achieving good local numbers.
Radio, newspapers, and magazines are certainly less expensive than TV (e.g., $250 for
one minute of radio, $5 k for one page and one day in a decent paper, $5–15 k for one
page in one issue of a magazine), but, of course, they also deliver smaller audiences. Bigger
magazines (where bigger implies greater reach) naturally cost more; for instance, a full-page
color ad in BusinessWeek is roughly $100 k and $200 k in Newsweek. Back pages cost still
more. Particular costs and GRP delivery depends on whether the radio station is local or
the newspaper a national.
Figure 12.3
Media Choi
ces: Relative
Strengths
on Business
Measures
TV
Ra
dio
Ne
ws
pa
pe
rs
Ma
ga
zin
es
Di
rec
t M
ail
Bi
llb
oa
rd
ww
w
Inexpensive Reach Frequency Targeted
Strong
Weak 0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
213Chapter 12 Integrated Marketing Communications and Media Choices
Each medium has its own personality. For example, newspapers have the advantage
of extreme timeliness. Magazines require longer lead times for production, but they have
nice reproduction quality. So-called “beauty shots” of products in magazine photos are as
high-quality as those on TV. Newspapers and magazines also have the advantage of being
nonintrusive because readers choose to pick up the magazine at a time of their convenience
and can flip past a print ad quickly if they wish to do so. Each medium has drawbacks as
well, like the flipping past the ad.
The media with the best customization options are online advertising and direct mail.
The varieties of ads on the Internet are still very inexpensive, and data-based profiling
enhances the technology’s ability to target. Still, online penetration isn’t yet 100%, and
users have to actively find the brand and company; hence reach is not yet a strength of this
medium.
Direct mail is relatively inexpensive, but it is not terribly efficient. That is, recipients will
receive some of the direct mail appeals as “junk” mail. With better database programs, the
reach of the particular target audience can be quite focused.
Figure 12.4 displays the relative strengths of these media in terms of the content they
can deliver. TV messages need to be simple and straightforward, and radio messages even
more so, given that fewer sensory modalities are engaged in receiving the message. TV
allows for vivid, dramatic portrayals, including humorous and emotional appeals, much of
which gets lost in the more impoverished media. On the other hand, print vehicles (maga-
zines, papers, direct mail, online, etc.) are the perfect outlets for conveying detailed product
information.
TV Tidbits
Even in households that receive more than 100 channels, on average, consumers watch only
about 14 channels.
When we sit down to watch, we (1) first go to one among our 14 favorite channels, (2) next we
check listings, (3) next, we zone out, channel surf, and select nearly randomly.
TV segments of customer media choices are as follows (based on research by ESPN Research and
Quirks.com):
Segment Watch their TV
shows primarily:
Because:
1 On-demand It’s convenient. Viewers can control the experience
(e.g., pause, rewind). They can watch any episode, and
the shows don’t take up space on their DVRs.
2 Live They’re ardent fans, and they schedule their lives around
their shows. They want to be cool and talk about the
show at work the next day.
3 Via DVR It’s convenient, and they’re busy. They like high-def, and
they can keep episodes they like.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
214 Part 3 Positioning via Price, Place, and Promotion
12-2b Beyond Advertising
IMC is about integrating a brand message across any media, not just traditional advertis-
ing outlets. In addition to advertising, whatever personal selling staff a company has at its
disposal, the firm’s sales promotions, public relations, and all related departments should be
expressing a consistent, complementary message. All of these media (broadly defined) are
supposed to work as a team on behalf of the brand.
The key advertising concepts are still applicable. For example, the AIDA process (atten-
tion, interest, desire, action) works in selling too: A salesperson must first get the attention
of the potential customer (by prospecting a database, qualifying the potential customers,
and approaching them). Then come the customer’s interest (through a sales presentation),
the desire (e.g., through a product demonstration, being ready to handle the customer’s
objections), and the action (closing the deal and following up with service).
Personal selling and a company’s sales force are essential communication vehicles for many
companies and industries. Personal selling is huge; the Department of Labor estimates
some 14 million jobs (over 10% of the workforce) are in selling. These sales-related po-
sitions include the guy doing road trips to sell machine parts or insurance, as well as the
counterperson at Nordstrom’s, as well as the order takers at 1-800-cataloger.
Although we’ve said that direct marketing and Internet are tailorable media, nothing beats
a face-to-face conversation to try to figure out what a customer wants and how a company can
deliver. Sales forces are clearly high-cost due to labor (salary, training, etc.), but they’re never-
theless important, especially for the sale of complicated, expensive goods and services. So, while
sales forces exist for consumer products (e.g., Avon, Amway, Dell, life insurance companies,
etc.), they’re enormous in B2B and pharma (e.g., Eli Lilly, Novartis). It’s thought that an ex-
pensive piece of medical equipment, a high-volume photocopier, a new eco-friendly chemical,
or a new cholesterol-reducing medication are all too complicated to s ell online or via a catalog.
A salesperson is needed to explain all the product features, as well as other details such as ser-
vice and leasing agreements. As Figure 12.5 indicates, different media have different strengths.
Marketers face three primary questions in designing a sales force:
• How many salespeople do I need?
• Where do I deploy them?
• How do I compensate them?
Figure 12.4
Media
Choi ces: Rela
tive Strengths
on Ad Content
TV
Ra
dio
Ne
ws
pa
pe
rs
Ma
ga
zin
es
Di
rec
t M
ail
Bi
llb
oa
rd
ww
w
Information Product demo Vivid, emotion
Strong
Weak 0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
215Chapter 12 Integrated Marketing Communications and Media Choices
Sale forces are larger when a company wants an aggressive product launch and when a
company wants to protect its territories from encroaching competition. Sales territories
are determined by existing sales and competition but also from strategic assessments of the
desired markets. Compensation is always some proportion of salary and commissions; the
proportions tend to have more to do with tradition and competition than with any
psychological assessment of the motivating factors.
12-2c Choice Between Advertising and a Sales Force
The costs of sales forces include more than compensation. Salespeople are partners, mem-
bers of your distribution channel, and, just like your end users, they want deals. So while
consumers might think they’re bombarded with
advertising, as Figure 12.6 indicates, companies’
expenditures on advertising and sales promotions
directed to consumers is only a small piece of the
pie. The largest portion of their marketing com-
munications budgets is directed to trade: their
channel partners.5
Recall the concepts of push and pull in channels
of distribution. Push is a top-down effort, selling
to customers through a sales force and retail part-
ners. Pull is a bottom-up drive from customers
Sell!
Inc., Money.CNN, and others track the largest sales forces in the world:
Top in computers: Microsoft, Xerox, Cisco
Top consumables: PepsiCo, Sysco, Interstate Bakeries, Coca-Cola, Anheuser-Busch
Top medical: Schering Plough, J&J, Pfizer
These days, most sales forces are facilitated by CRM databases. Customers’ purchases and preferences
are stored, so the salesperson can refresh his or her memory of the buyer and company before a sales
meeting, updating the database immediately after each contact (also vendors: SAP, Oracle, and the
unavoidable Salesforce.com).
Figure 12.5
Choice
between
Advertising
and a Sales
Force
• Customers can be anywhere
• Product is simple to understand
• Product is fairly standard
• Relatively inexpensive, less risky
• Advertising can be expensive
• Results can be difficult to establish
• Need geographic concentration
• Product is often technical, complicated
• Product can be customized
• High priced, B2B items
• Sales force can be expensive
• Quick feedback, measurable results
Advertising Personal Selling
Figure 12.6
Allocation of
Communi
cation and
Promotion
Budget
Media
advertising
25%
Trade
promotion
57%
Consumer
promotion
18%
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
216 Part 3 Positioning via Price, Place, and Promotion
seeking their products. Pull (advertising to consumers) is important to a brand manager
when the company’s intermediaries stock a large number of competing products, and the
partners don’t care about supporting any of them in particular. Then, advertising and sales
promotions are necessary vehicles. Direct-to-consumer (DTC) pharma ads are a very pop-
ular and effective example of pull.
Push relies more on personal selling, and a brand manager needs to direct promotional
efforts more to members of the channel than to the final user. Channel members don’t care
about ads per se as much as money, and so trade allowances are frequently used. These are
price reductions that the manufacturer offers to the intermediary (wholesaler or retailer)
in exchange for their doing something such as allocating space to a new product (so-called
slotting allowances) or buying more product during special periods. Sometimes these trade
bonuses are passed along to the retailer’s salespeople in the form of cash or training and
product demonstrations, free merchandise, or conventions and trade shows.
Public relations (PR) is another means of providing information and building brand at-
tributes. PR lines of communications are the attempt of an organization to reach its cus-
tomers, suppliers, stockholders, government officials, employees, or the general community.
PR can be conducted from within the company, run by its advertising agency, or (most
often) outsourced to PR specialists.
Whenever anything “newsworthy” is happening, PR people issue press kits—news re-
leases. These used to be in print; now they take the form of video clips. The information
features a blurb on whatever’s going on (e.g., a new product launch), as well as background
propaganda about the company, bios, history, whatever is needed to round out the edges.
That background information is also available on a website that is maintained for year-
round inquiries. PR people arrange events such as speaking engagements (e.g., CEO Joe
to speak at this year’s new bank opening), sponsorships (e.g., a poster and coffee at a pro-
fessional conference or trade show), or community philanthropy (the bank puts its name
on Little League uniforms or sponsors a walk for charity).
PR
Part of the utility of PR is its versatility. It has been exercised in the wake of oil spills, brake failures,
package tampering, and political and sports figure misbehavior. Newsweek identified several cases:
Company Problem PR Spin
Johnson &
Johnson
Recalls Customers can trust them. The company is transparent
in owning up to problems and addressing quality
control issues.
Boeing Delay unveiling the 787
Dreamliner
It’s Boeing, for heaven’s sake. They’re strong in many
businesses. We need to sit tight.
Glaxo Lawsuits regarding a drug’s
side effects of heart attacks
and strokes
They are settling cases quickly, and proceeding with
business as usual—developing vaccines to grow in
emerging markets.
For more, see the Public Relations Society of America (prsa.org) or Council of Public Relations Firms
(prfirms.org).
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
217Chapter 12 Integrated Marketing Communications and Media Choices
Most companies use PR in recovery mode, in an attempt to smooth over some
complicated or embarrassing event, such as when a product is reviewed critically or when
customers boycott a brand. Company reps communicate to the customers, shareholders,
and press to counter argue the criticisms and to enhance and strengthen positive images
and brand and corporate equity.
It’s even smarter to practice continual (albeit pulsing) proactive PR, which can be both
for brand building and for inoculating the firm against possible future criticism. Positive
PR can be large-scale, such as ingredient menus for restaurant chains, or local, such as
sponsoring fund-raising events or local teams.
The intent of PR is to convey a positive image and to educate a constituency about the
company’s objectives, such as recent innovations. In general, the job of a PR firm is to gen-
erate goodwill on behalf of the company.
Publicity is another tool of communication; it’s not paid for by the brand’s company. So it
can carry the appearance of objectivity, e.g., some new brand feature praised by a third party,
such as a newspaper or Website that provides news coverage. Press releases are, of course,
constantly prepared by a company, but there is no guarantee that any influential media will
bother to pick up on what a company deems newsworthy.
Sometimes the publicity indeed comes from a third party, such as when a popular press
business magazine like Fortune publishes its annual “100 Best Companies to Work For” issue.
Companies included in these listings are celebrated, and you just can’t buy that kind of atten-
tion. On the other hand, the company has no control over the spin on the story, and publicity
can be negative, requiring some recovery on the part of the company’s own PR group.
Product placement is more subtle than most advertising. It’s been around awhile but has
become increasingly popular (over $1 b annually) as brand managers struggle to find cre-
ative means of getting in front of viewers who are increasingly zapping ads. In movies (e.g.,
James Bond’s cars), on TV (Survivor), and in video games, products and brands are being
integrated into the show. The product is integral to the scene, so the viewer can’t zap past
it, and the inclusion of the product carries an implicit endorsement by the actors onscreen.6
While ads are more useful than product placements in providing information, both can
result in the transfer of positive associations.7 Both ads and product placement are also met
with some viewer skepticism, since it’s known that both are paid for. A somewhat related
phenomenon is the placement, or plant, of a brand advocate in chat rooms. When a brand
is talked up and the chat is thought to be authentic, it is very powerful and persuasive, but
if the rest of the chat room attendees smell a plant, the tactic can backfire.
Event sponsorship, usually of sports but sometimes of other cultural or artistic endeavors, has
a long tradition. The event is exciting, and the brand draws from its positive valence and energy.
NASCAR: the
champion of
sponsorship.
W
al
te
r G
A
rc
e/
Sh
ut
te
rs
to
ck
.c
om
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
218 Part 3 Positioning via Price, Place, and Promotion
NASCAR racing is a popular vehicle for sponsorship (17 of the 20 biggest spectator
sports are NASCAR races). Big crowds attend (the average attendance per race is 100,000;
the average ticket price is $90), TV audience sizes and ratings are soaring (Fox, NBC,
and TNT have a multibillion-dollar deal for coverage), merchandise exceeds another $2 b,
and corporate money is pouring in through sponsorship (already over $1.5 b according to
Fortune).
Working for a company whose brand helps sponsor an event is exciting, but it’s not
entirely clear that sponsorship is cost-effective in apportioning advertising budgets. For
example, when companies like Coca-Cola, GE, Kodak, Omega, Panasonic, and VISA
sponsor events like the Olympics or the World Cup, do they need the exposure? When
companies like Atos Origin or Manulife sponsor these events, does the exposure help
them (e.g., achieve heightened brand name awareness)? Yet so-called ambush marketing
is frowned upon because companies that associate themselves with such prominent events
don’t have to obtain and pay for sponsorship rights.
If you want to find the tough demographic audience of 35- to 40-year-old white-collar
men with bachelor’s degrees making almost $100 k, sponsor Fantasy Football. These guys
are into Fantasy Football big time, and (oops!) they’re checking their teams’ performance
while at work.
Sales promotion is still another tool in the IMC mix. The best known form of sales promo
is the coupon: a newspaper or magazine cutout to take shopping for a small discount on a
future purchase.
Coupons are very popular, so there are many forms: FSIs (freestanding inserts in news-
papers, magazines, and direct mail), printouts at the checkout, point-of-purchase coupon
pop-outs (on the shelves where the products are featured), Internet printout coupons to
take to retail shops, etc. In addition to coupons, sales promos include rebates, promo prices,
trade-ins, deals for loyalty programs, free trial-sized (i.e., small) products, contests and
sweepstakes, etc.
Sales promotions activate purchase interest, thus effecting short-term sales boosts.
Sales promotions are also thought to be effective devices for enticing customers to switch
brands.
12-2d The IMC Choices Depend on
the Marketing Goals
There are many media, any of which could be useful and all of which should be coordinated.
Advertising can be carried via print TV, radio, the product’s packaging, movie product
placement, sales promotion (coupons and rebates, loyalty cards), the sponsorship of events
and experiences, public relations and publicity, personal selling, direct marketing, etc. For
each element, the brand manager and CMO need to answer two questions:
1. Who is the target audience?
2. What is our goal: awareness, provision of information about features and benefits,
enhancement of brand attitudes, the strengthening of preferences, the stimulation
of purchase trial, the encouragement of repeat purchasing, the attraction of brand
switchers?
The effect of the ad campaign on that target segment with respect to the select goal can
be and should be measured. Other effects might also result, but one should not expect that
all the goals could be met with a single blip of advertising and IMC.
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219Chapter 12 Integrated Marketing Communications and Media Choices
If you sell something that is seasonal, you’ll advertise just prior to that season. Otherwise
you have a choice of advertising continuously or occasionally. Big companies with big ad
budgets can advertise continuously, but little brands can advertise continuously if the less
expensive media are used. So the choice between continuous and occasional is not just
budget.
Further, if the marketing goal is brand awareness, occasional ads won’t cut it. The adver-
tising needs to be fairly frequent until the basic knowledge has nearly saturated the target
market. Note that the target needs to be well-defined to be able to send media to it and to
test it later. In addition, the level of so-called saturation needs to be defined: Do you want
90% awareness? 60%? To be profitable, the saturation percentage can be smaller if the target
market is large.
Once there is awareness, to prompt continued purchasing, correlate the frequency of
advertising with the customers’ purchase cycle. If the item is purchased frequently, then
advertise frequently.
Modify all these actions depending on your marketing strategy. If, for example, the
brand in question is a cash cow at the end of its product life cycle, you’re likely to be adver-
tising less frequently. If the brand in question is one the company wishes to grow aggres-
sively, ramp up above previous years’ budgets and above competitors’ spending.
Regarding media choices, there are two questions: What can you afford? What fits best
for your target segment? If yours is a little brand with a meager budget, you’re precluded
from national TV or the sponsorship of big sports event. That’s okay; there are plenty of
other options. Even local TV or local sports events are fine alternatives. Be creative with
buying (or, better, with creating and maintaining) databases to target your audience. Find
out what magazines they read and what websites they visit, and advertise there.
Regarding the IMC across the message pieces, draw up a pie-in-the-sky message—all
that you want to convey to your customers—from the facts of the features to the benefits
and images. Then put the images in the visual media and the facts in the written media.
Use a common tagline, and design the appearance to tie the messages together. Doing so
will ensure a sense of consistency and complementarity, both of which reinforce brand
equity.
Figure 12.7 is an example IMC schedule that encompasses timing, media selection, and
the message for integration. Many companies make the most of their money during the
Christmas holiday season. Thus this example company hypes up for December. The ads in
the winter (March) and spring (May) feature the brand and the company (to maintain its
reputation). The messages are reminders in content: “We’re here, and we’re good quality,
and here are some reasons you should like us.” Media selections are targeted (magazine ads
or specialized cable TV ads), as well as broad (online) and price promotions (coupons), are
used along with the advertising.
Ad Ethics
Is it okay when Miller produces and advertises Plank Road beer as if it’s from a small brewer? Is it okay
when squeaky clean Disney produces R-rated movies under the name Miramax? Isn’t it impossible
to tell customers everything about products and how they’re made? (For more, see Davidson’s Moral
Dimension of Marketing.)
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220 Part 3 Positioning via Price, Place, and Promotion
At the end of August, a slight shift in message occurs. Kids are going back to school, and
this event prompts another coupon and a referral program.
Things get really heated right around Halloween and November. Messages that had
simply been nice reminders are getting more focused, keeping the attitude-enhancing
aspects but encouraging a salient top-of-mind readiness in recall and, of course, encour-
aging purchases. Advertising expenditures are growing, as the ads are placed in more
numerous and more expensive media outlets (e.g., large metropolitan radio spots, national
TV ads, etc.).
Thanksgiving kicks in some novelty, with the sponsorship of two highly televised events:
a float in a popular Thanksgiving Day parade and three announcer mentions during a big
college football game. In the second week of December, local TV ads are aired in three
large markets, and on the weekend, between the second and third weeks of December, city
newspaper insert ads are bought for those three markets, plus the next 20 in size. Prices are
also cut 15%.
Whatever product is left after the big Christmas rush is sold at a 50–75% discount
(depending on the retailer relationship). The company sits back to recover from the ac-
tivities of the last few weeks of the year and to regain energy to start the game all over
again in March.
The company is thoughtful about varying media choices, scheduling and planning, and
the overall content of the communication pieces that fit together. This is IMC as an integral
whole—across message and media.
12-3 HOW IS THE EFFECTIVENESS
OF ADVERTISING MEDIA MEASURED?
Depending on the goal sought, advertising effectiveness can be assessed in a number of
ways. In the previous chapter, we discussed measures of memory (recall and recognition),
attitudes, propensity to purchase, and so forth. Coupling that ad content with this chapter’s
Jan Feb March
Brand promotions, magazines
ads, online coupons
April May
Company ads, target segment
cable TV ad
June
July Aug
Brand; back-to-school online
deals, local paper inserts
Sept
Attitude brand ads via local
radio sports, refer-a-friend
Oct
Top-of-mind ad; 3 TV ads say
go online for more information
Nov
Spur purchase; events: parade
float, 3 ads during college
football games
Dec
Pre-Christmas: 3 local TV ads
& paper inserts. Post-holiday
deep discount
Figure 12.7
An IMC
Schedule
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221Chapter 12 Integrated Marketing Communications and Media Choices
concerns over media, it should be clear that things get both more complicated, and yet there
are some synergies.
For example, if the marketing goal is to enhance awareness and memory, then reach is the
more likely media goal than frequency, and this can be measured by viewership, readership
and circulation numbers, traffic indices, and many measures of exposures. If brand awareness
is already pervasive in the target segment, and if the goal of the ad campaign is an attitude
adjustment, then surveys (even quick three-item smartphone surveys) will be necessary.
Advertising researchers (on memory or attitudes) ask respondents whether they can
remember the source of the ad: Did they see something on TV? Hear something on the
radio? Receive a piece in the mail? And so on. Consumers aren’t typically accurate in their
identification of the media sources, which further underlines the importance of exposing
consumers to your messages via multiple media. The marketing concern is primarily that
the message reaches the consumer via any medium. But the fact that consumers can’t tell
you where they saw the message means it’s more difficult to assess, for example, a ROMI
on the radio portion of the ad budget vs. the direct mailing piece.
The ways to test advertising are many. The same scanner data that allow marketers to run
experiments in stores on price points are also used to assess ads in the marketplace. For all
households in a ZIP Code, advertising researchers can find out what national or local ads
have been running on TV, radio, newspapers, etc. For the households in certain research
companies’ panels (e.g., such as those run by A.C. Nielsen or Information Resources, Inc.),
finer measures of advertising exposure are possible, e.g., was the household TV on during
the ad showing, etc.?
Many studies have been conducted with such data. For example, to address the question
of whether spending more on advertising results in more sales, a huge real-world marketing
research study was conducted. Researchers found that increasing ad budgets, relative to the
competition, doesn’t increase sales in general. Think about it. Sometimes an ad might not
seem to predict something like sales or share because there is little variance in the system.
That is, if everyone in the industry tends to advertise a lot, then the relative market share
positions wouldn’t shift much. On the other hand, if everyone advertises less, they’d all be
more profitable because advertising is costly). Again, presumably market shares wouldn’t
change much, but cutting advertising is not a good idea for the long term. Companies are
supposed to be advertising to communicate with customers, but sometimes it almost ap-
pears as though they advertise because competitors are doing so.
While varying ad weights (budget expenditures) may have limits in affecting sales and
shares, research has found that qualitative differences, such as better ad copy or strategies
to reach current non-category users, etc,. can increase the likelihood that TV advertising
will positively affect sales. As another indicator that content matters, researchers have also
found that an increase in media weight (i.e., advertising budgets) is related to sales for
ads that both evoked positive feelings and failed to evoke negative feelings. Finally, some
marketers would say, why bother spending ad dollars on retaining customers who already
have a strong positive preference for the featured product. Instead, eliminate these wasted
(or redundant) dollars, and spend on consumers who are more ambivalent to prevent their
switching to the competition.
Online advertising is still new enough that advertising researchers are trying to de-
termine just what should be measured. Click-thru rates (from banner ads) are a simple
no-brainer, but they also track downloads, inquiries, purchases, returns, etc. Then costs can
be assessed against these measures: cost per click, cost per download, cost per acquisition,
etc. Costs of online advertising are low, but click-through conversion rates are also low, so
online costs-per aren’t terribly impressive. That is, cost effectiveness of online advertising
may not be great, but cost per se is so extraordinarily low that the inefficiencies are ones that
most advertising managers are willing to live with.
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222 Part 3 Positioning via Price, Place, and Promotion
Finally, just as advertising media need to be integrated, by way of IMC, messages and
media themselves may be optimally integrated. Consider the following example. A national
electronics firm that produces hearing aids was interested in learning how to get its message
to people who have various forms of hearing loss, as well as what they should say. Hearing
aids are a tricky product because, while young people can have suboptimal hearing, for
many people, hearing loss first occurs as they age. So wearing a hearing aid is an admission
of aging and it’s seen as somewhat embarrassing. So what to do?
In this example, a test market was run in which public media were tested against private
media. An example of the public media was a videotape of what a TV ad would look like.
An example of the private media was a direct marketing piece, sent to the home, which
could be read in the privacy of one’s own home. In addition, different messages were creat-
ed. One was a supposedly humorous ad (making fun of the confusions that hearing losses
can create), and one was an ad that essentially promised that the hearing aid would help the
wearer interact better with his or her family, friends, and coworkers. The funny ad worked
better on the video, and the promise ad worked better in the direct marketing materials,
and the direct marketing worked better than the video. The bottom line is that it’s not that
one message was better than another or that one medium was better than another; it’s that
there are synergies, and some messages are conveyed more effectively via certain media. The
challenge is to find the fit that works for your brand and product. The integration “I” in
IMC needs to be across media and messages.
MANAGERIAL RECAP
Media decisions about both expenditure and timing are integral in running advertising promotional campaigns.
• Marketing managers must oversee the media choices to integrate the marketing communications so that customers hear the compa-
ny’s message in one clear voice.
• The effectiveness of advertising is measured using long-term and short-term measures.
Chapter Outline in Key Terms and Concepts
1. What media decisions are made in advertising
promotional campaigns?
a. Reach and frequency and GRPs
b. Media planning and scheduling
2. Integrated marketing communications across
media
a. Media comparisons
b. Beyond advertising
c. Choice between advertising and a sales force
3. The IMC choices depend on the marketing
goals
4. How is the effectiveness of advertising media
measured?
5. Managerial recap
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223Chapter 12 Integrated Marketing Communications and Media Choices
MINI-CASE
Where Should We Place Our Ad?
A software company that is fairly well regarded for two large product lines has TurboTax in its sights. They’ve de-
veloped a tax package that they think their current customers will like, and they think this software will give them
a chance to bring new customers to their products.
The company has developed an informative, yet succinct, and even somewhat humorous ad. One of the top
managers is saying the company ought to ship out the ad in brochure form, along with a DVD with a demo file
on it, as a form of direct mail. Another guy is saying that, because the product is high-tech, they should reach out
to customers through an email campaign. The brochure should be a PDF file with an embedded link to the same
demo file that the direct mail recipients would receive.
The boss is indifferent (doesn’t know much about marketing, history, biology, or what a slide rule is for), but he
cares about costs. So a third manager called up some media providers and compiled the following prices.
New Customers Current Customers
direct mail
(list rental)
e-mail
(list rental)
direct mail
(list in CRM system)
e-mail
(list in CRM system)
Cost per 1000 (CPM) $1750 $500 $750 $50
Click-thru rate — 10% — 20%
Rate of purchase 2% 3% 4% 5%
Cost per sale $88 $167 $19 $5
Chapter Discussion Questions
1. What did we learn from the cost assessment
manager?
2. Which of the first two managers’ directions (direct
mail or email) would you support?
3. What is the strategy? If the company wants to
emphasize customer acquisition, what would
you recommend? If the company wants to
emphasize customer retention, what would you
recommend?
4. What else would you like to know for a more thor-
ough assessment?
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224
SOCIAL MEDIA13
13-1 WHAT ARE SOCIAL MEDIA?
Once upon a time, there were ABC, CBS, and NBC. No HBO. No Fox. You had to be near
a wall to talk on the phone. Amazon was a river, google was a number, and byte was a typo.
How primitive!
The enormity of today’s media choices—the Internet alone—makes it a wonderful time
to be alive. The media are obviously part of the social media story. Computer technology
continues to get smaller, more powerful, and less expensive. And it seems omnipresent.
Mobile marketing is growing because our cell phones are so convenient: They contain
our identities and those of the people we talk to frequently. They are our portals to email
and Facebook, our primary means of sharing information and entertainment. We engage in
simple social conversation, forward funny emails, and share videos, links, and music. We are
both voyeurs and exhibitionists in sharing photos and evidence of recent behavior. The GPS
units embedded in our phones help us find destinations and help marketers find us.
Tweet
From comedian Steve Martin: Did you know it’s possible to Tweet a concise, grammatical, correctly
punctuated sentence that is exactly one hundred forty characters long?
5Cs STP 4Ps
Customer
Company
Context
Collaborators
Competitors
What are Social Media?
What are Social Networks?
What do I need to know about Social Media ROI and Web Analytics?
Managerial Checklist
Segmentation
Targeting
Positioning
Product
Price
Place
Promotion
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
225Chapter 13 Social Media
At the same time that electronic and information technologies are becoming more ac-
cessible and pervasive, traditional media are experiencing their own changes:
• Newspaper circulations are declining. While optimists continue to launch new
magazines every year, magazines’ overall sales and circulations are down as well.
• The number of radio stations has grown, boosted by satellite servers such as XM
or Sirius. But listeners are tuned in for less time each day than just a few years ago.
• Television channels also continue to grow. The bad news about this fragmentation
is that, with more TV channels, the audience for any given show is typically smaller
(consumers are spread thin across the multitude of options). The good news is that
targeting is facilitated when the segments of viewers are somewhat more homogeneous.
The other part of the social media story is, of course, its social or human element. People
enjoy connecting with each other. Belonging to different communities and interacting with
all kinds of people in our social roles is part of our self-identity.
The most fundamental means of interaction is a dialogue. In social media, customers
have become participants in a dialogue with marketers or brands. Traditionally customers
had been mere recipients of one-way messages shot out by marketers, but now they have
means of talking back. Customers post positive endorsements about brands, and they also
use the Web to vent. Marketers are realizing that they’re losing control, and they are scram-
bling to reinsert themselves into the conversation and steer it in fruitful directions.
13-1a Types of Social Media
The phrase “social media” is usually applied to people interacting and connecting with oth-
ers via online software or with alternative electronic access technologies (e.g., their smart-
phones). There are so many variations that it is more useful to consider their properties
rather than their particulars. First, some social media offer very rich, vivid sensory expe-
riences, such as virtual worlds or video games, with their dynamic sights and sounds that
compel the user to interact and engage. By comparison, other social media seem relatively
simple, even impoverished, such as blogs and forums, which tend to resemble little more
than protracted strings of emails.
Second, social media differ from one another in that some are primarily social in nature,
such as social network sites, which serve as places to asynchronously hang out with friends.
On spaces like Facebook, friends chat and share photos, music, and videos. Sharing slices of
life with friends is the goal. Other media have more industrious goals, such as collaborating
on wiki content, seeking jobs via professional sites like LinkedIn, or reading technical blogs
to extract advice from experts.
Third, social media vary with regard to whether the interactions are pointedly commer-
cial. On this dimension, there are not many pure forms: For example, Facebook may seem
to host noncommercial gatherings, and yet there are ads floating about, and retail links
have begun to sprout. Online brand communities for Kraft, Starbucks, or Lego, hosted by
their respective companies, obviously have purchase as their ultimate goals, but their brand
Brands on Facebook
Some companies are already pretty sophisticated about buzz marketing. The brands with the most
Friends/Fans on Facebook are: Facebook, Coca-Cola, YouTube, McDonald’s, MTV, Red Bull, Nike Football,
Samsung Mobile, Oreo, FIFA World Cup, KFC, Converse, PlayStation, and Starbucks.
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226 Part 3 Positioning via Price, Place, and Promotion
communities—Kraft Recipes, My Starbucks Idea, and Lugnet—are built by user groups
who are more interested in simply celebrating the brand experience.
13-1b Word-of-mouth
A particularly important phenomenon for business is that social media facilitates word-of-
mouth (WOM). Long before social media technology, marketers have known that customer
word-of-mouth is very powerful. Consumers view ads with some skepticism, knowing that
the point of the message is persuasion. By comparison, if a customer hears the endorsement
of a brand from a friend, that message is seen as more objective because the friend presum-
ably has nothing to gain from making such assertions. As Figure 13.1 illustrates, you might
tell several friends about a new brand, and they in turn tell several friends of theirs.
A number of metaphors describe this
phenomenon of people talking about a
brand, e.g., people might say that a You-
Tube video about a brand has gone viral,
or a new Groupon issuance is generating
a lot of buzz. What makes a product or
event newsworthy? What makes opin-
ion leaders tell their friends about the
latest products they’ve found? How does
word-of-mouth work?
Word-of-mouth works on natural-
ly exciting products, where the notion
of buzz makes sense. Yet creative brand
managers have launched clever ad cam-
paigns that get talked about even for
pretty mundane products too. The key is that the product and the message are meaningful
to the customer. The hook can be humor, a give-away, or support of social causes. For exam-
ple, insurance is a little dry, but the Geico Gecko has many friends on Facebook—probably
more than you! Mash-ups of real brand material with nostalgic TV commercials and ir-
reverent content are another way to pique some interest and heighten buzzability. Distinct
from whether the product category seems WOM-worthy, some extroverted consumers
generate more word-of-mouth (positive and negative) than others. Word-of-mouth travels
via communication in social networks, so let’s understand those structures.
Who Gets WOM?
Harris Interactive polls regularly show:
The most WOM occurs for:
Restaurants and Movies. WOM helps because consumers seek novelty and variety.
Computers. WOM helps reduce perceptions of risk, due to the products’ expense, and most
consumers lacking technical expertise.
WOM occurs much less for:
Medicines and Financial Products. They’re personal.
Simple or Inconspicuous Goods. WOM isn’t necessary or exciting.
Your friends’ friends (and so on, and so on…)
Your friends
You
Figure 13.1
Word-of-
Mouth
Networks
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227Chapter 13 Social Media
13-2 WHAT ARE SOCIAL NETWORKS?
Networks have been studied in many realms—epidemiology (e.g., contagion), transporta-
tion (e.g., hub and spoke), and now business (e.g., word-of-mouth). The key is a focus on
connections. A network is defined as the set of actors (or nodes) and the relational ties that
link them. Actors may be customers, firms, brands, concepts, countries, etc. The connections
between the actors are relational ties (or links). Ties can be symmetric (“X and Y are cowork-
ers”) or directional (“X likes Y”), and they can be binary or vary in strength.
Networks are often depicted in graphical form (called a sociogram), but their analysis re-
quires tabular representation (called a sociomatrix). Figure 13.2 shows a network for 6 actors
and its corresponding matrix data. Actors B and E have a strong mutual link, and there is
a weak unidirectional link from C to B. F is isolated, and actors B, C, and E form a group.
While the graphical depictions can be impressive for large networks, the information is
converted to matrices for analysis.
13-2a Identifying Influentials
Many kinds of network analyses may be conducted on a sociomatrix. Our current agen-
da is to identify likely WOM generators. There is a natural intuition that, in social network-
ing sites as in any social circle, some members are more
connected and influential than others. Marketers would
like to leverage these interpersonal group dynamics, ide-
ally locating the highly connected influential members, to
induce their trial of products and in turn to initiate and
propel the diffusion process.
To do so, network marketers study how actors are em-
bedded in their network to locate those who are relative-
ly central—in the thick of things. Centrality indices are
computed for each actor in the network to describe his
or her position relative to the others.
The easiest and most common way to characterize
centrality is to count the number of connections each
actor has with the others in the network (see Figure
13.3). An index of degree centrality is derived for each
actor. Those with many links are said to be relatively
central, and those with fewer links are more peripheral.
Thus, the identification of potential WOM genera-
tors is fairly easy for two reasons: (1) You can see how
easy these indices are calculate. (2) Distributions of links
Figure 13.2
A Sociogram
and a
Socio matrix
F
—00000F
0—0040E
04—000D
020—10C
0400—0B
00200—A
FEDCBA
E
B
CA
D
E.g., D E represented in XD,E
Row Column
Figure 13.3
Degree
Centrality
Triangle actor has the most ties,
or the highest degree.
Finding opinion leaders
in networks is easy.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
228 Part 3 Positioning via Price, Place, and Promotion
in most networks follow an 80/20 rule, in that most of the links are connected to a small
number of actors.1 Thus, when you’re staring at a network graph, or when you’re having a
computer analyze its sociomatrix, you have to be kind of dense to miss them.
Before leaving network analyses, two more ideas are worth sharing: cliques and structural
equivalence. Network marketers looking for cliques are talking about exactly the same thing
you did when you were in high school: Cliques are groups of people in the network. Cliques
are common in delineating brand communities, cell phone friend networks, affinity groups,
and more, and they can be a nice way to find homogeneous segments of like-minded people.
What about structural equivalence?
13-2b Recommendation Systems
Structural equivalence is the other pattern sought when analyzing networks. Two actors
are said to be structurally equivalent if their links to others are the same (see Figure 13.4).
Structural equivalence is the logic underlying recommendation agents employed by big
SKU-offering sites like Amazon. Two customers are essentially equivalent if their purchase
patterns are similar; whatever one buys, the other might also find appealing. Thus, a rec-
ommendation is made based on similarities between the SKUs bought by one customer
compared with those bought by others. These systems are still far from perfect, but they’ll
clearly be around (and better articulated) in the future.2
Recommendation systems are an odd manifestation of social media. They are social in
that the data of purchase patterns or ratings are aggregated over many people, but ul-
timately these endorsements come from strangers. Yet, indeed, consumers trust online
recommendations:
Opinion Leaders
Art critics, book critics, and wine connoisseurs are trusted because they are objective and not
beholden to their respective industry. You might believe that the likelihood with which you would
see a movie is not affected by a movie critic’s opinion, but in general, a movie does better that
receive a critic’s blessing.
Fashion Week in New York in February and in Paris in March celebrate and influence retailers’
fashion buyers for the season. More directly influencing the consumer is Vogue’s September issue;
the issue is fatter than most of its models.
The two triangle actors have
the same links to others in
the network.
Customers are rows
SKUs are columns in XL
A popular application is to
identify customers who have
similar links in their online
purchases.
Figure 13.4
Structural
Equivalence in
Networks
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229Chapter 13 Social Media
• When consumers read an endorsement in a chat room dedicated to a sport they
follow or a health condition they are monitoring, they usually make the assumption
that others who visit the Website, read it, and post to it are similar to themselves and
hence bring credibility and relevance.
• When consumers read a rating of a book or piece of music online, they usually make
the assumption that the majority of people can’t be too far from wrong.
These scenarios share the fact that, while the word-of-mouth originates with strangers,
it nevertheless seems spontaneous and not paid for, and therefore it seems authentic in a
manner not easily achieved in advertising. As you can see, social media seem to have excit-
ing potential for marketing, social networks are fairly easy to track, and recommendation
agents are a boon as a systematic means of cross-selling.
What’s the resistance? Many CEOs are conservative in spending money on something
they can’t understand, and many CEOs are old enough that they can’t understand the at-
Recommendation Agents
Recommendation agents are another form of CRM. Companies keep track of your purchases and
then they match you with other customers whose purchases have had some overlap with yours. The
implication is that you and these other customers are probably in the same segment and have similar
preferences. Thus, things they’ve bought and you haven’t form the system’s recommendations to you,
and things you’ve bought but they have not are recommended to them.
Geek squad: How’s it done? Imagine a huge spreadsheet with millions of customers as rows and
with hundreds of thousands of SKUs in columns. There’s a 1 in a cell if that customer-row purchased
that SKU-column. Otherwise the database is mostly full of zeros. Cluster analyses are conducted in
an iterative fashion. First the rows (customers) are clustered, then the columns (SKUs). Wherever the
clustering converges are segments of customers and purchase groups of products. Every customer in
each segment can be sent a prompt recommending every SKU in the product grouping. Easy!
Social Media.
An
dr
es
r/
Sh
ut
te
rs
to
ck
.c
om
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230 Part 3 Positioning via Price, Place, and Promotion
traction of social media. As a result, CEOs want to know the ROI for social media. Never
mind that marketers hadn’t completely cracked the nut of being able to measure ROI for
traditional media. It’s a fair question to ask. So let’s see if there’s an answer.
13-2c Social Media ROI, KPIs, and Web Analytics
“What’s the ROI if we do this social media thing?” The question sounds eerily similar to
the one posed some 20 years ago when companies asked, “Should we have a Website? What
can it do for us? How can we make money from it?” We
know how that turned out, and for social media also, com-
panies will figure out what makes the best sense for them.
As with traditional media, we can begin to answer ROI
questions only if we know the goal that the marketing
action was intended to achieve. Once we know the goals,
selecting the media and measures is rather straightfor-
ward. We’ll assess whether resources have been well spent
by comparing costs to the measures intended to track the
effectiveness of the investment.
Early on, social media held the allure that they looked to be nearly free. The approach
is certainly less expensive than advertising via many kinds of traditional media. Every day,
something seems to go viral, yielding vast reach essentially for free, fueling the hopes that
future marketing efforts will be extremely cost-effective. But managers know now that
marketing via social media is not free. At the least, their 24/7 maintenance requires thought
and labor. Thus, when estimating ROI, the primary expenditures might not be so much
media buys or explicit budgetary contributions as salary equivalents of people’s time alloca-
tions. In this sense, time is indeed money.
If the costs are mostly labor, what are the measures of effectiveness or the key perfor-
mance indicators (KPIs)? KPIs for social media are analogous to traditional measures for
advertising effectiveness. Specifically, marketers are always interested in quantifying reach,
frequency, monetary value of customers, customers’ behaviors, attitudes, memory (recall,
recognition), and so on. In social media, measures for these marketing goals simply take on
slightly different forms.
13-2d Pre-purchase: Awareness
Let’s begin with popular marketing goals. In the pre-purchase phase, marketers want
customers to be aware of their brand and consider it for purchase. Reach is a classic mea-
sure of the size of the audience that has been exposed to some brand information and
who might therefore have some familiarity with the brand. Reach can be achieved via
traditional media and measured via online capture, e.g., as in a magazine ad that tempts
the reader to learn more by going online and landing at a particular page associated with
the magazine source. Reach can also be achieved wholly online, as a function of ads on
popular sites, purchased status on search engines, even via click-throughs on annoying
banner ads.
If we wish to enhance awareness, we seek media that optimize reach—media that, ide-
ally, fit our target audience, if possible. Tweets, Facebook postings, and contests to submit
videos of user-proposed jingles on YouTube would all work. They’re all brief and intended
to be a bit more fun than informative. In contrast, lengthy expert blogs, Webinars, podcasts,
and such would remain untapped; the customer isn’t ready for that detail.
The costs of social media are
primarily labor.
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231Chapter 13 Social Media
If there is an existing customer base (i.e., for anything other than a brand new prod-
uct), marketers can reward current customers with incentives to generate word-of-mouth.
WOM in customer networks is very rewarding to firms because they are usually bring-
ing in new acquisitions. Completely new customers are the most difficult for a company
to find.
13-2e Pre-purchase: Brand Consideration
Next, still in the pre-purchase phase but getting customers to consider our brand, marketers
want to offer more information to build customers’ knowledge of the brand, as well as more
persuasion to make their opinions as favorable as possible. To do so, marketers need to use
media that convey more content. Marketers pay for search engine ad placement, post some
information teasers in related brand communities, and provide podcasts containing product
information and customer testimonials. By comparison, brand consideration goals aren’t
achieved as readily by providing information on social networks. People use Facebook to
socialize or to be entertained, not to engage in product research.
Many of the measures in this phase fall under the broad category of search engine opti-
mization (SEO). When customers have a preferred brand, they can go directly to purchase
sites. When they don’t, they’ll do a search. The keywords depend on where they are along
the knowledge continuum. If they have heard of the brand, they will search the brand
name to learn more about it. If they are vague about the brand name they will search the
product category to see the scope of competitors. And if they’re even less familiar, they
will search the general benefits they are seeking to see which products and specific brand
names pop.
To narrow the search for consumers, search engines can be used to measure the relevance
of a Website or an information page by counting the number of times the searched words
appeared on that Web page or document. Unfortunately, this criterion of relevance was
easily (and frequently) manipulated. The innovation of Google’s PageRank algorithm was
to count the number of incoming links, weighted by the importance of the sending site.
SEO gurus say there are two important paths to enhancing the likelihood that a brand pops
to the top of the search results:
JM
ik
s/
Sh
ut
te
rs
to
ck
.c
om
Online purchase.
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232 Part 3 Positioning via Price, Place, and Promotion
1. Put the most meaningful keywords in the Webpage title. Page titles are very import-
ant to SEO.
2. The order of those words also matters, so lead off with the most relevant ones.
At the stage of brand consideration, several measures are prime Web analytics: fre-
quencies, durations, and rates. Frequencies are the sheer number of visits and estimates of
the number of unique visitors; that is, the second number is an attempt to remove the
duplications from the first number. Even the second number has its limitations, however;
e.g., imagine a couple trying to choose which car to buy next. Both parties may visit sev-
eral Websites, from their home computers and from those at work (only during lunch, of
course). That’s at least four computers, even though the search is one.
Durations are usually measures of times spent per page and the overall time spent on the
site. Rates include bounce rates, i.e., the percentage of sessions for which a visitor lands on
the Website and needs only one page viewing to decide, “I’m so out of here!” Then they click
off the Website altogether. Rates also include conversion rates, i.e., capturing when a visitor
transitions from a looker to a doer, and we’ll discuss those next.
13-2f Purchase or Behavioral Engagement
Ideally, customers are moving toward purchasing. However, just as any salesperson knows,
a number of steps serve as precursors that nevertheless are hopeful signals of the ultimate
purchase. Thus marketers speak of inducing any kind of action that begins to engage the
prospective customer. For example, once customers visit a Webpage:
• What do they open? What do they download?
• Do they watch demos that may be available?
• How much time are they spending on which purchase-related pages?
• Do they register to subscribe to newsletters?
• Do they sign up for RSS or other timely sources of news?
What are Companies Doing?
Adidas encourages its employees to post on social media sites, but asks that when they post on
Adidas-hosted sites, that they identify themselves as employees.
Doritos solicited ideas for new flavors via videos.
Los Angeles Times asks that its employees use the same criteria for posting in social media as in
their traditional outlet—authenticity, professionalism, and verify sources.
Mercedes-Benz challenges its customers to post photos of all the stuff in their cargo area to show
its roominess.
Oreo posts, and encourages customers to post, pictures and novel recipes.
Starbucks uses its Facebook page to inform customers about differences among their teas.
Taco Bell got permission from the Unicode Consortium, which regulates emojis (oh, brother), to
use a taco emoji.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
233Chapter 13 Social Media
Web analytics experts disdain the Contact Us buttons, instead recommending that a Web
visitor fill out a form so that the company can capture at least basic information on this
customer and sales opportunity.
Companies can provide exclusivity to Web visitors, e.g., preordering a product not yet
available to others. Brand fans may be asked to post opinions and reviews. Sales promos
may be made available from site visits or tweeted out to followers. Customer service can
unfold in real time, e.g., announcing flight cancellations as a courtesy or sending a map to
a customer’s phone who has clicked on a product online (or scanned a bar code in a store)
to find the nearest retailer (who doesn’t have a stock-out).
KPIs are pretty clean when measuring behaviors. Either they happen or they don’t;
it’s not a gradual or subjective thing like, “How positive is a customer’s attitude toward
my brand?” Thus metrics include numbers of posts regarding the brand on blogs or social
networks or audience build as measured by incoming links and the speed of that growth.
Conversion rates are straightforward to compute. They consist of frequencies of Web visi-
tors to engage in the focal behavior (purchase, sign up for email distribution, etc.) relative
to the number of visitors who come to the Website. That is, the rates compare the desired
outcomes to the number of visits or to the number of unique visitors.
It should be clearer to see how easy ROI will be to compute. Costs of the actions depend
on the marketing goals: estimates of acquisition costs, payment for placement in search en-
gines or banner ads, sending emails from a rented address database, etc. On the KPIs side,
the effectiveness of those actions can be assessed by these frequencies, rates, and durations.
Web analysts track the number of visitors coming via different routes, and they follow the
customers’ traversal to the particular engagement behavior of interest.
13-2g Post-purchase
The wise companies care about their customers long after the purchase. The online envi-
ronment offers more direct data about what happens post-purchase than we’ve had thus
far IRL. If customers are satisfied, they may post positive reviews. If they’re ecstatic, they
may post extremely happy endorsements. The company may wish to reward these so-called
brand evangelists (or brand ambassadors or brand advocates).
If the customers are unhappy, the company can at least read the nature of the complaint
and work to address it. Companies can intervene to try for service recovery, bringing the
customer back on board. Even grumbling customers respond to incentives; company apol-
ogies, problem solutions, and restorative benefits can help in retention, prevent customer
defections, and turn a bad situation around.
YouTube
Customers simply love videos. Videos can be used to:
Inform (and sell!)
Educate (and sell!)
Entertain (and sell!)
(For more, see YouTube for Business, by Miller.)
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
234 Part 3 Positioning via Price, Place, and Promotion
In the same way that the marketing media activity differs slightly from pre- to post-
purchase, they will also vary over a product’s life cycle. It is not unusual for blogs, wikis, and
lead user communities to be essential during product development and when generating
enthusiasm in the marketplace prior to launch. Webinars might then pick up the product
introduction. Networks might capture troubleshooting issues that the company’s customer
support can readily handle.
What’s especially fun about this day and age is the enormity of the data to play
with—all of which are captured easily and tracked in some form of dashboard. Then the
analytics are up to you: Do you want your data compared geographically (e.g., state by
state) or by time zone? Do you want to watch performance over time—e.g., the number
of brand share mentions today compared to yesterday, this quarter vs. last, this week vs.
prior to the ad banner launch, etc. What can be done is limited only by your strategic
creativity.
13-2h How to Proceed?
Anything that is new and anything that is growing as quickly as social media tend to throw
managers for a loop. Where do we begin? There are many social media, and the choice of
an initial medium can be difficult. Social media can be so exciting that managers believe
they must engage via all possible channels. This goal is obviously impossible and also not
desirable. As we have seen, some media fit some marketing goals better than others. In ad-
dition, some media fit the target market better than others; tweeting about twofer drinks at
a popular bar works for 20-year-olds, but not for 60-year-olds. In addition, being selective
of the social medium is important because they do require maintenance and constant ac-
tivity; otherwise followers lose interest. Trying to keep current on many media would keep
the marketer spinning.
Although the explosion of media is great for consumers, it is very challenging for mar-
keters. Even prior to the arrival of social media, marketing decisions about how to allocate
advertising budgets were complicated, as marketers tried to find attractive viewer profiles.
Resource allocation decisions have become more complex than ever.
Twitter
Twitter is popular because, with it, people never feel:
Out of touch
Lonely
Bored
Popular sites are those that are:
Informative
Interesting
Funny
(For more, see Twitter Revolution, by Micek and Whitlock.)
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
235Chapter 13 Social Media
Yet, with the right attitude, marketers can embrace social media as heartily as many of their
customers have, once they see the potential in doing so. Word-of-mouth conversations or
other customer-to-customer information flows have become a rich new source of consumer
insights. Marketing researchers learn a lot from lurking or Web crawling and scraping:
• Tweets, blogs, and discussion forums are monitored to make more accurate predic-
tions about new product launches. A great deal of data results from categories with
many releases, such as music, books, or movies.
• Marketers use text analyses on Facebook to get a read on customer opinions about
their brands. These comments may be on the brand’s own Facebook page or gotten
from an easy search of the brand name through other, seemingly unrelated postings.
• Beyond the brand itself, content analysis has been useful in detecting developing
consumer trends. Posted musings give insights into what people consider import-
ant: What are people talking about? What do people care about?
• Brand managers check Websites for misinformation, to try to nip bad grassroots
PR in the bud.
In addition to passive listening, marketers can actively create interventions:
• Marketers enter online communities and ask for (paid) volunteers to be user groups
to test beta products and offer feedback. Online lead users are easy to find.
• Marketers conduct experiments. In the so-called A/B split tests, one group is
exposed to one ad or new product description or whatever element of the marketing
mix the marketer is testing. The other group is either a control group, or they see a
different version of an ad, new product description, etc. The marketer then compares
brand attitudes or subsequent sales in test markets to detect some lift due to the
marketing intervention.
How to Do it?
Marketing researchers were trying to determine which brands played well on Facebook and why.
They found that:
Facebook users often profiled hedonic activities, those that are fun or adventurous, or their
participation in volunteerism. The particular activities tended to be: golf, tennis, wine class,
cooking class, shopping, fundraisers, and mission trips. The brands that tended to be featured
were: Callaway golf clubs, William-Sonoma, Polo, Brooks Brothers, Saks Fifth Avenue, Chanel,
Chateau Margaux, Red Cross, and the American Cancer Society.
Users also profiled their personal interests and goals, such as eating right, exercising, going to
the movies, socializing with friends, and traveling. The brands they found in these categories
of mentions included brands like: Nabisco 100 Calorie Snacks, Nike, Star Wars, Starbucks,
Whoopsie Daisy Designs, and Hampton Inn.
See “Consumers’ Use of Brands to Reflect Their Actual and Ideal Selves on Facebook,” by
Hollenbeck and Kaikati in the International Journal of Research in Marketing.
Finally, everyone advises: be authentic, i.e., don’t sound like a script. (See Kerpen’s Likeable Social
Media.)
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236 Part 3 Positioning via Price, Place, and Promotion
• More complex experiments are also obviously possible. A company may wish to
measure comparative click-through rates, member sign-up rates, or purchase valua-
tion, as a function of whether the ad appeal is more rational or emotional, whether
video or script endorsements are featured, which price is posted and whether a
discount is available, etc.
• GPS data function much like live cookies, storing information for your convenience
upon return (and still protecting your privacy). The purpose of GPS units in phones
was originally consumer service for mapping; e.g., “How do I get where I want to
go from here,” or “Where is my 15-year-old daughter?” GPS units are becoming
geo-retailing units, and they will soon offer extremely timely (intrusive) opportu-
nities for marketers. A motivated company will know where its customers are at all
times. The company’s claim will be, “When you walk near my product, I can send
you a promo.”
Finally, if it still seems overwhelming, many companies are willing to help. They can help
collect data, store it, provide simple but quick—indeed nearly instantaneous—analyses,
help you figure out what to measure, etc. Two big brand providers in the marketspace are
Google and Omniture (with Adobe), but many other software providers purport to do the
same; e.g., see the software tab at Toptenreviews.com.
In general, social media pundits advise that any corporate
postings or representations have to start by being interest-
ing; otherwise, they won’t even by read. The content needs to
be honest, not defensive, and not too corporate. There needs
to be transparency for customers, employees, and stakehold-
ers, where transparency usually means being honest, build-
ing trust, and presenting the opportunity for two-way dia-
log. Social media have sufficient variety and prevalence that
they can be a tremendous marketing tool—if the company
can offer something that provides value to those customers
and reaches them in a way that matters to them.
Marketers can embrace social
media as heartily as their
customers.
MANAGERIAL RECAP
Social media are an abundant opportunity for marketers. Word-of-mouth feels objective or authentic to consumers, compared to advertising.
That makes social networks an important and provocative channel.
• Social media are Web-based means of interacting with friends and strangers by posting opinions, pictures, and videos.
• Social networks are the structures of interconnections among customers that propagate word-of-mouth. Networks can be drawn and
analyzed, and the actors measured on indices of centrality to assist the marketer in finding opinion leaders and influential consumers.3
• Social media ROI and KPIs can be computed with the help of online analytics, as for any marketing effort, once the marketing goals
are understood.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
237Chapter 13 Social Media
Chapter Outline in Key Terms and Concepts
1. What are social media
a. Types of social media
b. Word-of-mouth
2. What are social networks?
a. Identifying Influentials
b. Recommendation Agents
c. Social Media, ROI, KPIs, and Web Analytics
3. Managerial recap
Chapter Discussion Questions
1. How would you describe this algorithm in network
terms? Would you use the same network principles
if you were to design a competing algorithm?
2. Critics say this method doesn’t account for the
fact that many Websites are not managed well;
they might not be updated, links might not work,
etc. How would you improve on this algorithm to
address these concerns?
3. What would you do to enhance the chances that a
video you post will go viral?
4. What would you do if you found out that a col-
league had posted your slides to a recent presen-
tation on a public slide-sharing platform? How do
you define intellectual property rights; when is
something yours?
5. Do you ever read product recommendations be-
fore buying? You don’t know these people—how
do you discern which ones to believe? What cues
do you use to figure out who knows what they’re
talking about?
MINI-CASE
Google’s PageRank
Google’s PageRank is an algorithm that attempts to inform you where people are coming from when they land on
your Website and which sources are the most frequent. Note that, as its name suggests, a page rank is an index
estimated page by page; it’s not an overall Website assessment.
Nevertheless, say you’re trying to determine the rank of your home page. You figure that’s a good start, and
customers can navigate more precisely once they’re in your domain. The ranking model begins by checking all
the incoming links to the home page over some given duration (say, the last 24 hours or the last week, depending
on the site traffic and how current the information must be). Customers can land on the home page starting from
many links, and the links generating traffic to you differ in their importance. In particular, the influence of the in-
coming pages varies, as weighted by two factors:
1. The page rank of the source link (higher is better)
2. How many outbound links that source page contains (A lower number is better, in that the link to your home
page is therefore more selective.)
Thus, if page A contains a link to your home page, and it has a high page rank of its own and relatively few out-
reaching links, it carries more weight than page B with its lower page rank and more outreach links.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
238 Part 3 Positioning via Price, Place, and Promotion
This algorithm is obviously iterative because we need to estimate the ranks of pages A and B before we can bring
them into the estimation of the rank for your home page. In theory, the iterations could continue ad infinitum. In
the actual algorithm, there are starting values, and about 100 iterations bring most estimates to the convergent
approximation. Finally, Google then exercises the universal modeling prerogative of including a term for wiggle
room or a fudge factor.
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239
CUSTOMER SATISFACTION
AND CUSTOMER RELATIONSHIPS
14-1 WHAT ARE CUSTOMER EVALUATIONS,
AND WHY DO WE CARE?
Marketers are interested in their customers’ assessments of how their company is doing.
Customer evaluations come in many forms: customer satisfaction, perceptions of quality,
customers’ intentions to repurchase the same brand or from the same provider, the like-
lihood that a customer will generate word-of-mouth (speaking favorably to friends and
family and coworkers), etc.
Marketers don’t track customer evaluations just because they’re interesting. Market-
ers know that satisfied customers contribute to the bottom line. Given the hierarchy of
customer behavior, from awareness to trial to repeat and loyalty, the hope is to satisfy
new customers so that they become loyal. Truly loyal customers love the brand, purchase
frequently, are zealous in telling others about it, and are even willing to pay more for the
brand and all it means to them. In this chapter, we’ll look at customer evaluations and
see how they translate to customer relationship management (CRM) and customer life-
time value (CLV).
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
Customer
Company
Context
Collaborators
Competitors
Managerial Checklist
• How do consumers evaluate products?
• How do marketers measure quality and customer satisfaction?
• What about loyalty and customer relationship management (CRM)?
• What are RFM and CLV?
14
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
240 Part 4 Positioning: Assessment through the Customer Lens
14-2 HOW DO CONSUMERS EVALUATE
PRODUCTS?
When you buy something—whether it’s toothpaste or athletic shoes, a travel package or
dental services—marketers think that you evaluate the goodness of the purchase against
some sort of expectations.1 This comparative evaluation process is depicted in Figure 14.1.
Relative
comparison
Perceived quality or
customer satisfaction
Expectations
Experience or
perceived performance
Figure 14.1
Customer
Evaluations =
Experience –
Expectations
The comparative evaluation process is thought to operate whether the purchase is low
or high involvement. For the low-involvement purchase, such as a routine repurchase of
your habitual brand of toothpaste, the process may be nearly instantaneous and equally
quickly forgotten. Even so, when you got the toothpaste home, if it was somehow different
(e.g., it cost more (or less), or the packaging looked different, or the taste seemed extra
minty), it would prompt you to think about your toothpaste more than you normally do.
Your expectations for toothpaste are usually latent (i.e., you don’t obsess over your tooth-
paste attributes normally), but those expectations would now become more explicit as you
think about whether you like the toothpaste that you just used and that seems different.
Your expectations, while normally tucked away, come to the forefront and serve as the basis
for the comparison.
For higher-involvement purchases, the comparison process is typically quite deliberative
and conscious. These are purchases that someone cares a lot about or that are more expen-
sive or complicated. For example, brands of athletic shoes have some very loyal segments of
customers because, in our society, shoes aren’t just shoes; they’re a means of self-expression.
Athletes purchase the shoes because they want high performance, whereas fashionistas seek
The brave company listens to its
customers. The foolish company
does not.”
There are three possible outcomes:
• If customers’ experiences surpass their expectations
→ customers are delighted!
• If customers’ experiences meet their expectations
→ customers are satisfied.
• If customers’ experiences fall short of their
expectations → customers are dissatisfied.
This comparative model is intuitively appealing, and it
has captured the minds of marketers, as evidenced by the
many ads that state, “We wish to exceed our customers’
expectations.”
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
241Chapter 14 Customer Satisfaction and Customer Relationships
attractive styles. Each segment thinks about the purchase and holds certain expectations,
and the shoes need to live up to those expectations.
The comparison of a purchase to expectations is also thought to occur whether the item
purchased is comprised primarily of search, experience, or credence characteristics. As dis-
cussed briefly in Chapter 6, for search goods, such as the athletic shoes, more of the qualities
sought are obvious from visual examination, objective, and concrete (e.g., the color, size,
style, price), and the evaluation process is thought to be straightforward (e.g., a holistic,
or attribute-by-attribute comparison to expectations, perhaps weighted by attribute
importance).
For experiential purchases, such as the purchase of a travel package, where the evaluation
cannot be completed until there is some trial or consumption, marketers acknowledge that,
prior to purchase, expectations might not be fully formed. The experience itself simulta-
neously shapes the evaluation as well as the expectations. For example, a customer might
hold rather generic expectations of hotels when they’re checking in, but when they check
out, they might muse, “Gee, the hotel with the pool could have been nicer.” This process is
referred to as constructing counterfactuals (on the spot, you think of how things might be
different). Many purchases have these kinds of experiential elements.
Finally, expectations also form a basis for comparison in credence purchases, such as den-
tal services or many professional services. Most consumers don’t have the expertise to eval-
uate their dentist’s abilities, so we instead evaluate what we can, e.g., the ability to book a
timely appointment, courtesy of the frontline staff, friendliness of dentist, appearance of
dental offices, price if we are paying, etc.
14-2a Sources of Expectations
If purchase experiences are judged relative to expectations, it is important to understand
expectations. The source of expectations that consumers trust most is their own experience.
The experience can be direct, as in the last time they shopped at a particular retail outlet,
visited a particular coffee shop, saw their dentist, etc. Or the experience can be indirect, and
then the experiences we draw from range along a continuum of similarity. For example, the
beauty of franchises is that all the outlets in the chain are supposed to resemble each other.
So, when visiting a coffee shop in another city that shares the brand of your favorite coffee
shop near home, you project that the experience should be roughly the same. The overarch-
ing brand is supposed to lend consistent expectations, and we benchmark the performance
accordingly.
Sources of Expectations
Personal experience
Friends’ advice
Marketing info
Third party, such as online ratings
Sometimes the indirect experiences seem even less related, or the purchase happens
infrequently so we don’t have a lot of direct experiences to draw upon. Nevertheless, in
trying to function as quasi-rational beings, we draw from what we can. For example, in
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
242 Part 4 Positioning: Assessment through the Customer Lens
a first-time visit to a realtor, most new home buyers don’t know what to expect. But we
might think, “It’ll probably be something like dealing with a bank account manager and a
salesperson,” and so our expectations are extrapolated from a general category of past expe-
riences with professional service providers.
If we have little personal expertise in making brand choices, our next favorite and trusted
source of information is our friends. We seek people whose judgments we trust. Our friends
usually have somewhat similar value systems and often similar preference structures, and
they have no commercial gain in expressing an opinion for one brand over another. Some-
times we seek opinions from people who are experts, perhaps coworkers, who are not as
close to us as friends, but they are people we acknowledge as having more information than
we do about the category we’re about to enter. And, as we saw in Chapter 13, social media
is exerting a good deal of influence on customers’ behaviors.
The third class of information that contributes to our expectations is any marketing mix
element originating from the company, including:
• Positioning claims made in advertising.
• Suggestions of quality inferred from the price point or the frequency of sales and
coupons.
• Inferences we draw from the exclusivity (or non-exclusivity) of the distribution
outlets in which the merchandise is available.
• Product performance descriptions from retail salespeople, and so on.
This class of information is tricky: It is usually very detailed and in many ways quite
objective (compared to our own subjective personal experiences or those of our friends). Yet
consumers trust this source of information the least because they expect the company to be
biased; i.e., of course, it will say good things about its products.
Finally, third-party communications can help consumers form expectations. Customers
can get ideas from movies, television, books, the Internet, Consumer Reports, and other
third-party objective rating services about quality, value, and service experiences. The bad
news for the marketer is that these sources of information are usually beyond their control.
However, that neutrality is also why this information seems especially valid and objective
to customers.
Glimpses like
this raise our
expectations.
Zo
ra
nd
im
/S
hu
tte
rs
to
ck
.c
om
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243Chapter 14 Customer Satisfaction and Customer Relationships
14-2b Expectation and Experience
Next, let’s examine the nature of experiences. In particular, marketers have found that
customers routinely evaluate the core of the purchase itself (e.g., reliable performance,
tangible cues to quality including the appearances of the facilities, the employees, the firm’s
communications materials) and, when applicable, the interpersonal aspects of service that
may surround the purchase (e.g., a front line that is responsive and able to offer personalized
attention to a customer’s unique needs, employees who seem competent in their knowledge
of the organization, and employees who express empathy and who are courteous).
What’s interesting is that both the core components (e.g., dinner at a nice restaurant)
and the peripheral, value-added supplemental components (e.g., the service or the wait
time at the restaurant) contribute to customer satisfaction and dissatisfaction, but in slight-
ly different ways. Specifically, if the core is good, it doesn’t enhance satisfaction much
because it was anticipated to be good; it should be good, and the customer expects any
provider to be able to meet this commodity-like requirement. But if the core is bad, it can
affect dissatisfaction. So, if the dinner (the core) was not good, the customer can be dissat-
isfied, but the company doesn’t get any points if the dinner was good. By comparison, the
supplemental services can affect satisfaction or dissatisfaction. If the dinner is fine but the
service is great or bad, even though the service is not as “important,” it affects the custom-
er’s judgment.
Just FYI, this distinction is analogous to that between so-called hygiene and motivating
factors. The hygiene attributes of goods or services are the must-have features (so if they’re
missing, customers are dissatisfied). For example, a hotel room should be clean; if it’s not,
the customer would be dissatisfied. At the same time, if it is clean, the hotel chain doesn’t
get brownie points toward customer satisfaction because it didn’t do anything unusual-
ly good. Motivating factors show that the company is going above and beyond customer
expectations, thereby enhancing customer satisfaction. For example, a mint on the pillow
before retiring is not expected, so that extra touch contributes to satisfaction. Note that if
the mint had been missing, it wouldn’t contribute to dissatisfaction.
It is also important to know that customers evaluate companies and brands based on
every data point they see, every so-called moment of truth or point of interaction between
the company and the customer: the search effort (online or trying to find a retailer’s address
while driving); the shopping experience; the apparent quality of the purchase, its price, the
checkout process, etc. To gain a better understanding of all that entails the customer expe-
rience, marketers have suggested mapping the shopping experience as a flowchart. Doing
so forces them to be explicit in depicting, from beginning to end, the myriad interactions
Jell-O
When quality initiatives first entered the world of hospital management and concerns for patient/
customer opinions increased, many hospital administrators lamented, “We pay tons of money for
the best physicians and the best medical equipment, and we find that our patients complain about
the Jell-O!” It may not seem fair, but it makes perfect sense: The patient/customer cannot evaluate
the physician or the equipment and instead makes the (fair or unfair) assumption that they’re
excellent and even comparable across hospitals. The patient/customer can, however, reflect on how
frequently a physician visited, how nice the nurses were, how warm the hospital setting seemed,
and what the hospital food was like. As a result: “Yes, you are your Jell-O!”
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
244 Part 4 Positioning: Assessment through the Customer Lens
between the customer and company. A flowchart allows marketers to understand the com-
pany from the eyes of the consumer, and it makes us understand what corporate elements
must be in place to support the front line in their attempts to provide superior service.
Flowcharts have been used to generate quality measures at each stage (e.g., “We answer
95% our calls within two rings”), identify pressure points of likely repeat problems (e.g.,
queues, inefficiencies), and suggest redesigns to streamline and make systems more efficient
for both customers and employees.
As difficult as it seems to some companies to satisfy customers, the good news is that
most customers’ expectations aren’t unrealistic. Marketers talk of three kinds of expecta-
tions: ideal levels of quality, predicted or expected levels of quality, and merely adequate levels
of quality. Some customer segments are demanding, but, for most purchases, most segments
have an average predicted level of quality as their expectation marker. The wiggle room be-
tween the low, adequate level of expectations and some point slightly exceeding the middle,
predicted level of expectations is referred to as a zone of tolerance, a range of performance
that would be acceptable in the eyes of the customer.
Expectations depend on price or, more generally, any cost incurred to the buyer
(e.g., having to drive farther for a sale, engage in a more protracted search online, etc.).
As a result, some marketers would say that firms should seek to enhance not customer
satisfaction but rather customers’ perceptions of value. Value is defined as the trade-off of
the quality of the purchase received compared to the price paid and other costs incurred.
For example, we all would agree that a consumer has a right to have higher expectations
when buying a brand-new Ferrari compared to parents who are buying a beater for their
15-year-old kid to learn to drive.
Expectations are dynamic, and the purchase experience that pleased a customer last year
may no longer suffice this year. Marketers lament this what-have-you-done-for-me-lately
attitude among customers, but it’s a phenomenon in every industry.
Expectations also vary cross-culturally, as when defining good value or beautiful
design. Marketers have also found that individualistic cultures, in which personal suc-
cess and achievement are valued (e.g., the United States or Europe), are more likely to be
satisfied when the quality of reliability and of service provider responsiveness is strong.
Customers in collectivistic cultures, in which social ties are highly valued (e.g., Asian
or Latin American countries,), appreciate the relational aspects of frontline employees
(e.g., assurance and empathy). Different cultures even expect different things from Websites;
their appearance and what information is provided. As a result, rolling out products to new
What Most Customers Look For
Quality in the core purchase
Reliability
Tangible cues (e.g., retail appearance, price)
Quality in the attendant service
Responsiveness, customization
Competence
Empathy
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
245Chapter 14 Customer Satisfaction and Customer Relationships
customers in new markets should be done thoughtfully (e.g., beginning with conducting
local marketing research).
14-3 HOW DO MARKETERS MEASURE
QUALITY AND CUSTOMER
SATISFACTION?
Manufacturers have gone through the total quality era, with programs such as 6σ (i.e., only
three or four errorful parts per million produced) or ISO9000 compliance, and now mar-
keters are facing an even tougher challenge. How can we measure customers’ perceptions of
quality and satisfaction and expect such precision? The answer is simple: We can’t.
There are occasionally objective measures of quality, such as the risk a passenger incurs
by flying a particular airline carrier, based on ratios of accidents to numbers of passengers
safely served. However, rarely can we set precise measures of quality standards and expect to
conform. For example, a cereal manufacturer can decide, “I want 10.2 ounces of cornflakes
in each box—no more and no less. I don’t want more flakes to go into the box because in the
end we’d lose money. I don’t want less because I want my customers to be happy.” Barring
a glitch in the machine, each box will have 10.2 oz of cornflakes. Now imagine creating
a comparable standard for much of marketing: “I want my ad to be seen by 10.2 million
viewers; I want my revenue sharing offer to incentivize cooperation from 75% of my suppli-
ers.” It’s not clear how we could measure these achievements, and it’s not clear that human
beings are capable of such standardized and perfectly consistent behavior.
Surveys are ideal instruments to obtain customers’ perceptions. Critics may wish we had
10.2-ounces-of-cornflakes standards, and they may complain that we seek softer num-
bers, like “90% of our customers check the ‘top two’ boxes” (satisfied and very satisfied).”
Yet consider what we’ll do with the numbers. Our ratings data would be no more
subjective than those of our competitors or than our numbers from a comparable survey
conducted last quarter, etc. So while these may be imperfect measures, the numbers nev-
ertheless allow us to gauge our performance relative to benchmarks (past or competitive
performance).
Is Anybody Listening?
Best Buy has become very active in reading its customers’ reviews, and sharing feedback with its
vendors when appropriate.
Hershey Company knows that listening to its customers can provide guidance and leads to brand
loyalty. They also use their customer feedback data to fine-tune forecasts and choose test market
and product launch cities.
Marriott reads its guests’ feedback and grades the issues according to customers’ satisfaction or
levels of problems and tries to address the problems.
When Netflix did not listen to its customers and proceeded to split its DVD and streaming
businesses, resulting in price increases of around 40%, they lost almost one million subscribers
and half their stock value and they popped up on lists of “most hated” companies in America.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Restaurant
1 2 3 4
5
High-quality food:
❏ ❏ ❏
❏ ❏
Good selection:
❏ ❏ ❏
❏ ❏
Reasonable prices
: ❏ ❏
❏ ❏ ❏
Not too crowded:
❏ ❏ ❏
❏ ❏
Friendly service:
❏ ❏ ❏
❏ ❏
In-room entertain
ment 1 2
3 4 5
Good selection:
❏ ❏ ❏
❏ ❏
Reasonable prices
: ❏ ❏
❏ ❏ ❏
Fast download:
❏ ❏ ❏
❏ ❏
Website
1 2 3 4
5
Easy booking:
❏ ❏ ❏
❏ ❏
Good availability:
❏ ❏ ❏
❏ ❏
◀ Previous page
Next page ▶
http://www.ourhot
el.com/survey2.ht
ml
Gender
Age
❏ Male
❏ 18-29
❏ Female
❏ 30-49
❏ 50-64
❏ 65+
Education
Household income
❏ Some high school
❏ < $30,000
❏ High school graduate
❏ $30,001- $49,999
❏ Some college
❏ $50,000- $74,999
❏ College grad or more
❏ $75,000 +
Is there anything else you wis
h to tell us?
◀ Previous page
Send
Thank you for your time!
http://www.ourhotel.com/surv
ey3.html
We’re Interested in Your Opinions!Please help us improve our service to you! We will not sell your
information and we will keep your responses confidential.
Reflecting on your most recent stay at our hotel, how satisfied were
you, overall?
Extremely dissatisfied 1 2 3 4 5 Extremely satisfied
❏ ❏ ❏ ❏ ❏
Specifically, how satisfied were you with:Extremely dissatisfied 1 2 3 4 5 Extremely satisfied
Check-in
❏ ❏ ❏ ❏ ❏
In-room
entertainment ❏ ❏ ❏ ❏ ❏
Restaurant
❏ ❏ ❏ ❏ ❏
Meeting rooms ❏ ❏ ❏ ❏ ❏
Value for price
❏ ❏ ❏ ❏ ❏
Next page ▶
http://www.ourhotel.com/survey1.html
1st Screen (or Page), brief intro:
• Promise confidentiality.
• Promise not to sell data.
• Say their opinion matters.
3rd Screen:
Demographics go
at the end.
Progress bar
33% complete
Page 1 of 3.
2nd Screen:
• Get more detail on
focal attributes.
Always include at
least one open-ended
question.
Be nice!
Anatomy of a Customer
Satisfaction Survey
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
247Chapter 14 Customer Satisfaction and Customer Relationships
Marketers have made peace with the fact that the numbers represent customers’
perceptions; that is no longer the issue. But there’s a popular management adage, “If you
can’t measure it, you can’t manage it.” So marketers want some customer data.
Some marketing gurus claim that just one or two indices can reflect the overall health
of an organization. However, survey results are more actionable if they measure multiple
facets of the customers’ thoughts about the firm. Look at it this way: If everything is go-
ing well, you can have one or many indices—who cares? But if things aren’t going well,
and marketing managers are trying to assess and improve performance, they need more
information.
For example, say a department store just received its annual “Happy Stats” but found, to
its dismay, that the customer satisfaction score dropped from last year. The store was able
to glean more diagnostic information from the survey because it had been structured to
cover several contributing factors. The scores on the questions about the store’s prices and
the quality of the staff were stable from last year, but there were drops in kitchenware and
children’s clothing regarding their assortment selections. The store could make a decision
to pull out of one of these lines of businesses, but customers would be happier if these areas
were more fully stocked. That is, there is still a managerial decision to be made, but at least
the data are clear and helpful.
In terms of customer dissatisfaction, when things go wrong, research suggests that
the primary means to regaining the customer is through an empowered frontline employee.
That employee needs to be capable of immediately redressing the problem, empathizing with the
customer, and offering a perk for the customer’s troubles.2 We worry about recovery because,
if customers are dissatisfied, they can go to the competition or drop out of the category
altogether. Instead, as we consider in the next section, marketers seek customer retention and
long-term relationships with customers, at least the ones we find to be valuable.
Dissatisfaction
What bugs customers most?
Frontline people who are incompetent or rude.
An initial complaint that wasn’t handled well.
Heaping insult upon injury.
A purchase that was too expensive.
When they’re dissatisfied, what do customers do?
Switch brands.
Complain to friends.
Few dissatisfied customers complain directly to the company because:
They figure it won’t make any difference.
It’s not worth their time or effort.
They couldn’t figure out where to go to complain.
It’s a drag to hear negative feedback, but, if the company doesn’t facilitate hearing it, then see above:
Customers will switch brands!
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
248 Part 4 Positioning: Assessment through the Customer Lens
14-4 LOYALTY AND CUSTOMER
RELATIONSHIP MANAGEMENT (CRM)
Customer satisfaction isn’t a goal in itself. Companies are in business to make money.3
You could perhaps be a monopoly and make money even with unhappy customers, but
most industries attract competition, so your sole provider status won’t last for long. Plus,
who really wants to be in business with unhappy customers? Companies and employees,
from CEO to frontline workers, take pride in providing good products to customers.
They enjoy having customers who appreciate them and want to return, customers who are
enthusiastic about their brands and who tell their friends about their good experiences with
the company and its products.
In addition, we need to push beyond customer satisfaction. Many measures capture cus-
tomer evaluations from opinions, such as preference or satisfaction or purchase intentions.
We want to see positive reinforcing behaviors, such as repeat purchasing and customers
generating word of mouth. In addition, for true loyalty, we want to see customers who have
positive attitudes toward the company or brand, not just repeat purchases.
Mantra
Contrary to the age-old mantra, the customer is not always right!
Unfortunately, right or wrong, they often have big mouths, e.g., posting on Facebook.
Remedy? First step: Check to be sure that your brand has found the right segment.
Success Paradox
Marketers believe that customer satisfaction should result in more sales. With success, the segment of
buyers gets larger and, by definition, more heterogeneous. It is difficult to please all customers with a
single market offering, which is why marketers segment in the first place. A larger market share, with
more customer differences in expectations and experiences, can then result in customer dissatisfaction.
What to do? Re-segment, launch another product line, repeat. (See research on ACSI: American
Consumer Satisfaction Index by Professors Claes Fornell and Michael Johnson, University of Michigan.)
If marketers want to be taken seriously and have input at the executive C-level, they
need to translate these marketing metrics into money metrics to impress the finance guys.4
A popular means of attaching a financial value to a customer is via the assessment of cus-
tomer lifetime value, per customer or at least per segment.
Quality
Quality and satisfaction are not the same thing. For example, experts may create excellent technology,
but the customer who doesn’t “get it” will be dissatisfied. Conversely, some electronic toy may be
lacking bells and whistles, yet customers may be perfectly happy with it (perhaps due to its simplicity).
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
249Chapter 14 Customer Satisfaction and Customer Relationships
Customer satisfaction is thought to be the first step in a longer-term relationship. Ear-
ly, primitive efforts at customer relationship marketing (CRM) were frequently driven by
price discounts, reasoning that a company could buy a little loyalty by locking in their
customers (e.g., “Buy nine coffees, get the 10th free”). There are certainly debates: Is it
true loyalty. Or is it merely inertia or ingrained purchasing habits? Or how do we keep the
members of loyalty programs separated from the non-loyal segment of customers? But
the bottom line is that loyalty programs can keep customers from defecting, as well as in-
duce some additional purchasing.
Recently, the loyalty pendulum has swung in the opposite direction, with companies
charging their loyal customers more, figuring that the loyals like the brand so much that
they’re price insensitive. It’s not unusual, for example, for companies to entice new custom-
ers with special deals, while not rewarding current customers with comparable promotions.
These extremes are just another indicator of how frequently price is used as a knee-jerk
lever. But just because price is easy to change doesn’t mean it’s the best element in the
marketing mix to change. And whether the loyals pay more or are rewarded with lower
costs or more benefits, plenty of research supports the clear tie between satisfied returning
customers and bottom-line corporate financials.
14-4a Recency, Frequency, and
Monetary Value (RFM)
Whereas a loyalty program invites customers to become members to enjoy certain benefits
for frequent or heavy purchasing, a CRM (customer relationship management) program is
a tool in the company that tracks spending, regardless of whether customers are segment-
ed into loyals or disloyals and rewarded or not. Early forms of CRM system began with
primitive information: customer identification and contact information, and some form of
RFM, that is, information on the recency, frequency, and monetary values of the customers’
purchase history.
It’s nice when our
customers are
happy!
Ro
be
rt
Kn
es
ch
ke
/S
hu
tte
rs
to
ck
.c
om
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
250 Part 4 Positioning: Assessment through the Customer Lens
Figure 14.2 represents these three dimensions as a cube, and the most desirable
customers—e.g., those we might wish to send premium offerings via emailed direct mar-
keting efforts—are those in the “recent/frequent/high value” area of the cube. Traditionally,
these three factors comprise the key ingredients to so-called scoring models. To find the
most desirable customers, the RFM behaviors are recorded, coded, and weighted using
expert system judgments of the importance of each component.
Regarding the first step, codes might be assigned like these: “If the most recent order
was placed within the past three months, then R = 3 points. If the most recent order
was between three and six months, R = 2. If the most recent order was between six and
12 months, R = 1. Any customer who hadn’t purchased within the past year receives a code
of R = 0. Frequency and monetary values are coded similarly.
In the next step, R, F, and M are multiplied by weights judged to reflect their impor-
tance, such as 5 for M, 2 for R, and 1 for F. A single score is obtained for each customer,
as the simple function [(5 × M) + (2 × R) + (1 × F)]. Customers with the highest scores
are deemed most worthy of special attention. RFM models are still used and still useful,
but they emphasize past customer behaviors (purchasing, Web surfing, etc.), whereas more
sophisticated models allow us to extrapolate into future earnings of customer segments, as
we’ll see in a moment.
In addition, the best CRM programs begin with the RFM behaviors, but they go beyond
these data to learn more about their customers. With better customer knowledge, compa-
nies can provide specially tailored offerings through cross-selling efforts; i.e., the product
assortment itself is modified, or the channels through which the goods and services may be
accessed are made more flexible, etc. Specifically, CRM databases typically contain:
1. Contact information: Name, address, phone, email, permission status.
2. Demographics: Economic worth, age, marital status, partner’s name and age, children
(names and ages), region of country.
3. Lifestyle and psychographic data: Homeowner or renter, car ownership (type and
year), media preferences, payment preferences, relevant product ownership, recre-
ational preferences.
4. Internet info: Time spent on Websites, number of visits to site.
5. Transaction data: Source and date of first transaction, R, F, M, what was purchased,
form of order (Web, phone, etc.), mode of payment.
6. Rate of response to marketing offers: Promos and other incentives redeemed.
7. Complaints.
And so forth—pretty much anything the company can get its paws on to compile. Finally,
expenditures are cross-tabbed with everything to try to find patterns.
Frequency
High
Low
Low High
R
ec
en
cy
Monetary
value
Low High
Figure 14.2
Recency-
Frequency-
Monetary
Value
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
251Chapter 14 Customer Satisfaction and Customer Relationships
Good CRM programs take planning and money, and they require ongoing monitoring
of customers. Even just the coordination and maintenance of the database is nontrivial.
Companies are still struggling with how to design an information system that integrates
inputs from all relevant touch points (call centers, order placements, Websites, etc.) and that
may be accessed in useful formats for managerial usage (system recommendation agents,
useful profiles for call center recipients, predictions about responses to promotions, etc.).
14-4b Customer Lifetime Value (CLV)
Just as customers assess the value of their purchases—what quality do I get compared with
the price I paid?—companies can assess customers in terms of their worth to the company.
Some customers are costly to acquire, and others are more costly to retain. How can we seg-
ment our customer base to maximize our profitability and know which segments to serve?
To answer these questions, companies are getting smart about estimating customer lifetime
value (CLV).5 We’ll look at a process for thinking about and estimating CLV, to see how
all the pieces come together in a reasonably good and yet fairly simple model.
Figure 14.3 shows conceptually how CLV unfolds. Models of CLV involve three kinds of
components: (1) numbers about money, (2) numbers about time, and (3) a financing finesse.
The money inputs we need are: (a) estimates of acquisition costs, (b) estimates of retention
costs, (c) average contributions (for the segments under consideration). The time inputs are (a)
a decent guesstimate at the likely retention rate from year to year and (b) a sense of the average
lifespan duration for the particular product or brand. Finally, if the estimates are to be useful
in forecasting and budgeting, a simple financial adjustment of a discount rate is important.
t2 t3
etc.
t1
Retention RetentionAcquisition
Higher HigherLow
Costs to
company:
Profits for
company:
Timeline
Figure 14.3
Customer Life-
time Value (CLV)
Conceptually
To see the model, let’s consider an example: Mobi-Med is a mobile provider of health-
care consultation and services for all but the most complicated conditions, e.g., screening
and physicals, annual vision and hearing tests, immunizations (e.g., kids going back to
school, travelers going to exotic locations), diagnostics via portable X-ray, ultrasound, cardio
EKGs, even some basic lab work. Business is booming for several reasons: (1) Healthcare
costs are disturbingly high, and, while people pay cash for many of MobiMed’s services,
customers don’t have to wait for appointments, and the retail exchange is very pleasant.
(2) Some technology is portable. (3) Most health complaints that motivate customers to
seek advice are fairly simple and can be handled by a variety of healthcare staff.
The MobiMed founder, an MD/MBA, attracts new customers via advertising and
coupon promotions. Once a month, the company takes out an ad in the local paper, alter-
nating between a weekend flyer at $50 each and a half-page ad at $200 each. The acquisi-
tion costs thus are ($50 × 6) + ($200 × 6) = $1,500 per year. Both kinds of ads contain a
nominal coupon embedded in them, which helps MobiMed track how the customer came
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
252 Part 4 Positioning: Assessment through the Customer Lens
to hear of their services and which helps them measure the effectiveness of the ad money
expenditures. Approximately 60 customers redeem coupons in a year, or just over 1 patient
a week. Thus, acquisition is $1,500/60, or $25 a head.
In addition, MobiMed has a sales manager who works part-time (20 hours), with no
benefits (other than health!) but who is loyal because he’s paid $45,000. When he’s on duty,
he’s supposed to spend 10% of his time, or two hours a week, logging sales calls. Thus, note
that the sales call budget is essentially 10% of $45,000, or $4,500. In any given week, while
many calls are placed, the yield is approximately one customer a week, or about 50 a year.
Personal selling is almost always more expensive, but the belief is that customers contacted
via a salesperson is already beginning to develop a relationship and therefore is more likely to
convert to being a loyal customer. In this scenario, the cost is $4,500 ÷ 50 = $90 per capita.
We can track these groups separately to test the comparative effectiveness of the two
acquisition approaches, but our goal at the moment is simply to compute CLV. Thus, we’ll
take the average acquisition cost to be (60 × 25 + 50 ×90) ÷ (60 + 50) = $54.55.
This $55 is the first number entered into the spreadsheet in Figure 14.4.
Figure 14.4
Crunching
Customer
Lifetime Value
(CLV)
Time 1 Time 2 Time 3 Time 4...
a. New customer acquisition cost $55
b. Retention costs $20 $20 $20
c. Retention rate 100% 75% 70% 65%
d. Cumulative retention 75% 52% 34%
(multiply adjacent rates)
e. Avg customer contributions $100 $150 $200 $250
f. Net contrib. =
(Contribution e − Acquisition a or − Retention b) $45 $130 $180 $230
g. Expected avg contribution (f × d) $45 $97.50 $93.60 $85.00
h. Financing finessing, e.g., for discount rate
of .07, divide each g by [1.07^(t − 1)] 1.0 1.07 1.145 1.225
today’s value $45 $91.12 $81.75 $69.39
Final sum:
$287.26
Next, MobiMed estimates retention costs. Each customer who has ever been treated
is issued $100 worth of coupons throughout the year, and, on average, $20 are redeemed.
The retention figure is represented in row b in the spreadsheet.
Retention rates begin at 0.75 and decline slowly thereafter. Row c in the spreadsheet
lists the loyalty rates per segment, and row d shows how those numbers multiply and
accumulate.
Average contributions begin at about $100 a year and grow. These values form row e in
the CLV computation.
You might think the lifespan for customer lifetime value is 80 years or something
like that, but obviously that’s not likely to be true for any brand. For example, people are
mobile, moving about every seven years. Once MobiMed goes national, customers could
take their membership with them, and loyalty to the chain could be sustained throughout
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253Chapter 14 Customer Satisfaction and Customer Relationships
the patient’s life. In any event, for the ease of computation, we’re going to pretend the lifes-
pan is a mere four years.
We now have all the components to crunch the CLV numbers. (We’ll tweak the
financial discount at the end.) In Figure 14.4, the net contributions begin with the averages
in row e; subtract the acquisition costs of time 1 or the retention costs of subsequent times,
as noted in row f. Row g figures the expected contributions, based on the net contribution
in f and the cumulative retention rate in d. Row h takes the time horizon out on the dis-
count rate. At the bottom right is the sum, the CLV for a customer (over four years).
The basic CLV calculation is very simple. Once the basic template is in a spreadsheet,
you can extend it to other scenarios and make it more sophisticated. For example, costs
and revenues, even retention rates, usually vary across segments, so at the least there could
be multiple versions and different resulting estimates per segment. There is obviously a lot
of flexibility in capturing CLV. The important thing is to get the assumptions as right as
possible and to use the numbers as guides regarding which segments to continue to target,
which customers to try to please, and which customers to let defect.
Let’s broaden the view to include CRM, not just models of computing CLV. Marketers
can think of CRM as a holistic strategic approach in managing customer relationships to
create shareholder value. From this view, CRM is core business, and the firm is custom-
er-centric. The strategy is to win and retain profitable customers. Alternatively, marketing
can be more analytical about CRM as plans are enacted to route and analyze data and
to store information appropriately. Finally, marketing can get quite operational when im-
plementing plans to capture and create those databases. Customer information must be
collected, automated, and integrated to be useful to the firm, such as in turning around and
sending out messages or products to customers.
What’s important is to keep an eye on the goal. It’s fun to calculate CLV, but we do it
because it fits a strategic initiative to serve certain segments of customers better, as well as
our corporate goals for growth and profitability.
Firms frequently demonstrate their implicit knowledge of CLV. For example, a Honda
product line begins by appealing to young customers with limited budgets and who
Honda hopes will grow into customers whose lifestyles and wallets might appreciate fanci-
er, more expensive models as they can afford to do so. The product line is a classic means of
a company trying to extend the duration of its customers’ lifetime, as well as contribution
margins, in CLV.
A newer development in loyalty programs is the transference from physical cards to
mobile technology. Customers are rarely without their smartphones; hence, they might use
their loyalty programs more frequently, hiking up the contributions as well, if they are as
accessible as their phones.
MANAGERIAL RECAP
Customers are thought to evaluate goods and services by making comparisons to their expectations. Their expectations can come from previ-
ous experience, word-of-mouth, or marketing efforts such as advertising.
• Quality and customer satisfaction can be precisely measured in the production of goods, but not as easily for services. Surveys can be
used to ask customers for their evaluations of any kind of purchase.
• Beyond customer satisfaction, marketers care about long-term criteria such as loyalty and customer relationship management.
• Customer lifetime value is a means of translating marketing efforts into financial results. CLV allows firms to match customer benefits
to revenues to ensure that each customer relationship remains profitable.
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254 Part 4 Positioning: Assessment through the Customer Lens
Chapter Outline in Key Terms and Concepts
1. How do consumers evaluate products?
2. How do marketers measure quality and customer
satisfaction?
3. Loyalty and customer relationship management
(CRM)
a. Recency, frequency, and monetary value (RFM)
b. Customer lifetime value (CLV)
4. Managerial recap
Chapter Discussion Questions
1. How would you interpret the data? Where is the
hotel chain doing a good job?
2. How could you tease out the effects of customer
satisfaction vs. cultural biases?
Japan: Strongly disagree Strongly agree
Overall, I was satisfied with the hotel. 1 2 3 4 5 6 7 8 9
The hotel prices were good value. 1 2 3 4 5 6 7 9 10
The hotel exceeded my expectations. 1 2 3 4 5 6 7 8 9
I will recommend this hotel to others. 1 2 3 4 5 6 7 9 10
10
8
8
England: Strongly disagree Strongly agree
Overall, I was satisfied with the hotel. 1 2 3 4 5 6 8 9 10
The hotel prices were good value. 1 2 3 5 6 7 8 9 10
The hotel exceeded my expectations. 1 2 3 4 6 7 8 9 10
I will recommend this hotel to others. 1 2 3 5 6 7 8 9 10
7
4
Brazil: Strongly disagree Strongly agree
Overall, I was satisfied with the hotel. 1 2 3 4 5 6 7 8 9
The hotel prices were good value. 1 3 4 5 6 7 8 9 10
The hotel exceeded my expectations. 1 2 3 4 6 7 8 9 10
I will recommend this hotel to others. 1 2 3 4 5 6 7 8 10
10
2
5
9
These data draw from three samples: Brazil, Japan, and England.
Here is the hotelier’s response to seeing these data: “Wow, we’re doing great in Japan, and pretty good in Brazil
except for their perception of value. Maybe the English don’t care that much about hotels.”
10
4
5
MINI-CASE
Happy Global Customers?
Joe Pike is a CMO in a consulting firm out of Miami that specializes in creating loyalty programs for its clients.
As a first step, he gathers customer satisfaction data, and the results for an international hotel chain follow.
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255Chapter 14 Customer Satisfaction and Customer Relationships
Marketing managers of global multinationals frequently gather customer satisfaction data from their customers
all over the world. The question is how to make sense of the data. When the Japanese customer satisfaction ratings
look higher than those in England, does that mean the Japanese customers are truly more satisfied, or is something
else going on?
Joe has a lot of experience with international data and knows the cross-cultural literature. There are known
response tendencies found in different countries. These are stereotypes, of course, but here are the generalities
typical in such data:
• Some cultures are said to be “enthusiastic,” meaning that the ratings display high variance. Thus, customers
in the U.S., Brazil (and many other South American countries), France, Italy, and Australia produce data
indicating that, when customers are happy, they’re really happy and when they’re not, they’re really
most sincerely not.
• Other countries, such as England and Germany, are more “reserved.” The numbers on surveys show less
variability. Ratings tend to be near the midpoint, which means customers won’t indicate liking or disliking
anything all that strongly.
• Some countries (e.g., Japan and some other Asian countries) have an “acquiescence” or courteousness bias,
saying things look favorable when maybe deep down that’s not quite what they think. Thus, when the Jap-
anese ratings appear more positive, giving the impression they’re happier, it’s more likely that they’re just
being polite on the survey.
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256
15 MARKETING
RESEARCH TOOLS
15-1 WHY IS MARKETING RESEARCH
SO IMPORTANT?
Every marketing decision should be based on facts. Marketing research is about gathering
those facts.
The smartest marketers are always monitoring their customers, the environmental
context, their competitors’ actions, their relationships with their collaborators, their
own company strengths—the 5Cs. And the smartest marketers make decisions about
their products, place, promotion, and price—the 4Ps—based on marketing intelligence.
As Figure 15.1 indicates, marketing research methods can be used to obtain many insights
about marketing and customers.
Marketing information should be gathered constantly, so that the company can be
knowledgeable and poised for action. Customer relationship management databases are
an important example of ongoing data collection and management systems. In addition,
occasions frequently arise that require periodically pulsing the market with specific mar-
keting research projects. Whether the assessments are continuous or periodic, they require
knowledge of marketing research techniques.
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
Customer
Company
Context
Collaborators
Competitors
Managerial Checklist:
• What kinds of marketing research do we need?
• Cluster Analysis for Segmentation
• Perceptual Mapping for Positioning
• Focus Groups for Concept Testing (in New Products or Advertising)
• Conjoint for Testing Attributes (in Pricing, New Products, or Branding)
• Scanner Data for Pricing and Coupon Experiments and Brand Switching
• Surveys for Assessing Customer Satisfaction
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257Chapter 15 Marketing Research Tools
Figure 15.2 depicts the typical flow in the research process, from formulating the
marketing and marketing research problem, to data collection and analysis, to reporting the
results. Data collection can take quite a number of forms, as Figure 15.3 suggests.
STP
cluster analysis for segmentation
multidimensional scaling for perceptual mapping, targeting and positioning
4Ps
conjoint for new products
scanner data for pricing
surveys to assess customer satisfaction with Internet as a distribution option
experiments to verify ad testing
5Cs
secondary data to understand context
observational data to check on competitors
networks to study collaborators
interviews to study company’s employees
surveys for customer satisfaction
Figure 15.1
Examples
of Relevant
Marketing
Research
Define marketing, and marketing research problem
Try to answer questions with secondary data
Design primary data collection
Sample (e.g., random sample, stratified sample by segment)
Technique
Qualitative: interviews, focus groups, observations and ethnographies
Quantitative: surveys, experiments, scanner data analysis
Instruments (e.g., questionnaire, focus group moderator guide)
Mode of Administration (e.g., web survey, mail, personal interview)
Data collection
Data analysis
Communicate results (white paper, presentation, recommendations)
Figure 15.2
Marketing
Research
Process
Kind of Data? Definition? Examples? Advantages?
Secondary Already exist Library, online Quick & cheap to get
Primary Design, collect, Focus group, Can be quite precise
analyze surveys
Kind of Study? Used for? Examples?
Exploratory Formulate marketing questions Focus groups, interviews
Descriptive Obtain large scale stats Surveys, scanner data
Causal Study effects of manipulating 4Ps Experiments
Figure 15.3
Kinds of Data
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258 Part 4 Positioning: Assessment through the Customer Lens
Marketing research is tremendously flexible; it can be used to address just about any
business question, and there are many ways to do so. This chapter focuses on six popular
techniques:1
1. Cluster analysis for segmentation
2. Perceptual mapping for positioning
3. Focus groups for concept testing (in new products or advertising)
4. Conjoint for testing attributes (in pricing, new products, or branding)
5. Scanner data for pricing and coupon experiments and brand switching
6. Surveys for assessing customer satisfaction
15-2 CLUSTER ANALYSIS FOR
SEGMENTATION
A couple of MBAs who are feeling a little broke are thinking they could start an NPO
to fund young people to go to college. There are many such nonprofits, but not many
(or no particular branded ones) seem to support the goal of offsetting these costs. The team
wishes to first verify or test its assumptions by looking at people’s perceptions on these
issues. They figure there must be a segment of customers who will be sympathetic.
The results of their study are presented in Figure 15.4; it’s a typical executive summary
of a segmentation study. The segment names are catchy titles that the marketer creates to
label the segments and to summarize the qualities that the customers have in common,
e.g., people who give charitably to medical associations, the arts, environment societies, etc.
The size column reflects the proportion of customers in the database who belong to each
segment. The beneficiaries column contains the questions from the survey that each group
resonated with the most.
Segment Name Size Beneficiaries
Health and Medical 30% American Cancer Society
The Arts 20% Ballests, Museums, Operas
Greenies 15% Nature Conservancy, World Wildlife Fund
Children 10% Make-a-Wish, St. Jude’s Charity, Unicef
Other 25% Religious, Local (e.g., Animal Shelter,
Food Bank)
Figure 15.4
Segmentation
of NPO
Supporters
Let’s see what’s behind the segmentation summary and how the marketers got these
results. Figure 15.5 shows the survey that gave rise to the data. The marketers asked
customers about their charitable giving behavior, as well as their opinions about higher
education—its importance in society and its cost.
Figure 15.6 contains part of the data set. For example, the first customer tends to give
money to environmental and medical causes, but not to a lot to kids’ causes, and is not
overly concerned with the price tag on colleges.
Next the marketer imputes the data into a cluster analysis. Clustering methods form
smaller groups of customers, where, within a group, customers are seeking similar attributes.2
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
259Chapter 15 Marketing Research Tools
Different groups look for different attributes. In these data, there are 11 variables, and, al-
though clustering techniques have no problem with processing even more variables, it is
difficult for us to imagine what 11-dimensional scatterplots look like. So in Figure 15.7, the
problem is simplified a bit.
In the left plot, we can see the pretty clear patterns of the first and third clusters, people
who support environmental concerns and people who are concerned that higher ed is so
expensive that only the privileged can attend. Customers near the origin don’t care as much
about either issue. In the next plot, we see the second cluster identified as those who sup-
port the arts and believe that education enhances society. Finally, in the plot at the right,
there seems to be a customer segment that is willing to sponsor a child through college
Altogether, the intuitions of the MBA team seem to be valid; they may be on to something
in creating an NPO to support scholarships, and there seems to be at least one segment of
people who would be willing to help.
How important is it to support these nonprofit causes for a better society?
Not very Very
important important
Medical causes like American Heart Assn. 1 2 3 4 5 6 7
1 2 3 4 5 6 7
The arts, like ballet or museums 1 2 3 4 5 6 7
Environmental concerns, like WWF 1 2 3 4 5 6 7
Children’s charities, like Make-a-Wish 1 2 3 4 5 6 7
To what extent would you say that you agree with these statements?
strongly strongly
disagree agree
Higher education is very important. 1 2 3 4 5 6 7
More college educated people make for a better
society. 1 2 3 4 5 6 7
My success in life was largely due to my going
to college. 1 2 3 4 5 6 7
People don’t really need to go to college. 1 2 3 4 5 6 7
Only the very privileged can go to university
these days. 1 2 3 4 5 6 7
Higher education is too expensive. 1 2 3 4 5 6 7
I would help sponsor a kid (not my own) to go
to college. 1 2 3 4 5 6 7
Figure 15.5
Survey Used
to Interview
Customers
Customer
ID# Med Art Envir Kids Imp More Suc No Need Priv Too Exp Spons
1 5 4 7 1 4 2 4 2 1 1 1
2 3 7 3 5 4 7 3 4 1 1 3
3 3 5 2 4 5 4 2 4 7 7 4
4 5 5 1 3 7 2 2 2 4 2 7
5 6 5 3 3 4 3 4 3 3 1 3
Figure 15.6
NPO DataSet
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260 Part 4 Positioning: Assessment through the Customer Lens
“Only privileged
go to U and higher
ed too expensive.”
“Support
environment.”
C1
C3
“Support the arts”
“More college
educated people
make better society” “Sponsor a kid”
C2
“Expensive”
C4
Figure 15.7
NPO and
Beliefs Clusters
That’s all there is to it. Get data from your customers and process it through a clus-
ter analysis. There are many clustering techniques, so you will have to hire a marketing
researcher for the fine points. But this example shows you the essence of how to find
segments. Note, of course, that a cluster analysis helps you identify segments (and their
sizes), but it does not tell you which segment to target—that’s dealt with in Chapters 4,
14, and 16.
15-3 PERCEPTUAL MAPPING FOR
POSITIONING
Positioning studies are used to understand customer perceptions of brands in the mar-
ketplace. Marketers and executives find perceptual maps extremely appealing. They are
pictures of competing brands as well as attributes, which together offer a sense of compet-
itive strengths and weaknesses. There are two approaches to creating a perceptual map: an
attribute-based approach and multidimensional scaling (MDS).
15-3a Attribute-Based
To create a map based on attributes, customers complete a survey that looks like the one
in Figure 15.8. The customer makes two kinds of ratings: (1) How does our brand rate
on a number of attributes? (2) How important is each of these attributes? A local gym
called BeFit Gym had aspirations for growth, including expansion to multiple locations,
and their hopes and plans motivated this particular study. They solicited a positioning study
of their gym and some national chain competitors. They asked customers about their per-
ceptions regarding how well each gym fared on the bases of variety of equipment, variety
of classes, helpfulness of staff, value, and the extent to which the gym brand “reflected their
personalities.”
The analysis begins by merely simply averaging over these questions. Doing so results in
a pair of means for each attribute; e.g., there is a mean on whether the gym is good value
and a mean for how important value is to this customer.
These pairs of means are used to plot the attributes in a 2-dimensional chart, as in
Figure 15.9. The higher the mean performance on an attribute (in the first 5 ratings)
determines how far to the right the attribute will be plotted. The importance of the attribute
(in the second five ratings) is the coordinate on the vertical axis of the chart.
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261Chapter 15 Marketing Research Tools
Along the horizontal axis, these data indicate that the BeFit Gym is perceived to be a
good value and offers a good variety of classes, relative to the other gyms tested, but it is
not as strong on the other attributes. Along the vertical axis, these data indicate that value,
equipment, and classes are the most important features of the gyms, whereas a gym having
a helpful staff is less so.
This very simple construction (simple survey, simple data analysis, simple plotting) of
an attributed-based perceptual map yields pretty helpful insights. The gym has strengths,
including some in areas that are important to customers. Unfortunately, the gym is seen
as weaker in some areas that are also important (e.g., variety of equipment). Attributes on
which a brand is doing poorly and yet that are important to the customers would be priority
number one for fixing.
Multidimensional scaling (MDS) takes a slightly different approach. Rather than asking
customers, “What’s important?” MDS simply starts by asking, “How similar are these two
brands” for every pair in the set. So in Figure 15.10, the first ratings are the similarities
judgments for all pairs of the four gyms. The next ratings cycle through each gym, and ask
how each brand rates on each of a number of attributes.
How does {our brand } rate?
Not as good Better than
as others others
Variety of equipment 1 2 3 4 5 6 7
Variety of classes 1 2 3 4 5 6 7
Helpful staff 1 2 3 4 5 6 7
Value 1 2 3 4 5 6 7
Reflects my personality 1 2 3 4 5 6 7
How important are these qualities to you?
Not very Extremely
important important
Variety of equipment 1 2 3 4 5 6 7
Variety of classes 1 2 3 4 5 6 7
Helpful staff 1 2 3 4 5 6 7
Value 1 2 3 4 5 6 7
Reflects my personality 1 2 3 4 5 6 7
Figure 15.8
Perceptual
Mapping
(Attribute-
Based): BeFit
Gym
H
ig
h
im
p
or
ta
nc
e
Lo
w
ValueVariety of
equipment
Helpful staff
Variety of
classes
Re�ects my
personality
Worse than
competitor
Parity Better than
competitor
Priorities for
improvement
Pre-emption
opportunities
Competitive
strengths
Figure 15.9
Perceptual Map
(Attribute-
Based) for
Competitive
Analysis
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262 Part 4 Positioning: Assessment through the Customer Lens
Figure 15.11 shows what the similarities data look like. LA Fitness and Gold’s Gym are
seen as the most similar, and Gold’s Gym and YMCA are the most different.
MDS takes the similarities data to create a map like the result in Figure 15.12. This
figure represents brands as points in two dimensions, such that brands that customers think
are similar are points close together, and brands that customers think are different are
How similar are these cars?
Very similar Very different
BeFit Gym & Gold’s Gym 1 2 3 4 5 6 7
YMCA & LA Fitness 1 2 3 4 5 6 7
LA Fitness & BeFit Gym 1 2 3 4 5 6 7
Gold’s Gym & YMCA 1 2 3 4 5 6 7
BeFit Gym & YMCA 1 2 3 4 5 6 7
Gold’s Gym & LA Fitness 1 2 3 4 5 6 7
How does BeFit Gym rate on these qualities?
Not great Really great
Good value 1 2 3 4 5 6 7
Comfortable 1 2 3 4 5 6 7
Fun to drive and own 1 2 3 4 5 6 7
Attractive design 1 2 3 4 5 6 7
Reflects my personality 1 2 3 4 5 6 7
(Then the other brands are rated on the same qualities.)
Figure 15.10
Perceptual
Mapping
(Multidimen-
sional Scaling)
BeFit Gold’s LA Fit YMCA
BeFit —
Gold’s 5.0 —
LA Fit 4.7 1.8 —
YMCA 5.1 6.2 5.5 —
Figure 15.11
Average
Ratings over
n = 75
Respondents
1 = “Very simi-
lar” to 7 = “Very
different”
Gold’s Gym
BeFit Gym
YMCA
LA Fitness
Figure 15.12
MDS
Representa-
tion
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263Chapter 15 Marketing Research Tools
Variety of
classes
Value
Helpful staff
Reflects my
personality
Variety of
equipment
Gold’s Gym
BeFit Gym
YMCA
LA Fitness
Figure 15.13
MDS
Representation
with Attribute
Vectors
points that are farther apart. Hence, recall, LA Fitness and Gold’s Gym were similar, and
here they are close in space.
Next, the marketer must interpret the North-South/East-West of the map. To do so,
we overlay the basic perceptual map with the attribute ratings to obtain Figure 15.13.3
Now the interpretation is a little clearer. LA Fitness and Gold’s Gym are similar, and what
they have in common is that they offer a good variety of equipment, they seem to fit the
users’ personalities, and they have reasonably helpful staffs. (These two gyms project high
onto those vectors.) BeFit Gym does well on classes and value, as we had seen in the raw
data, and it does not fare as well on staff or the personality measure.
B2B
U.S. marketing research providers were surveyed and 56% said they were doing some B2B
research. B2B marketing research also seems robust to economic fluctuations, at least compared to
B2C marketing research.
Some industries are bigger users of B2B marketing research (e.g., health care products and
services, financial (banking, insurance, credit cards), and technology industries. Other industries
use B2B research less, e.g., in consumer packaged goods and retailing, manufacturers tend to
overlook their partners and instead go directly to the consumer.
What kind of B2B marketing research is conducted? Clients ask for “attitude and usage” studies,
and customer satisfaction surveys (66% of marketing research companies have conducted these
studies within the last calendar year). They commission studies of brand tracking throughout
their products’ life cycles, from concept testing to later stages of new product development (50%).
The next most popular kinds of marketing research projects examine ad copy testing and brand
equity and market structure estimations (30%).
How is the B2B marketing research conducted? Most respondents are contacted via phone and
online reaches (42% together, 37% online only, 13% phone only). In person reaches are rare (4%)
and good old-fashioned mail surveys, rarer still (1%).
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264 Part 4 Positioning: Assessment through the Customer Lens
Feature staff in ads Feature fun classes in ads
Show fun amenities
Figure 15.14
BeFit Gym
Re-Positioning
as Personality
Plus
These perceptual maps offer a great deal of descriptive information about current
positions among competitors. It is a strategic question to consider possible repositioning
efforts. Thus, for example, Figure 15.14 shows one of the directions BeFit is considering.
If it can create more superficial personalization, it hopes to be seen as more personal and
more fun as well.
15-4 FOCUS GROUPS FOR CONCEPT TESTING
There’s something amazingly compelling about focus groups—watching a group of 8 to
10 consumers discuss your products and your competitors’ products in the contexts of their
lives. All the while, you’re munching M&M’s behind a one-way mirror and schmoozing
with your colleagues. Focus groups are usually used as exploratory techniques, meaning,
you don’t quite know yet what questions you’d put on a survey. The sample sizes are smaller
(running maybe 3 to 4 groups of 8 to 10 customers), so, really, predicting how the market-
place will respond as a function of these focus groups is not a great idea. It’s best to follow
up the focus group leads with a larger-scale survey. But there’s just something remarkable
about watching a live person say something good, or bad, about your brand.
An exploratory technique is used in the early stages of a marketing inquiry. Most often,
focus groups are used as a vehicle for concept testing in the early stages of new product
development or when working toward the development of an ad campaign.
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265Chapter 15 Marketing Research Tools
A person is hired to be a moderator, or someone who keeps the discussion going.
The moderator tries to address all the items on the client’s wish list, to bring out the quieter
group members, to control the overbearing group members, etc. If the topic is a sensitive
one (e.g., dealing with some health issues), it can help if the moderator is similar to the
focus group participants (e.g., in age, gender, ethnicity) to put them at ease and establish
rapport.
The moderator kicks off the group discussion with some warm-up exercise, e.g., going
around the room with brief introductions and an easy question, e.g., “How do you use this
product in your lives?” Then questions from the client are introduced, e.g., “Here are two
different ads my client is working up. Which one speaks to you more, and why?” Then the
discussion is off and running. “I like the sexier one” or “I disagree, I think the wholesome
one makes better sense for this product,” etc. When the discussion starts dwindling on
this topic, the next topic is introduced. After one-and-a-half hours, the group is thanked,
dismissed, and paid.
If you’ve been an observer, you should jot down notes about your impressions before
your work team starts talking about what they think the conclusions are. If you weren’t an
observer, these sessions are usually taped, and, often as not, transcriptions made as well.
Moderators are also usually paid to interpret the session because they have more experience
than you in watching focus groups interact; they are in a better position to tell you whether
to really worry about that one disgruntled member or that one overeager member, and so
forth. On the other hand, you know more about your company and brand than any moder-
ator, so the path to truth lies somewhere between the two extremes.
Other qualitative techniques are available, and they ebb and flow in their popularity
among marketers. One is a set of observational techniques, ranging from having so-called
secret shoppers act as customers purchasing your brand and competitors’ to make compar-
isons, to having auditors watch consumers make choices in grocery store aisles or among
clothing racks at the Gap. The strategy of brands and retail outlets, if done well, should
be easily discernible; e.g., different stores’ positioning should reflect themselves in differ-
ent merchandise, different ambience, different frontline personnel, and, of course, different
shoppers. Ethnographies are a mix of observation and interviews with other participants.
While surveys can deliver large sample sizes and some certitude about numbers, qualitative
methods offer rich, deep understandings of customers’ motivations.
15-5 CONJOINT FOR TESTING ATTRIBUTES
Conjoint studies are very popular for questions of pricing, new products, and branding.
The studies are run to understand how consumers make trade-offs. For example, in the
design of a new product, engineers and R&D departments are always keen to add as many
bells and whistles as possible, but then, of course, doing so drives up the price. So the
question is: What do customers really want, if they can’t have everything (all the features
and a cheap price)? Conjoint analyses help uncover the attributes that are most valued
by consumers and provide guidance as to the attribute values to combine for optimal
product design.
Figure 15.15 presents all possible combinations of a new service that an airline is
thinking of designing. The airline wonders what features its frequent fliers would like in-
cluded in their loyalty program: Should there be access to an elite club at the large airports
(yes or no)? Do the customers value being high priority for upgrades (yes or no)? Should
the loyalty program and these benefits be free or available at a fee (e.g., $50 annually)?
These three features are easily provided by the airline, so the question is: What do the
customers want?
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Anatomy of a Market Segment
Focus groups are used to elicit qualitative feedback on brand perceptions, testing new
product concepts, reacting to “storyboards” depicting a potential ad campaign, etc.
Why are focus groups so popular?
There is something compelling about watching customers talk about your brand.
Also, they’re flexible, they can probe to see whether something interesting comes up,
the resulting data are rich and deep, they get at the why of customer behavior, they
help generate some business ideas and clarify others, and the group dynamics can
be synergistic and creative.
On business specs, they’re relatively inexpensive, and there is a ready industry of
providers.
Focus groups can also be used to obtain quantitative ratings, but then the focus groups should
be followed up on with more extensive surveying on larger, representative samples.
Focus group rooms
can be set up for a variety
of uses,
such as showcasing
products, like shampoo . . .
. . . Or technology like
high-definition screens
to show websites or new
designs for a restaurant,
retailer, hotel. M
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FAQs:
How many in the focus group?
Eight to ten.
How many groups? ~Three (per
segment).
Moderator should be similar
to participants if discussing
“personal” (e.g., health) issues.
Hire a company to do the focus
group. If your team or your
company runs the focus group,
it will be biased.
Ask focus group facilitating
company for both video files
and transcripts.
Focus groups of the “future” are
already here! There are participants
in our town (in the room) and
participants on the screen are in
another city.
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A focus group room as seen from
behind one-way mirror. The viewing
room is where management gathers
to watch the group discussions
without interfering with the free
flow of ideas and commentary.
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In
c.
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267Chapter 15 Marketing Research Tools
The two (club) by two (upgrade) by two (pricing) design results in eight combinations
(as in the eight boxes in Figure 15.15). Consumers are asked to rate or rank these eight
combos in terms of their most to least preferred.
Figure 15.16 shows one flyer’s data. The first five columns are data that are constant for
every flyer; they comprise the design of the new service offerings. The consumer’s judg-
ments are the ratings in the last column. Perhaps not surprisingly, this customer would
most prefer to have club access and upgrades for free. The very next question would be,
okay, “If you can’t have all that, what are you willing to give up?” If you give up the club
access, that tells us you don’t value that feature as much as upgrades and a free program.
If you say you’re willing to pay, then that tells us you want the perks (club access and
upgrades) and are not price sensitive. Thus, even going from first preferences to second
preferences, customers already begin to tell us about the attributes that are important to
them and the trade-offs they’re willing to make.
Monthly
1 day
$30/mo
Scheduled
1 day
$30/mo
Monthly
2 hour
$30/mo
Scheduled
2 hour
$30/mo
Monthly
1 day
$60/mo
Scheduled
1 day
$60/mo
Monthly
2 hour
$60/mo
Scheduled
2 hour
$60/mo
Figure 15.15
Conjoint
Design
Row Column Schedule? Window? Fee? Rating*
1 1 0 0 0 5
1 2 1 0 0 6
1 3 0 1 0 7
1 4 1 1 0 8
2 1 0 0 1 1
2 2 1 0 1 2
2 3 0 1 1 3
2 4 1 1 1 4
*Like the least 1 2 3 4 5 6 7 8 like the most predictor variables coded: 0 = no, 1 = yes
Figure 15.16
Conjoint Data
for 1 Customer
In a conjoint, we run a regression on these data: The variables “club,” “upgrade” and “fee”
are the predictors, and the consumer’s judgments are the dependent variable, as in this
model:
Rating = b0 + b1 Club + b2 Upgrade + b3 Fee + error
Running the numbers in Figure 15.15, the regression yields the following (b) weights:4
Predicted rating = 5 + 1 Club + 2 Upgrade – 4 Fee
The interpretation is this: We start in the middle of the scale (i.e., the five). Then, as the club
variable goes from code of zero (no) to one (yes), preference ratings go up (by one unit).
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268 Part 4 Positioning: Assessment through the Customer Lens
As the upgrade variable goes from code of zero (no) to one (yes), ratings go up (upgrades
are desirable, by two units). Finally, as the fee variable goes from code of zero (free) to one
($50), ratings go down (free is preferred to fee, by four units). The sizes of the weights
are interpretable (as are the signs). Thus, we’ve learned that fees are the most important
feature of this service offering, and club membership the least important.
It should be pretty clear how helpful this information would be in designing a new
product or brand extension. What’s also great, as you’ve seen, is that a basic conjoint is quite
simple: both the data collection and the data analyses.
15-6 SCANNER DATA FOR PRICING AND
COUPON EXPERIMENTS AND BRAND
SWITCHING
Scanner data have reshaped marketing and business. Scanners began in grocery stores to
help inventory management, but it quickly became obvious that the information obtained
was far more valuable. Whenever you go to a grocery store, your purchases are scanned, and
in that simple gesture, the company knows what you bought, how much of everything you
bought, what brands you bought, and how much you paid for everything. If you offer your
loyalty card for discounts and coupons, the company uses your buyer identification number
to tie your current purchases to your past buying history.
In addition, these companies hire store and area auditors to integrate into the
database what the prices were for competing brands, whether any brands were on sale
or specially featured (e.g., in end-of-aisle displays), which brands were advertised in
local weekend newspaper inserts, etc. Finally, beyond your grocery scanner swipes and
Big Data
Scanner data, CRM databases, or any huge data set requires “data mining.”
The databases contain millions of customers and SKUs.
The analytical techniques aren’t that different from those used on smaller data sets.
The challenges of working with a large data set include IT (memory for storage) and time (for the
number crunching to be completed).
The largest practical concern for businesses is simply the coordination of disparate data.
Data come from many sources:
Customer behaviors (e.g., purchase transactions, customer service and call center transactions,
web site visitations, warranties registrations),
Attitudes (e.g., post-purchase satisfaction survey data, sales contacts follow-ups),
Demographic data (e.g., ZIP Codes from purchase data yield geographic and income
estimates).
The sources must be organized to have any value, before the data miners begin their dig.
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269Chapter 15 Marketing Research Tools
the auditors supplementing the data, panels of consumers, hired by marketing research
firms, agree to participate (usually for ridiculously nominal gain), have their media tracked
(e.g., electronic hookups to TVs and the Web), and provide the companies with household
information (income, ZIP Code, number and ages of children, etc.). Companies can use
these single-source data to tie purchase patterns to demographics and media.
These data can be used to forecast demand or to watch consumer responses as a function
of all kinds of marketing mix activities. For example, if you want to know the answer to the
question, “If we raise our prices by x amount, what happens?” These questions are answered
via so-called causal, or experimental, methods. The idea is that, if you manipulate something
(like price) and all else remains constant (which can be a big assumption in the real world),
then any change in sales for your brand would be attributable to your intervention. Price or
packaging can be tweaked in one market, in one store, or in one town, and subsequent sales
can be compared to those in the other markets or stores that serve as the control group. This
kind of study provides the cleanest test possible of the ROMI (return on marketing invest-
ment) of any marketing mix lever: Tweak the marketing, and watch the sales move.
Also, many things happen in the marketplace that you can’t control. Maybe you don’t raise
prices, but your competitor does. Then what happens? This scenario is referred to as naturalis-
tic observation: You’re not tweaking the environment, but you’re constantly monitoring it. You
can still run regressions to try to forecast and understand what happens under different sce-
narios; it’s just that it’s likely that many factors are moving simultaneously, so it’s more diffi-
cult to attribute sales differences to one localized action, such as a competitor’s raising prices.
Experiments have the advantage of internal validity. This means that, when we tweak
something and all else is held constant, we can be rather confident in our causal statements:
“We did X, so the changes are attributable to X.” Natural observation has the advantage
of external validity, meaning that it’s a little easier to believe that our findings will gen-
eralize to the real world because indeed it is unfolding in the real-world setting. These
strengths are somewhat at odds. For example, field studies are conducted in the real world,
so they are strong in external validity, but they tend not to be as clean in terms of internal
validity. Often numerous alternative explanations must be eliminated before we can be
certain about the reasons for the results we’ve seen. We may wish to attribute our sales
increase over recent weeks to, say, our added promotional efforts, but we’d need to eliminate
Most
companies
need help to
understand the
onslaught of
their big data.
bl
ea
ks
ta
r/
Sh
ut
te
rs
to
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om
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270 Part 4 Positioning: Assessment through the Customer Lens
the possibility that sales were going to increase naturally, due to reasons such as the season-
ality of the product being sold. The good news is that the strengths of these two kinds of
studies are complementary, so smart companies engage in both.
15-7 SURVEYS FOR ASSESSING
CUSTOMER SATISFACTION
Many companies are interested in getting feedback from their customers. As a result, a little
industry within marketing research has sprung up to offer their services at creating and
evaluating customer satisfaction surveys. Surveys involve a bit of an “art,” and so relying on
someone with experience is a good idea. The basic idea is not complicated. You write survey
questions, pretest them, and then put the survey out to a sample of your customers.
Questions about customer satisfaction can be as straightforward as, “How would you
rate the service you just received at our car dealership: 0 = very dissatisfactory to 100 = very
satisfactory.” It’s also common to ask customers how the purchase rates compared to their
expectations; e.g., “How did your visit at our hotel seem to you? 1 = Fell short of my expec-
tations, to 4 = Met my expectations, to 7 = Greatly exceeded my expectations.”
Beyond customer satisfaction, many surveys ask about repurchase intentions and inten-
tions to generate word of mouth; e.g., “How likely is it you would fly with our airline again,
for your next trip? 1 = Very unlikely to 9 = Very likely.” And, “I am going to tell my friends
to come to this restaurant: 1 = Strongly disagree to 5 = Strongly agree.”
It is important to include survey questions that will be actionable. If customer satisfac-
tion is high, that’s great. If it’s low, some diagnostic questions must be asked that point to
Field Experiment
A brand manager was studying the effect on pharmaceutical sales of three classes of factors:
1. Product characteristics: Some drugs may sell better due to qualities inherent in the drug and its
intended actions. For example, drugs taken to address chronic conditions (e.g., statins to lower
cholesterol) or lifestyle choices (e.g., birth control pills) may well sell more than periodic pills for
acute symptoms.
2. Competitive strategies: Some drugs may sell better because they come from certain firms, with a
certain approach to business, as measured by its drug’s FDA ratings, how long the drug has been
in the market, the firm’s order of entry (e.g., the so-called pioneer effect).
3. Marketing and the promotional mix: Some drugs may sell better because they have good marketing
teams working on them. For example, they have a budget for detailing—i.e., having the sales
force visit hospitals and doctors’ offices to explain new drugs, to build relationships, and to provide
samples.
What worked? Product characteristics helped sales (i.e., whether the product itself was good
or not), and marketing helped sales. Not surprisingly, there was a synergistic boost between the
two; i.e., good product supporting good marketing is the best of all worlds. Wondering about
the company’s business philosophy? It didn’t make a dent. (For more info, see Latta’s “What’s Having
the Most Impact?” at Quirks.com.)
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271Chapter 15 Marketing Research Tools
the measures a company should take to enhance customers’ perception of quality (recall
Chapter 14).
Surveys are supposed to be short, so the respondent doesn’t have to endure much pain or
boredom, and shorter surveys enhance response rates. Responses are kept confidential, for
research purposes only, not for subsequent sales opportunities. Marketing researchers are sup-
posed to attend to strict ethics (for AMA’s standards, go to ama.org). Respondents can be
consumers or B2B customers. Surveys can be administered in person (e.g., the people who
intercept you at shopping malls with clipboards), over the phone, via fax, and increasingly on
the Web.
What’s cool about surveys is that you can ask customers about anything. Even more
impressive is that they’ll answer you on just about anything. Recall the NPO segmentation
study earlier in this chapter. We had 11 survey items, rather a lot of variables. A first step
to simplify the analysis would be to reduce that number. That reduction is done by means
of factor analysis.
Factor analysis is a technique that begins with a correlation matrix, like that in Figure
15.17. (This set of variables is a subset of the NPO study, to keep things simple.) Factor anal-
ysis examines the strong and weak correlations to identify underlying factors common to the
responses. Some of these correlations are larger than others, indicating that perhaps they’re
measuring the same underlying concept or factor. If two items are highly correlated, then we
could take advantage of the fact that they’re somewhat redundant by maybe just taking an
average of the two items as we proceed to other models, such as regressions and forecasting.5
Q5 Q11 Q9 Q10
Q5 = Higher education is very important 1.00
Q11 = I would help sponsor a kid . . . 0.93 1.00
Q9 = Only the very privileged . . . 0.48 0.52 1.00
Q10 = Higher ed is too expensive 0.25 0.25 0.91 1.00
Figure 15.17
Correlations
Among Some
NPO Survey
Items
Figure 15.18 provides the factor analysis solution. Within each factor, we’re looking at
the large numbers because those items “define” the factor. Thus, these results indicate that
a perception of education being important and a willingness to help out hang together;
i.e., many of the customers who rated education as important (or unimportant) also rated
a higher (lower) willingness to sponsor. All this is to say that the items were correlated and
perhaps form a single factor. The second factor reflects the apparently overlapping opinions
that only privileged people can go to college and that college is too expensive.
Factor 1 Factor 2
Q5 education important 0.94 −0.01
Q11 help sponsor 0.96 0.01
Q9 only privileged 0.18 0.89
Q10 too expensive 0.12 0.99
Figure 15.18
Factor Analysis
on NPO Data
The computer produces a matrix that looks just like this figure, and it’s up to the mar-
keter to interpret what each of the factors “means.” The meaning is driven by whatever the
variables with high coefficients seem to have in common. For example, for factor two, we
have to decide what “privilege” and “too expensive” have in common—something about
money, obviously.6
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272 Part 4 Positioning: Assessment through the Customer Lens
MANAGERIAL RECAP
There are many marketing research techniques, and just about any can be used to address marketing questions related to the
5Cs, STP, and the 4Ps. In particular, some methods nicely match some marketing responsibilities:
• Cluster analysis identifies groups of similar customers and ideal for segmentation studies.
• Surveys and MDS are used to create perceptual maps, which are useful in assessing current competitive positions.
• Focus groups offer a natural vehicle for investigating customers’ early reactions to corporate ideas, e.g., new product concepts, new
advertising approaches.
• Conjoint methods ask respondents for preference trade-offs, which allows marketers to infer the attributes that customers value
most.
• Scanner data allow the investigation of brand switching and loyalty and price sensitivity and the conducting of marketing
experiments.
• Surveys are very flexible, and these days are common instruments for assessing customer satisfaction. Survey results can be
cleaned up and simplified using factor analyses.
Factor analysis and cluster analysis are nicely complementary techniques. A factor
analysis can be used first to group variables into factors. Then a cluster analysis can be
used, using the smaller set of factors (rather than the larger set of raw variables) to group
customers into segments.
Helpful Data
Here are some helpful data sources:
Stats on people and economies
U.S.: census.gov, usa.gov/statistics, ita .gov
Global: worldbank.org, un.org, country-data.com, greenbook.org, euromonitor.com
Big, full-service marketing research providers
Nielsen.com, iriworldwide.com, quirks.com, npd.com
Special interests
Small biz: sba.gov
Europe: esomar.org
Asia: apec.org
Latin America: latin-focus.com
Health care industry: dssresearch.com
Media: www.arbitronratings.com
Customer satisfaction: jdpower.com
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273Chapter 15 Marketing Research Tools
Chapter Outline in Key Terms and Concepts
1. Why is marketing research so important?
2. Cluster analysis for segmentation
3. Perceptual mapping for positioning
a. Attribute based
4. Focus groups for concept testing
5. Conjoint for testing attributes
6. Scanner data for pricing and coupon experiments
and brand switching
7. Surveys for assessing customer satisfaction
8. Managerial recap
Chapter Discussion Questions
1. It’s common for a top-level manager (i.e., your
boss) to watch a single focus group and get excited
about something a customer says, and prepare a
marketing plan around it. Why do you know this is
premature? How would you handle your boss?
2. Imagine designing a conjoint for your b-school’s
café. In particular, you’re in charge of the daily
pizza orders. Pizzas are tricky—while they’re
a simple food, they can be created in a zillion
combinations. What factors should you test in
terms of your fellow students’ likely preferences?
Wheat crust vs. white, thick vs. thin, plain cheese
vs. sausage vs. sausage and green pepper vs.
vegetarian (you get the picture). Design a conjoint
that would result in identifying 2 or 3 popular
slices that your café managers could order every
morning. The student body knows you’re responsi-
ble—how do you make most of them happy?
Video Exercise: Research Design at LSPMA (14:25)
Lake-Snell-Perry-Mermin Associates (LSPMA) is a decision research firm that works on behalf of
clients to determine what different segments of the population believe and feel about issues of
interest to the clients. A third of LSPMA’s work is for political candidates, another third is
work for progressive issues organizations, and the remaining third is work for foundations and major
institutions. LSPMA uses telephone polls, online polls, and in-person and online focus groups to collect data
and to identify population (or audience) segments. Audience segmentation enables an LSPMA client to
identify groups of people who are supportive of its issue(s) or cause(s), groups who can be converted to being
supportive, and groups who will never be supportive. A client can then target its resources toward connecting
with and persuading those segments that are likely to be the most receptive to the client’s message. The research
enables the dividing of the audience into segments; once segments are identified, they are tracked in future
decision research. Although audience segmentation can be useful, it can make the population seem more divided
than it actually is.
Video Discussion Questions
1. Why do political organizations need marketing research conducted by LSPMA?
2. What is the relationship between marketing research conducted by LSPMA and identifying the needs and
wants of specific market segments?
3. Why would a business rely on a marketing research firm that is heavily into political polling?
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274 Part 4 Positioning: Assessment through the Customer Lens
MINI-CASE
How to Design an Attractive Wearable Redux
Recall from Chapter 1, an electronics firm was contemplating what attributes would appeal to its customers
if it were to issue a new wearable. The features that the brand team focused on, and the dummy variable codes,
were these:
• Design appearance: small smartphone (1) wristwatch (0)
• Apps activated by: touch (1) voice (0)
• Annual Fee: $0 (1) $20 (0)
• Co-branding with teams: yes (1) no (0)
They ran a conjoint study on every 10th customer who came into one of their retailer partner’s stores until they
had a sample of 100. The 4 factors listed above result in 16 combinations (2 × 2 × 2 × 2 = 16). Each person rated
the 16 possibilities from 1 (would not consider buying such a wearable) to 100 (would definitely purchase such a
unit). The regression results follow:
Wearable attractiveness = 0.6 design + 0.2 activation + 0.9 fee + 0.1 co-branding.
Case Discussion Questions
1. What features matter to customers, and which do not?
2. What would the optimal wearable look like? If you were to cluster the customers first, and then run a separate
conjoint on each cluster, do you think the results would vary? Could the company create different wearables
to satisfy multiple segments?
3. Are you worried at all about the sample—are customers who visit the retailer representative of those
who might purchase online?
4. What features do you wish the company had included that might appeal to customers more?
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275
MARKETING STRATEGY
Strategy can mean a lot of things, so we’ll begin by discussing business and marketing goals,
and then we will look at several approaches to thinking about marketing strategy. We’ll
assess our company’s current standing and what it will take to achieve our goals. Then we’ll
consider measures to evaluate the extent to which we’ve been successful at doing so.
16-1 TYPES OF BUSINESS AND MARKETING
GOALS
Let’s begin by thinking about business very simply. Then we’ll see more clearly what mar-
keting goals should be set to achieve the broader business goals.
No company is in business merely to break even year after year. Even nonprofits want
more money to be able to support their socially responsible missions. So let’s agree that
growing profit is the ultimate goal. Even that simple statement can be achieved via multiple
paths. We know that:
(1) Profit = Sales Revenue − Costs
Breaking the right-hand side down into its components:
(2) Sales revenue = Sales volume (in units) × Price
(3) Costs = Variable costs + Fixed costs
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
Customer
Company
Context
Collaborators
Competitors
Managerial Checklist:
• What types of Business and Marketing Goals are there?
• What is Marketing Strategy
• How do we “Do Strategy”
• What are the Key Marketing Metrics we want on our Dashboard?
16
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276 Part 5 Capstone
If we plug equations (2) and (3) into equation (1), we obtain:
(4) Profit = (Sales volume × Price) − (Variable costs + Fixed costs)
Further,
(5) Variable costs = Variable unit costs × Sales volume (in units).
Thus, substituting (5) into equation (4), we see:
(6) Profit = (Sales volume × Price) − [(Variable unit costs × Sales volume)
+ Fixed costs].
Every year, a zillion new popular-press business books are published, each promising the
secret to riches and fame. Equation (6) shows that there is no secret. The answer to riches is
very simple (which is not to say easy). As Figure 16.1 also depicts, to increase profitability,
we need to increase sales volume, change prices, or decrease variable or fixed costs.
We can grow sales volume by:
1. Growing the market or the size of the overall pie.
2. Growing our market share or our slice of the pie. Either of these can be achieved by
3. Receiving more revenues from our current customers if we can up-sell to them our
more expensive offerings, or
4. Getting our current customers to buy more frequently, or
5. Stealing customers from our competitors, or
6. Finding another segment whose needs might not be far from those of our currently
satisfied customer base. We can
7. Create new products to satisfy our current customers or attract new ones. We can
8. Reduce brand switching of our customers out to other competitors by enhancing
our brand equity,
9. Achieving lesser switching by means such as by raising our customer satisfaction, or
10. Adding value through a loyalty program, or
11. Otherwise raising switching costs so that leaving our brand is not attractive.
Figure 16.1
$Cha-Ching
Change
Price
Increase
Sales Volume
Increase Sales Revenue
Decrease
Variable Costs
Decrease Costs
Decrease
Fixed Costs
e.g., raise
prices and
add customer
benefits
e.g., grow the
overall market,
or grow our
market share
e.g., spend less
on advertising
or administrative
e.g., seek
suppliers who
are cheaper, but
same quality
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277Chapter 16 Marketing Strategy
Strategies 1–11 give us 11 means of increasing sales already! We can also:
12. Change prices. Unfortunately, most companies think this option—cutting prices—
as deceptively easy to do. A drop in prices may bring additional volume in the
short term, per any economic prediction. But a marketer cares about the likely
ensuing damage to the long-term brand image and brand equity. Operationally,
low prices and low margins also necessitate the hassle of having to deal in large
volume. Furthermore, when we were looking at pricing, we saw that striving to be
the low-price provider often initiates price wars and worse future margins. A far
more profitable option is to:
13. Raise prices, which yields greater margins. A terrific side effect of this simple
attempt to bring in more revenue is that customers usually believe that high prices
are a cue to higher quality—that is, higher prices are also beneficial to higher-end
brand positioning. Such an enhancement of perceived benefits to the customer also
leaves the customer
14. Less price sensitive. If our customer information indicates that, unfortunately for
us, they are price sensitive, we can
15. Shift our target segment to more upscale buyers.
In our business delivery, we can tighten up our system to decrease variable costs. We can
16. Try to find less expensive but requisite quality suppliers, or
17. Outsource the parts of our business that appear to be expensive for us but might be
scalable and less expensive for a business partner, or
18. Choose to become a niche provider, to keep units down and price higher for our
special customers.
In general, we need to become a leaner provider.
The other cost-related lever is to decrease fixed costs. We can:
19. Spend less on R&D, unless our company prides itself on being innovative, or
20. Spend less on advertising. It’s probably not a good idea to cut out advertising per
se, so that our brand associations won’t suffer in the future. But we can certainly cut
advertising spending by being more creative with our current advertising dollar, e.g.,
fewer TV spots, more social media. We can
21. “Milk the brand,” an expression that will make more sense in a moment, but briefly
the idea is to just let our strong brands speak for themselves and not spend much on
their continued development or maintenance.
There—just beginning, we’ve already listed 21 approaches! Next, we’ll see these ideas
and more in other contexts.
Definitions from Dictionary.com
Goal: The purpose toward which an endeavor is directed; an objective
Objective: Something that one’s efforts or actions are intended to attain or accomplish; purpose;
goal; target
Strategy: A plan, method, or series of maneuvers for obtaining a specific goal or result
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278 Part 5 Capstone
16-2 MARKETING STRATEGY
There are numerous strategy gurus, each with a favorite approach to framing business and
marketing situations. We’ll look at the most popular frameworks. Marketers take responsi-
bility more for increasing sales revenues and tend to pass much of the responsibility for de-
creasing costs to the operational side of the business. So it will come as no surprise that these
strategic perspectives follow suit, emphasizing increased sales more than decreased costs.
16-2a Ansoff’s Product-Market Growth Matrix
One very popular strategic tool makes no bones about it: It’s all about sales growth. The
question is what will be the source of that growth? Will we stick with our current product
portfolio and simply try to get more purchases from our current customers or attract new
customers? Can we create new products that might appeal to our current customers or use
them to attract new customers? In other words: new stuff or new peeps?
Figure 16.2 shows all four possible product and market combinations. In the upper left
of the matrix, we see the strategy of market penetration. In this scenario, we have no plans of
expanding our product lines, nor do we seek new customers. We will simply encourage our
current customers to purchase from us more frequently. This strategy is low risk, but obvi-
ously it also might max out quickly.
In the lower left, we still have no new products, but we’re reaching out to new customers.
We’re hoping to construct market development. Perhaps we have found a new use for our
product that naturally suits a new customer segment, or perhaps we plan to advertise through
new outlets (e.g., social media) to reach different demographics (e.g., younger customers).
Figure 16.2
The Ansoff
Product-
Market
Growth Matrix
Current
Products
Current
Markets
New
Markets
New
Products
Diversify
Product
Development
Market
Development
Market
Penetration
Strategy Snippets:
P&G owns the high-end diaper market in the U.S. but had to figure out how to translate that
in China. They thought they’d have diapers made there locally (to reduce costs and keep prices
lower), but those failed. P&G is having much better success selling high-end diapers, with the
new claim, “Made in Japan!”
India may have variable infrastructure, but a company can get around that. PepsiCo will start
selling Doritos, Tostitos, Pepsis and Mountain Dews to Indian customers directly, online.
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279Chapter 16 Marketing Strategy
In the upper right, we are introducing new products to our current customers. This product
development strategy might fit well for a company that prides itself on being innovative, but
it might be more of a stretch for relatively conservative companies. Entertainment and high-
tech industries are masters of creating new products; they have the template (e.g., a DVD),
and they just tweak the content. This approach is also thought to be a great way to really
delight one’s customers and strengthen their loyalty to us—by giving them even more value.
Finally, in the lower right, we have diversification, the most difficult and therefore riskiest
strategy in this framework. We are trying to introduce new products to new customers, and
obviously we’re out of our depth in both. It is smarter to achieve diversification after first
going through product development or market development; i.e., get to know either a new
product line or a new customer base before trying to do both simultaneously.
16-2b The BCG Matrix
Figure 16.3 shows the BCG matrix, another strategic framework that has been useful to
marketing managers for portfolio analysis. It is also all about growth—the industry’s growth
and the company’s relative growth compared to competitors within the industry. The com-
pany does a self-assessment of its overall business and an assessment of the industries in
which it competes. All of a company’s products (or brands) are classified according to
whether each has a strong or weak market share and whether that market share occurs in
the context of a slow or growing market.
The classes have memorable labels. A brand with a relatively large share in a growing
market is called a star. Conversely, a brand with small share in a market that’s not growing
is called a dog. The other classifications are cash cows, de-
scribing brands that are doing well (strong market share),
in a non-growth industry, and question marks, which are
brands that aren’t doing well in an industry that is.
A company wants to optimize the number of its stars.
It will also fiercely protect its stars. Thus, if company A’s
strategy is to enter into the market space near company B’s
star, company B will typically move swiftly to do whatever
necessary to hold onto its star.
Cash cows are also desirable. These brands are literally milked; that is, usually advice
is given that not much marketing attention (or budget) should be paid to these brands.
It’s not clear that that’s great advice because, in the spirit of a product’s life cycle, with-
drawing marketing support can propel a brand into faster decline. But the overall point
is that the brand is very strong (awareness, trial, repeat purchasing, loyalty, etc.), and it is
being leveraged for the greater good of the company by not devoting resources to it.
Figure 16.3
The BCG
Mat rix: Port-
folio Analysis
High
Relative Market Share
High
M
ar
ke
t
G
ro
w
th
R
at
e
Low
Low
Dog
?
Cash cow
Star
To grow: make new stuff
or find new peeps.
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280 Part 5 Capstone
The future of question marks is somewhat unknown and also somewhat under the com-
pany’s control. The industry shows potential, so the company might wish to support the
brand with richer marketing (quality improvements, promotional campaigns, temporary
price cuts to attract more trial) in an attempt to transform the question mark into a star
with an enhanced market share. These question mark products may be in development via
new technologies, entering different markets, etc., and they may need time and additional
supporting resources to pay off for the company.
Finally, the dog brands should be minimized. The company could just let them be, and
reap whatever profits they bring in, however meager. Alternatively, if these brands have any
residual value, they’re also candidates for divestment. Note that moving a dog “west” to
become a cash cow is not easy and moving it “north” to be a question mark doesn’t give us
clear closure. (What will that question mark become?) So, who let the dogs out? Probably
the brand manager.
16-2c The General Electric Model
The so-called General Electric model is a strategic tool that forces the marketing manager
to make explicit some judgments about the brand’s (or the company’s) performance, as well
as the assumptions that the company operates under with respect to expected performance.
As shown in Figure 16.4, two dimensions are measured: market attractiveness and busi-
ness strength. These dimensions are analogous to the external and internal pieces of SWOT
analyses. For the external element (market attractiveness), the particular ratings might vary,
but in this example, the strategist is asked to fill in two sets of numbers:
1. The figures in the column labeled “Weights”: How important is sales volume, market growth
rate, and competitive intensity to the firm? Constrain these weights to sum to 1.0.
2. The perceptions about how well the brand (or company) is doing in each of those areas: The
ratings are made on a 1–5 scale, where 1 = awful and 5 = outstanding.
For the internal element called business strength, a number of sub-dimensions are also
rated, both for importance (the weights) and the achievement level (the performance ratings).
Next, we multiply the weights and ratings to obtain the numbers in the “Value” column.
Those values are summed, and the sums are plotted in Figure 16.5.
Many places
try to appeal
to the growing
customer inter-
est in medical
tourism.
gr
ah
am
to
m
lin
/S
hu
tte
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to
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.c
om
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281Chapter 16 Marketing Strategy
This brand or this line of business is in a moderately attractive market, but the brand or
firm is not doing as well as it might. Obviously, controlling the attractiveness of the market
is difficult, but we need to find a way to get our business strength score up. Ideally, we’d be
in one of the green (go-go-go) cells. We want to avoid the red disaster cells.
When we look at our business strength scores (Figure 16.4), we can diagnose that we are
apparently an expensive shop; we need to control our costs better. These scores are import-
ant (the largest weight by far), and we get our lowest performance scores here. We’re not
doing remarkably well on market share or brand strength either, but neither of those facets
are as important (at least according to our own previously stated judgment).
16-2d Porter and Strategies
Porter offers another approach to classifying strategies.1 He says, generally speaking, a com-
pany can dominate its market in one of three ways. First, it can strive for cost leadership,
producing goods and services more efficiently than the competition. To deliver that, the
company might have such resources as easy access to plentiful, good raw materials, cheaper
labor sources, better information, or other technologies, etc. The cost savings might be passed
along to customers in the form of low prices, or they might be retained as higher margins
than those of the competition, thereby fueling other actions, e.g., R&D, more advertising, etc.
Rating
Weight (1–5) Value
Sales volume 0.2 4 0.8
Market Attractiveness Market growth rate 0.4 3 1.2
Competitive intensity 0.3 4 1.2
3.2
Rating
Weight (1–5) Value
Market share 0.2 3 0.6
Business Strength Brand strength 0.2 3 0.6
Unit costs 0.6 2 1.2
2.4
Figure 16.4
The General
Electric Model
Figure 16.5
The General
Electric Model
Business Strength
0
5
05
1.67
3.33
1.673.33
H
ig
h Protect
Brand
Build,
Go For It
Divest
M
ed
iu
m
Build
Carefully
Lo
wM
ar
ke
t
A
tt
ra
ct
iv
en
es
s
Strong Medium Weak
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282 Part 5 Capstone
Second, a company might take the approach of differentiation. This strategy is an attempt
to distinguish one’s products as unique in the industry. Differentiation may be fostered
through excellent quality in products and customer service, distinctive design, exclusivity,
value-addeds bundled into the core purchase, etc.
Porter Examples
Cost leadership: “We’re efficient!”
Costco, Dollar General, jetBlue, Priceline, Walmart
Differentiation: “We’re unique!”
BMW, Build-a-Bear, Nordstrom, Volvo
Focus: “We do one thing very well!”
Jeep, Lego, Redbox
Porter calls the final approach focused. Whereas the cost leadership and differenti-
ation approaches are said to be broad, the focused strategy is narrow. The mantra of
these companies is typically, “We do one thing very well.” Such players often serve niche
markets, and customers in that segment can be very satisfied, very loyal, and rather price
insensitive.
16-2e Treacy and Wiersema Strategies2
Another major approach to classifying business strategies offers a slightly different set of
three philosophies. Companies can seek to achieve and maintain operational excellence, prod-
uct leadership, or customer intimacy.
Operational excellence is the ability to deliver products or services smoothly and reliably.
In some industries, it is a necessity; e.g., a package delivery company or a cell phone com-
pany wouldn’t go far if they could not provide excellent operations.
Product leadership is achieved by providing predictably excellent quality in products and
services or by being a market leader in terms of innovations in those products and services.
The churn of new products in high-tech and electronics is a show of competing for product
leadership. Just watch who’s producing the newest, coolest toy.
Treacy and Wiersema Examples
Operational excellence: “We’re smooth and reliable!”
Dell, FedEx, IKEA, McDonald’s, Southwest Airlines, TurboTax
Product leadership: “We’re excellent and special!”
Apple, BMW, Johnson & Johnson, Mont Blanc, Sony
Customer intimacy: “We know our customers very well!”
Amazon, Home Depot, Fidelity Investments, IBM, Lexus, Verizon
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283Chapter 16 Marketing Strategy
Customer intimacy involves the knowledge of customers’ fuller set of needs, and trying
to offer them a full package of benefits, highly tailored to their unique desires. While there
are non-tech versions of intimacy (e.g., a customer’s relationship with a good hairstylist, re-
altor, banker, etc.), it’s no surprise that this approach is huge—and hugely effective—online.
On the Web, customer relationship management hits new highs because of the data storage
and access capabilities. Hence, all the recommendation engines for books, music, movies,
and such demonstrate a strong advance toward customer intimacy.
In sum thus far, there are probably as many ways to think about strategy as there are
strategy theorists. We will describe a few more as the chapter unfolds, but these—Ansoff,
BCG, GE, Porter, and Treacey and Wiersema—are the biggest.
16-3 HOW TO “DO” STRATEGY
While the word “strategy” sounds abstract, in truth it is usually grounded in practicality. A
company must know itself, its environmental context, its competitors, its collaborators, and,
of course, its customers (yes, the 5Cs) before knowing where it wants to go next or deciding
there is a problem to solve or an opportunity to exploit.
Strategic planning involves a reflection on our corporate identity. We pose the questions:
Who are we? Who do we want to become? Stated differently, recall the 2 × 2 × 2 × 2 posi-
tioning matrix in Chapter 5. The questions are: Are we positioned where we want to be? Do
we wish to be high quality, high price, selective promotion, and exclusive distribution? Or
do we wish to be basic quality, lower price, broader-band promotion, and mass distribution?
If we wish to vary from either of these extremes, why do we think that makes sense for us?
How do we proceed?
Strategic planning questions may be revisited for a number of reasons:
• A company may simply be a thoughtful, reflective one that revisits its assumptions
from time to time.
• The company may be considering launching a new product, or a line extension,
or a new partnership, or something new, and it wants to be smart about it, either
by being consistent with its current business or in using the new action to move
purposely through the positioning matrix.
• Contextual issues may arise, such as the economy’s tightening up, or a competitor’s
getting acquired by an international company.
• A company or industry might be experiencing changes in profitability or in its
component drivers (equation 6).
Note that these scenarios are easily discoverable via periodic SWOT analyses. That’s
terrific, since SWOTs are so easy to do and to communicate.
Corporate Ethics
If a company screws up, how should it be punished? A firm can’t go to jail. Picking some executives
as scapegoats doesn’t capture the complexities of decision making in large organizations. So, a
company pays fines. But who really pays the fines—the company can increase their prices to
recapture its finances! Plus, the fines are tax-deductible!
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284 Part 5 Capstone
16-3a SWOT’s S&W
An important assessment in strategic thinking is to know your company’s strengths and
weaknesses, and its corporate identity with regard to the company’s typical philosophy toward
the marketplace (see Figure 16.6). For example, some companies pride themselves on being
innovative and want to invest in R&D so that they can enter the marketplace with cool new
things frequently and regularly. Other companies have a more conservative, careful culture,
so they will rarely lead temporally (although they may lead in market share). Similarly, some
companies are more inclined to take offensive initiatives (initiating price wars or launching
competitive advertising claims), while others are more likely to respond defensively.
Whether a company shows tendencies toward offensive or defensive actions isn’t correlat-
ed with size; a company with a large market share may have the resources to take the initiative
and lead the other players in a new direction, but small entrepreneurial companies frequently
create something new in the marketplace that may elicit responses from other (bigger, older)
Is it okay when consumers don’t know certain facts? For example, Miller markets “Plank Road”
beer as if it’s from a small brewery and Disney produces R-rated films under the name, Miramax.
Some might argue that it’s impossible to tell customers everything about their products and how
they’re made.
What about pricing—what constitutes a “fair” price? Economics tells us that the right price is
where the supply and demand curves cross, but does that mean it’s fair? When buyers and sellers
agree on price in their negotiations, does that mean the price is fair? Customers often complain
about prices being too high, but they rarely understand the complexities of a company’s costs
(e.g., for wireless phone service, health care provision, etc.). If we also believe in the economic
premise of utility maximization, and so believe that buyers and sellers are both looking out for
their own interests, how often or how easily could they arrive at a price they both consider fair?
As a final twist, consider that economists might say that the market determines the price, but
marketers want more than a single transaction with their customers.
In their Sustainability Survey, PricewaterhouseCoopers reported the top reasons that companies
try to be socially responsible. The reasons aren’t exactly altruistic. Companies hope their
responsible actions will provide them an enhanced reputation, a competitive advantage, cost
savings, and a way to meet industry trends. A survey of MBA students said they thought that the
benefits to companies would be a better public image or reputation, greater customer loyalty, a
more satisfied and productive workforce, and fewer regulatory or legal problems.
Some nice corporate practices:
Xerox employees who are selected for its Social Service Leave Program can take a year off
with full pay to work for a community nonprofit of their choice.
Green Mountain Coffee Roasters pioneered in helping struggling coffee growers by paying
“fair trade” prices (which exceed regular market prices), and offering microloans to coffee-
growing families.
Chick-fil-A supports foster homes, summer camps, and charity golf tournaments.
Home Depot no longer stocks lumber or wood products from endangered forests.
For more, see Davidson’s Moral Dimension of Marketing and the Sage Brief Guide to Marketing
Ethics, LA, CA: Sage.
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285Chapter 16 Marketing Strategy
competitors. In addition, the role that a firm plays in the marketplace can change over time—
it is not unusual for a company to be more aggressive (risk seeking) in its youth and to age
toward conservatism (risk aversion) when it has market share, sales, and customers to protect.
Companies can be referred to as leaders for various reasons. They may have the largest
market share. They may have been first to market. They may be known for being innova-
tive, quick to improve another company’s ideas, a company known to please its customers,
etc., showing leadership in any of a number of ways. And, of course, life is rarely black and
white, so there aren’t just leader and follower companies. There are leaders, quick followers,
followers, also-rans, barely-in-the-games, etc.
Furthermore, while many companies think of themselves as innovative, it’s not clear that
being first to market is always a good thing. For example, launching really new products
can be risky, adoption can be slow, and the pioneering company can take quite a hit. In
comparison, the so-called quick-follower companies can learn from the leader’s mistakes
and benefit from customers’ learning how the new offering might be valuable in their lives.
Yet few companies want to think of themselves as quick-followers.
Finally, it’s completely rational to have a slightly split personality in that a company can
be a leader for some of its brands in their respective industries and more of a follower for its
other brands. For example, the company’s orientation to offense or defense may vary across
its brand portfolio. Mature, cash cow brands are treated carefully, whereas more risk is taken
with newer ventures. This distinction depends on the products’ life cycles and the stage of
maturity of their industries. Lastly, dynamics naturally coincide with the 5Cs, such as the
economic context. If innovativeness is central to a company’s identity and economic times
are good, then venturing into a large-scale offensive action can be sensible. If the corporate
culture is more conservative or if the economic context is weaker, then more moderate actions
make better sense, such as mere line or brand extensions in the case of new product launches.
16-3b SWOT’s O&T
A reexamination of strategic goals can also be brought on by changes in the external ele-
ments of SWOT or when observing the effects of the 5Cs on perceived opportunities and
threats (see Figure 16.6). If market shares are being eaten away by new competitors or if our
prices are no longer attractive to our customers, how shall we respond? These motivating
questions would bring us to the strategy table.
When considering any variation of goals, keep in mind that, when all is said and done,
there are really three strategies. The first two are a little lame, but they’re done all the time.
The third is more exciting, but naturally it’s more complicated.
The first strategy is to do nothing. We’d let a brand sink or swim on its own with no infusion
of marketing budget (and we’ll probably watch the brand decline). This passive strategy might
be used on a cash cow brand, to funnel funds to another brand that needs resource support.
Figure 16.6
SWOT:
Strengths,
Weaknesses,
Opportunities,
and Threats
Favorable
Internal
(Corporate)
External
(Environment)
Unfavorable
Threats
Weaknesses
Opportunities
Strengths
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286 Part 5 Capstone
The second strategy is to do nothing differently from the status quo. We may have a
mature brand in a stable market, so we maintain business as usual—same price, same mar-
keting support, etc. This strategy is somewhat non-thinking. If business is good, keeping on
track seems sensible enough (i.e., “Don’t fix what’s not broken”), but when business drops
or competitors step it up, a status quo strategy won’t yield good results.
The third strategy is to do something different. Then the question is: What do we wish to
change? Very common, very popular, and very timely goals follow.
• Let’s Make More Money! Most organizations have monetary goals: A company can
set sales objectives in terms of some currency or relative to other providers (i.e.,
market share goals). We can aim for profitability objectives, such as routing some
cash cow monies toward some question mark brands. Sales goals can be stated in
terms of units or of change from last year or quarter. Goals can be stated per region,
e.g., minimal or typical growth in the company’s standard markets but more aggres-
sive growth in the company’s newer markets. Sales goals can be formulated against
investments made toward the current sales, per the philosophy underlying the ROI
or ROM (return on marketing) or ROQ (return on quality initiatives), etc.
• Let’s Delight Our Customers! A company can try to enhance customer satisfaction,
create an attractive loyalty program to lock in customers, reward customers for being
influential and spreading good word-of-mouth, etc. If marketing research indi-
cates customization is valued, the firm might investigate whether it can offer such
personalization profitably. Perhaps CRM systems could be used to tailor messages
to the target segment better and, in turn, reducing acquisition costs and enriching
customer lifetime value.
• Let’s Reposition Our Brand! Strategic goals must integrate all 4Ps, but sometimes it
seems like the focus is more on one P than the others. For example, goals regarding
better promotional communications can include spending our advertising dollars
more wisely, figuring out which media make most sense to our segments and for
which part of the message. Place or distribution goals involve identifying what
channels the target customers find most desirable. Perhaps multichannel touch
points are no longer needed; e.g., some industries are successfully moving their
value-sensitive segments to self-service or lower-cost channel interactions.
• Goals About Broader Social Concerns. Different goals arise when a company broadens
its scope and sets goals beyond marketing and sales per se. The goals may reflect the
health of the broader organization such as human resource and internal marketing
(e.g., employee wages and benefits, career development, reduction of turnover, etc.)
or societal concerns—giving back to “context” C (e.g., charitable or community
contributions, boosting the stability of local employment, demonstrating leadership
in environmentally friendly business practices, etc.).
The core of marketing is 5Cs, STP, 4Ps. Typically, we don’t have control over all the
5Cs, but the other elements have some malleability. So, shall we seek new target segments?
Change one of the 4Ps? If we change one P and we’re truly practicing integrated marketing
and wish to build consistency for brand equity, we need to be sure to examine how the other
Ps are affected. For example, if the boss says, “We should raise prices,” think through what
the other Ps should look like to ensure that a consistent message is sent to the customer.
Corporate vision goals, not unlike personal goals, can be complex, numerous, intercon-
nected, and at times overwhelming. And, like individuals making progress by focusing, com-
panies usually make faster progress by choosing the goals that, at the moment, for the times
(see the 5Cs) and for the company’s philosophy seem the most important. After these goals
are achieved or modified, the company can stake more territory and achieve more goals.
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287Chapter 16 Marketing Strategy
16-4 KEY MARKETING METRICS TO
FACILITATE MARKETING STRATEGY
How do we see our strengths and weaknesses through the eyes of customers? How do we
know what our competitors are doing? We monitor marketing metrics.
An old management adage goes, “You can’t manage what you don’t measure.” More re-
cently, it’s morphed into, “You measure what matters.” The clear implication is that, if some-
thing is important to a company or its CEO, they’re going to want to know how the
company is doing. So it needs to be measured.
Measures are important both in the assessment phase
(how we are doing) and in the strategic planning phase
(what measures we will raise or lower). So let’s consider
some of the measures on goals that a company might pursue.
First, we’ll surely keep an eye on a company’s profitabil-
ity. It was the beginning of this chapter, and it is the moti-
vating basis of a company’s actions.
But let’s look beyond just finance. We can also measure
indicators such as customer or employee satisfaction, a company’s stewardship of the en-
vironment, etc. In terms of marketing, we can look at sales, share, average prices, levels of
awareness, and penetration in trial. Some of these measures should be correlated with a
company’s financial health. Some indeed will be leading indicators.
Much has been made lately of a company’s so-called dashboard. The idea is that there
are many indicators of a company’s success, like the indicators on your car’s dash repre-
senting fuel, speed, engine temp, and so forth. Alternatively, take the sporting analogy of a
scorecard: How are we doing on RBIs, errors, scoring, etc.? Choose your analogy, but the
point is that companies also have multiple dimensions in which they can be measured.
Some measures will confirm the ways the company is great and has advantages over com-
petitors. Other measures can serve as a diagnostic in identifying problems that the compa-
ny can strive to perfect. Anyway, whether we’re keeping score or we’re monitoring the dash,
what are we looking for?
Measure what matters and make
your measures matter.
There are lots of
ways to
proceed.
Marketing
strategy helps
define your
choice.
N
om
ad
_S
ou
l/S
hu
tte
rs
to
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288 Part 5 Capstone
Figure 16.7 shows what a simple dashboard might look like for a company (or brand)
whose sales are good, market share is good, profit margins are so-so, and employee and
customer satisfaction aren’t so great. What story does this profile of indicators tell? This
particular brand operates in monopoly-like conditions; thus sales and share are indeed
strong because the customers don’t have many alternatives. The lack of options might con-
tribute to the relative poor status of customer satisfaction. The company’s weak profit mar-
gins suggest that it’s not managing cost efficiently, which does not portend well for the poor
employee satisfaction. Why are they dissatisfied? Are employees not paid well? Are they
working with old equipment? The solutions to either of these problems would cause the
profit margins gauge to tilt farther to the left.
Dashboard indicators represent information analogous to what our car is trying to con-
vey: Are we driving on empty? Are we going too fast? Is our engine overheating? What’s
the temperature in the car? And so on. When the gauges head to the center or to the left,
there’s not necessarily reason for panic, but the levers give us a heads-up: Is it time to ease
off the pedal (stop pushing our employees), go get fuel (invest in new plant equipment),
turn the A/C down (conduct some marketing research to find out what bells and whistles
would make our customers happier), etc.?
Dashboards can take any shape. Figure 16.8 collects a number of diagrams in different
formats that together express the attributes that this company cares about: revenue per
customers over time and loyalty per segment, market share against the two primary com-
petitors, quarterly customer satisfaction confidence intervals, and employee turnover per
department. Use whatever format works for you. What’s important is that you’re overseeing
multiple measures to optimally manage the company.
There are parts of marketing strategy that may sound overwhelming, but you can do it,
and you can do it well! Remember: if you think about your customers, try to think like your
customers, and simply try to please your customers, you will beat the competition. It is that
easy. Really!
Dashboard Measures
Financial: Sales, profits
Marketing: Share, customer satisfaction, average prices charged
HR: Employee Satisfaction, low turnover
Operations: Lean, mean, green, customer-pleasing machine
Figure 16.7
Dashboard
Sales Profit
margins
Employee
satisfaction
Customer
satisfaction
Market
share
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289Chapter 16 Marketing Strategy
Figure 16.8
Marketing
Metrics
Visualization
Average revenue per customer
Goal
Sales
Q1 Q2 Q3 Q4 Q1 Q2
Loyalty per customer segment
Men, 20–30
Men, 40–60
Women, 20–30
Women,
40–60
20 40 60 80 100%
Employee turnover per dept.
Eng. IT Mktg Service
Customer satisfaction CI’s
Avg
Q1
0
20
40
60
80
Q2 Q3 Q4 Q1
Market share
Compet B
Compet A
us
High
Low
Ag➞Manufacturing➞Services
A recent report by McKinsey’s Global Institute describes how manufacturing is important for
developing and advanced countries. In developing countries, it is commonly acknowledged that
manufacturing helps take a country’s citizens from an agricultural subsistence to circumstances
with greater incomes and living standards. By comparison, in already developed countries,
manufacturing is still where a great deal of innovation and competitiveness occurs, R&D grows
and contributes, exports are created, and indices of productivity grow.
Globally, manufacturing typically creates some 16% GDP and 14% of employment. As
manufacturing grows toward 20-35% of GDP, its relative contribution declines, not because
manufacturing itself is in decline, but because as wages have risen and consumers have money
to spend, they begin to spend more money on services, so it appears that service sectors grow
and accelerate. Governments and educational systems are considered important conduits
to the growth of either manufacturing or services, and to the transition from the one to an
emphasis on the other. The results of manufacturing continue to dominate international
trade—70% compared to 30% services, which are more likely to be created and consumed
locally.
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290 Part 5 Capstone
MANAGERIAL RECAP
Many marketing strategies can be successful (see Figure 16.9):
• Before even thinking about making changes, we need to conduct an honest self-assessment. What does our brand portfolio look like
and what are our strengths and weaknesses, as measured by our dashboard indicators?
• Then we’re ready to consider what we’d like to change and how we’d like to change: our target segments or our product, price, place,
promotion.
• There are many ways to increase profitability, and some may fit our corporate culture and strengths better than other ways. There are
also goals beyond profitability.
I. Growing sales volume
A. Grow the market, size of overall pie
B. Grow our market share, our slice of pie
C. More revenues from current customers
1. Up sell them our expensive offerings
2. Get them to buy more frequently
D. Steal customers from competitors
E. Find new customer segment(s)
F. Create new products for current/new
customers
G. Reduce our customers’ brand switching
1. Raise customer satisfaction & brand equity
2. Add value through loyalty program
3. Raise switching costs
II. Changing price
A. Cut price, but worse margins and rely on
volume
B. Raise prices
1. Cue to quality, customers price insensitive
2. Seek upscale buyers
III. Decrease costs
A. Decrease variable costs
1. Find less expensive suppliers
2. Outsource
3. Be niche provider
B. Decrease fixed costs
1. Cut back R&D (if we’re not “innovative”)
2. Spend less (or smarter) on advertising
3. Milk cash cow brands
IV. Ansoff Product-Market Growth Matrix
A. Market penetration
B. Market development
C. Product development
D. Diversification
V. BCG
A. Star (large share, growing industry)
B. Cash cow (large share, non-growth industry)
C. Dog (small share, slow market)
D. Question mark (small share, growing market)
VI. The GE model
A. Market attractive, business strength
B. Weight, combine, matrix insertion
VII. Porter
A. Cost leadership
B. Differentiation
C. Focused strategy
VIII. Treacy and Wiersema
A. Operational excellence
B. Product leadership
C. Customer intimacy
IX. Positioning matrix
A. High quality, high price, selective promotion, exclusive
distribution
B. Basic quality, low price, broad promotion, mass
distribution
C. If veer from either, have a good reason
X. Company & Portfolio Strengths
A. Offense or defense?
B. Aggressive (risk-seek), conservative (risk averse)
C. Leader or (quick) follower?
XI. Currently popular goals
A. Make more money
B. Delight our customers
C. Reposition our brand
D. Broader societal concern
XII. Ultimate strategy choices
A. Do nothing
B. Do nothing different
C. Do something: What? See above.
Figure 16.9
Strategies,
Strategies,
and More
Strategies
to Increase
Profits
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291Chapter 16 Marketing Strategy
Chapter Outline in Key Terms and Concepts
1. Classic Marketing Strategy Models and
Frameworks
a. Ansoff ’s product-market growth matrix
b. The BCG matrix
c. The General Electric model
d. Porter and strategies
e. Treacy and Wiersema strategies
f. SWOT
2. Types of business and marketing goals
3. Key marketing metrics to facilitate marketing
strategy
4. Managerial recap
Chapter Discussion Questions
1. Consider the Treacy and Wiersema strategies for mar-
ket dominance. Which of them (operational excel-
lence, product leadership, customer intimacy) do you
think guides these companies: Calvin Klein, Harley,
Hermes, Lego, Microsoft, Nokia, Starbucks, Virgin.
2. What strategies would you say dominate cor-
porate philosophies in these countries: the U.S.,
China, Japan, Germany, Brazil? Are their “brand
managers” watching the right indicators?
3. Think of a company you’d like to interview with,
and list 1-2 specific factors for each of Porter’s five
forces.
Video Exercise: Blu Dot (6:00)
Blu Dot cofounders Maurice and John discovered they did not like the furniture they could afford
after graduating college and could not afford the furniture they wanted. Blu Dot was conceived as
a business venture to address what was perceived as a void in the U.S. furniture market. The furni-
ture market can be segmented into several levels, ranging from the promotional level of inexpensive
furniture on up to expensive, high-end furniture that is custom designed and accessible only through interior
designers. The challenge for Blu Dot was to merge the affordability of the low-end furniture market with the crafts-
manship and quality of the high end. Each Blu Dot product is expected to rely on a smart design composed of
two components, be simple to put together, use straightforward materials and manufacturing processes, pack
flat, ship efficiently, and be attractive and interesting. Blu Dot’s pricing is determined on the basis of cost plus the
specified profit margin needed.
Video Discussion Questions
1. What would a SWOT analysis of Blu Dot reveal to a marketing professional?
2. What are Blu Dot’s strategic goals?
3. Is Blu Dot’s strategy one of cost leadership, differentiation, or focus? Explain your answer.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
292 Part 5 Capstone
MINI-CASE
How to Watch Movies
Consumers looking for entertainment have many options. Each content provider has business strengths and
weaknesses. For example, Netflix has a recommendation engine and a relatively vast library for streaming. Hulu
can be freely accessed because of advertising sponsorship, but has limited selections, movies in particular, and in
availability durations. Cable services’ “on demand” features are not free, but some customers like the convenience
of one-stop shop for cable and phone, etc., and selections are limited (in numbers and duration). Redbox has
altogether different model, with vending for DVDs located in popular places (e.g., near McDonald’s, in airports),
interchangeable pick-ups and returns locations, and of course limited selections.
Case Discussion Questions
1. How would you advise any of these companies with regard to their strategy, positioning, and tactical execu-
tion? Take one (Netflix, Hulu, cable, or Redbox), and draw a scenario in which strengths might be retained,
weaknesses strengthened or eliminated, and future directions pursued to make the business model more
solid, more profitable, and less prone to competitive matching or attack.
2. Could a Blockbuster type of shop re-enter this arena; i.e., a storefront where consumers go to pick up and
drop off DVDs, or is that customer model now defunct? If you could imagine it, what would you recommend
they do? If not, imagine you were to design an entertainment provider from scratch (movies and video games,
mostly), what would it look like—STP and 4Ps? What elements in the 5Cs are likely to be most relevant to
address in the near future?
3. If these companies start looking even more similar and commodity-like in the next 3-5 years, how would you
advise one of them to break out of the pack and distinguish itself by offering . . . what?
4. How can any of these providers take greater advantage of a CRM philosophy? Most of them have little by way
of retention programs, e.g., customers can cancel or rejoin anytime. Are there any benefits for staying?
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293
MARKETING PLANS
17-1 HOW DO WE PUT IT ALL TOGETHER?
You’ve been reading and reading about marketing. Now, as Nike would say, we need to just
do it.
As Figure 17.1 indicates, the marketing plan begins with an executive summary. It
provides a brief overview of the content of the larger planning document that follows.
The marketing plan retraces the marketing framework. Figures 17.2 through 17.5 collect the
main themes and call out questions from each of the previous chapters. Compiling these
provides a good review, and seeing all the questions posed together gives perspective on
how the pieces fit together.
A marketing plan begins with an assessment of where things currently stand. This sit-
uation analysis is documented by the 5Cs. We draw on those Cs to develop segments
and choose segment(s) to target, per the strategizing that is STP. The STP section usually
involves summaries of marketing research, e.g., a segmentation study. Marketing and finan-
cial goals then stipulate the objectives the company wishes to achieve and how success and
ROI will be measured. The next big section is an action plan for positioning by implement-
ing the marketing mix 4Ps. Typically, this section is long and detailed because it contains
both the big picture on strategy and also the nitty-gritty details on tactics.
There are many workbooks designed to assist in writing a marketing plan.1 They func-
tion like an interviewer, asking multitudes of questions about your brand. We’ll proceed
similarly.
The questions and logic in Figures 17.2 through 17.4 offer a static approach, but we have
also created an interactive module, available online to guide you in creating a marketing
plan.
5Cs STP 4Ps
Product
Price
Place
Promotion
Segmentation
Targeting
Positioning
Customer
Company
Context
Collaborators
Competitors
How do we create a marketing plan?
How do we put it all together and turn marketing thinking into marketing magic!
Managerial Checklist:
17
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294 Part 5 Capstone
In this chapter, we’ll illustrate all three parts of a marketing plan, applying it to one of
three different marketing scenarios: marketing a nonprofit, getting into social media, and
launching a new service. Alternatively, we could look at the plan for a single product, but
it is better pedagogically for newbie marketers to see a breadth of examples to enhance the
likelihood that they can apply the tools beyond the single exemplar.
17-2 SITUATION ANALYSIS: THE 5CS
We’ll begin by addressing the 5Cs with the scenario of being a marketing consultant for
a nonprofit. The 5Cs of the marketing framework are blown up in Figure 17.2, with the
managerial checklist questions posed from their respective chapters to remind us of the
basic issues. Table A17.1 in the appendix to this chapter provides the marketing questions
in the interactive marketing plan builder.
Figure 17.1
The Sections
of a Marketing
Plan Follow
the Marketing
Framework
Marketing
plan 1. Executive summary
2. Situation analysis (5Cs)
3. Market analysis
and strategies (STP)
4. Tactical plans (4Ps)
5. Appendices
Executive SummaryTable of Contents
A good executive
summary is no longer than
1 page. It is a minireport,
stating highlights and
recommendations. It is
self-contained and not a
teaser. Details are
provided in as many
appendices as necessary.
This summary is usually
written in prose (full
sentences), not bullet
points.
Figure 17.2
Situation
Analysis: 5Cs
• Political and legal
(stable partners, new
laws)
• Economy (growth,
consumer mood)
• Society (demographic,
attitudes)
• Technology (IT, other
machines); threats or
opportunities?
2.3 Context
• Good supply chain
relations?
• Good relations with
downstream channel
members?
2.4 Collaborators
• Who are our major
competitors,
broadly defined?
• Their strengths?
• How might they
respond to our
actions?
2.5 Competitors
1. Executive summary
2. Situation analysis (5Cs)
3. Market analysis
and strategies (STP)
4. Tactical plans (4Ps)
5. Appendices
Table of Contents
2.1. Customer
2.2. Company
2.3. Context
2.4. Collaborators
2.5. Competitors
Situation Analysis
• Describe segments’ demo
psychographics, buying
behavior), level of
satisfaction (measured?).
• Loyalty and CRM program
useful? Get RFM, CLV.
• Price sensitive?
• Channels used?
• Changes now, future?
• Compare current and
potential customers.
Nonbuyers—why not?
2.1 Customer
• Who are we (known
for, good at)? Do a
SWOT.
• What do we want to
become? Formulate
strategy
2.2 Company
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
295Chapter 17 Marketing Plans
Company. In a marketing plan, we’ll start with a corporate self-examination. Much of the
company C is knowing our own strengths, such as in a SWOT analysis, and knowing our
goals, which we’ve delineated in the strategy chapter.
Recall the discussion in Chapter 15 about clustering types of NPOs. There seems to be
an opportunity to create an NPO that provides scholarships to offset university students’
expenses, especially if it is to achieve strong brand recognition (like so many successful
medical or children’s charities). Thus, an NPO was registered last year, called “Brain Trust.”
Some progress has begun, thus far only locally, but several good lessons have been learned
that will facilitate rolling out nationally next year. So far, the answers to the company C
questions on the marketing plan would be:
Company Questions Proposed Answers
• What are we known for?
Do a SWOT!
• A central point to coordinate the receipt and dispersal of scholar-
ships, to enhance college attendance and graduation rates.
• Who do we want to become? • A brand as well-known as Unicef or World Wildlife Fund so that we
would be the first NPO that donors would think of when wishing to
demonstrate their largesse.
Customer. If we don’t start with a good understanding of our customers, we’re toast. The
only way to know our customers is to get data on them. We can begin by studying second-
ary data to know the background trends, but at some point, we’re going to have to roll up
our sleeves and get in touch with our customers. We need to get fresh data on our current
customers, past customers, potential customers, our competitors’ customers—everyone.
Many NPOs have reasonably good data on their donors. Last year, Brain Trust began
by renting lists of 50 universities’ alumni and 10 cities’ voter registration lists. Each person
on the lists was sent two solicitations: One was a hardcopy mailing in mid-December (to
cash in on the holiday spirit or in anticipation of annual taxes). The other was via email for
some people (and hardcopy for others), and the months were varied (in an experiment to
see when and how responses might be most favorable).
Donors were allowed to specify how their dollars are to be spent in terms of (1) the
kind of students to support and (2) the particular universities they’d attend (as noted by the
alumni lists). However, what was obviously the most appealing was the choice to support
students by the topics they were interested in studying. For example, some employees from
DuPont and 3M (at least according to their addresses) sponsored chemical engineering
students, whereas several alumni of a liberal arts college near Los Angeles earmarked their
provisions for drama students, etc.
Consider writing
a marketing plan
for any product or
brand.
Tw
in
D
es
ig
n/
Sh
ut
te
rs
to
ck
.c
om
Ze
yn
ep
D
em
ir/
Sh
ut
te
rs
to
ck
.c
om
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296 Part 5 Capstone
The target age of donors from the alumni lists were between 30 and 60 years old.
The voting lists’ targets ran a little older, between 45 to 65.
Most donors enclosed checks of $20 or $50. Brain Trust doesn’t yet have a loyalty pro-
gram, but it is being scrupulous about putting any new information into its CRM database
(which was first populated by the alumni and voting lists). For donations of $100 or more,
the CRM database triggers the NPO to send out a nice calendar (each month has a picture
of some well-known brainiac).
Brain Trust ran a couple of focus groups to explore various elements of their programs.
One of the themes they heard was that people thought they had to donate large amounts of
money, and they’d be embarrassed to give $5 or $10. In truth, obviously the NPO could use
even small donations. With that description of the NPO’s donors, we fill in their customer
answers.
Customer Questions Proposed Answers
• Demographics • 30–60 or 45–65 years
• Psychographics • Care about higher education
• Buying behavior • Give $20 or $50 once a year
• Customer satisfaction? • Never measured, assumed okay if repeated
• Do we have a loyalty program? • No, but give a calendar for $100+ donation
• Why don’t non-donors donate? • They think they have to give large amounts.
• Channel for donors? • Send check by mail
• Are our buyers price sensitive? • Let donors know that giving only a little is okay and to
give more frequently.
• Changes to expect? • Should grow as awareness grows
Context. Regarding context, assess the macro-environmental issues you must attend to,
e.g., legal, technological, social changes, and trends. If you’re working in the industry, you’ll
be familiar with these factors. If you’re new to the industry or job, start reading in-house
white papers and go online and study up. Here are the basic questions to pose for an under-
standing of the business context:
Context Questions Proposed Answers
• Economy • Concerned with economy
• Politics • Unknown; never tried a different appeal to Democrats and Republicans
• Legal • N/A
• Technology • Move more giving online, perhaps online videos of students’ testimonials.
• Societal • Emphasize the many benefits of an educated populace.
The NPO hopes giving will increase as the economy recovers; people probably don’t
want to give away money that they think they might need. The examination of the context
factors pointed the Brain Trust people to something they hadn’t considered before: the
possibility that the Democratic and Republican donors might seek different things (e.g.,
education vs. fiduciary responsibility). So now they’re thinking about how to explore that
idea. No real legal issues have popped up, so they count themselves lucky (and we’ll leave
it alone). In terms of technology, it obviously would be easier for the NPO and more
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
297Chapter 17 Marketing Plans
cost-effective if more donors would give directly online. In terms of broader societal con-
cerns, the NPO mission seems to be already fairly enlightened.
Sometimes marketers gloss over these contextual factors, and sometimes that’s okay.
After all, many of these factors are relatively stable; we revisit the questions only as we see
changes in the environments or as we change our company or brand or target segments.
In addition, early in one’s career, strategic decisions like, “Should we go into Indonesia or
Brazil next year?” are few and far between. But, as you advance up the corporate ladder,
increasingly your job responsibilities will become more global (literally), and you need to
do a quick check to convince yourself that the factors aren’t relevant in the new (to you)
marketplace or, when they are, how they affect your goals and plans.
Collaborators. Networks of support functions can be complex. Even good relationships
between providers in the supply chain and the firm or with the channel members down-
stream from the firm can be in flux, such as when new products are offered, with implica-
tions of shared shelf space or shared ad space, etc. We’ve discussed various means of trying
to maintain good relations, so we’ll begin by documenting the nature of those network ties.
The NPO admitted that they hadn’t thought about collaborators per se before trying to
do this marketing plan exercise. But doing so prompted them to consider who its suppliers
and distribution partners were. One sense of the term “supplier” is the route through which
the NPO obtained its list of potential donors. While that seemed to work, it also seems
limiting going forward. In terms of the downstream channel, the NPO began to think
about where they might place ads to reach a broader base.
Collaborator Questions Proposed Answers
• Good relations with supply chain? • Fine so far, perhaps try to partner with some
professional associations?
• Good relations with distribution channel
members?
• Perhaps post ads on professional sites, LinkedIn,
etc., to broaden appeal
Competitors. In the spirit of a SWOT analysis, our strengths are defined somewhat rela-
tive to other providers in the marketplace. The discussion at the NPO was grim when the
marketing plan turned to the question of competitors. While there may be few or no direct
competitors (focused on higher ed), there are many competitors in the sense of an NPO to
whom a person or household might give their donor dollar. Furthermore, many competitors
dominated due to their very strong brand names. (It had to be pointed out to the NPO that,
in fact, there are even zillions more NPOs, albeit relatively less known.)
Competitor Questions Proposed Answers
• Who are they? • Any donation behavior: medical and health, museums and the arts, etc.
• Competitors’ strengths? • Some have very good brand names.
At this point, we compile our NPO answers and have the basis for part one of the mar-
keting plan: the situation analysis.
Situation Analysis for the NPO
Our current customers are: 30–65 years old and care about higher education. Their sat-
isfaction is assumed okay if they donate repeatedly. We’re beginning a CRM program
and issue a calendar if they give $100 or more. This is what our customers do: They
give $20 or $50 once a year, they send a check by mail, and they are price sensitive.
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298 Part 5 Capstone
We need to tell them that giving only a little is okay and get them to give more fre-
quently. Here are possible customer issues to consider: Giving is not strong yet, per-
haps due to the economy or lack of awareness, so could we develop a loyalty program
and convince them that giving only small amounts is still helpful.
Currently, as a company, our position is our uniqueness in the NPO world to
support higher ed. This marketing plan is to further strengthen brand recognition.
Our current business environment reflects people’s concerns with the economy. The
NPO has never tried different appeals to Democratic and Republican donors; it is possible
they seek different things. No legal issues are looming. We would like to move more of our
donors’ giving online, and perhaps there we could post small video clips of our students.
We might be able to leverage more donations if we partnered with some profes-
sional societies. We might consider a greater ad presence online, e.g., via LinkedIn.
Our competitors are many—whoever receives donations. In particular, certain
competitors may be a threat, given the strengths of their big brand names.
17-3 STP
With the 5Cs nailed down, we should have a good background for understanding and
interpreting our customer segments, which in turn offers a clearer basis for choosing the
segments to target. Figure 17.3 blows up the STP portion of the marketing management
framework for our planning purposes, and Table A17.2 in the appendix emulates the inter-
active module on the STP strategic questions and choices. We’ll start with segmentation,
and recall from Chapter 3 that numerous variables could be relevant: demographic, geo-
graphic, psychological, behavioral, and more.
We’re changing examples now, leaving the NPO behind, to look at STP in the context
of a social media host company. This new scenario arose because some recent alumni have
asked us to give some marketing consulting advice to them, to be passed along to a friend
named J.J., who runs a social media and social networking site. The purpose of the site is
to host friendship communications like any other social network service, but J.J. wants to
sell travel vacation packages through testimonials and word of mouth. (We’d have to think
through whether we believe this is a viable business concept, but for now, we’re simply try-
ing to create the heart of the STP part of a marketing plan.)
Naturally, to date, J.J.’s site isn’t the size of Facebook, but he’s got about 800,000 users
who sign on at least once a month. When people sign up (for free), they are asked some
Figure 17.3
Market Analy-
sis and Strate-
gies (STP)
• What kinds of
customer knowledge
do we need to form
segments? (Do we
have demographic,
geo, psych data? Shall
we run surveys?)
• Use cluster analysis to
identify segments, and
descriptive data to
validate the “marketing
segmentation”scheme.
3.1 Segmentation 3.2 Targeting
• Choose segments to
target:
• “Size” the market,
estimate its
pro�tability (lifetime
customer value).
• Consider �t with
corporate goals, and
actionability (can we
�nd target).
3.3 Positioning
• Positioning via
perceptual maps.
• Where are we in the
positioning matrix?
• Write position
statement.
1. Executive summary
2. Situation analysis (5Cs)
3. Market analysis
and strategies (STP)
4. Tactical plans (4Ps)
5. Appendices
Table of Contents
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
299Chapter 17 Marketing Plans
basic demographic questions, which, of course, J.J. can tie to their online behavior. He can
see that most of his frequent users are young (mid- to late-20s), most of whom are online
to stay connected to friends. A very small proportion (less than 10%) click through and
actually buy trips. He has almost no users 40 years old or older. He’s okay with a younger
profile, as long as they have some money to spend. He realizes that attracting people in
their 30s and even 40s is likely to bring in more people with greater discretionary income.
Compiling that description, we can characterize J.J.’s users, nonusers, and his aspirant users:
Segmentation Questions Proposed Answers
• Current customers • Mid- to late-20s, some stay connected to friends, some click through and
buy trips
• Nonusers • 40s and older
• Ideal customers • Late-20s+ with good disposable income
In targeting, we need to choose segments that are big enough to pursue. Specifically,
we’ll consider whether the segments (1) have potential to be profitable enough, (2) have
enough growth potential to pursue, (3) fit in with our corporate goals, and (4) are action-
able, which often means finding an easily identifiable characteristic to serve as a proxy for
the more central quality we’re seeking.
For the online social network service, we helped J.J. crunch some numbers. He’s a
geek and loved seeing what we could do. It was already obvious to him that he wasn’t
making money off the people who went online to network but not to buy, but he hadn’t
previously had the concept (or the value) of his acquisition costs pointed out before.
Thus, not only were these people not bringing in money, they were costing him real
money. The people who eventually traveled took about a trip once every other year (the
site is only about five years old, so these data, while better than nothing, are probably
a little “soft”). The average trip purchased was $1,350, so, on average, this segment
brought in about $625 a year. The stark monetary picture startled J.J. who had tried for
a young, hip Website. His alumni friends are encouraging him to not worry so much
about being hip and instead worry more about money, and therefore probably bringing
in a slightly older, way richer crowd. They also helped him begin to prioritize his seg-
ments for potential outreach.
Targeting Questions Proposed Answers
• Estimate size and
profitability
• Friendship connectors bring in no direct $ and only minimal from WOM; buyers
are worth $625 a year (they take one trip every other year, approx. $1,350).
• Corporate fit • Maybe aim a little older; maybe we should stop trying so hard to be hip
(we may be turning off older crowd).
• Rank desirability
of segments
• 25–35—better disposable income than younger, and more time than 35–50
crowd
The P of STP is positioning. Positioning is executed via the 4Ps, and we’ll turn to them
shortly. We also recall from Chapter 5 other principles of positioning including perceptual
mapping and writing a positioning statement.
The social media network site is obviously not the only game in town. There are also
plenty of travel channels. J.J. wants to offer high-end travel, and the notion of the referrals
was originally to help ensure that only similarly high-end others would be traveling com-
panions on the trip. J.J. was thinking about instituting an invitation-only threshold to sign
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300 Part 5 Capstone
on and become members, thinking that this exclusivity would be a good signal and would
distinguish his site from many others (in social networks or travel). The problem then
becomes how to seed the invites. As with any service that is fundamentally network based,
this service would succeed better with some scale, but his numbers seemed acceptable al-
ready in this regard.
Positioning Questions Proposed Answers
• High quality and high price?
Or low quality and low price?
• High quality: Prices are high but we say they’re good value.
• Compare to competitors? • No one is exclusive.
• Distribution: mass/exclusive?
Promo: heavy/light?
• To succeed, need some scale, which suggests wide availability/
presence and mass promo if cheap (e-referral program).
Now we compile our social media answers and have the basis for part two of the mar-
keting plan: strategic development.
Strategic Development for Social Media Network Host
Based on our marketing research, customer segments may be described by age,
online activity, and purchase activity of the trips. We currently serve the segment
of young 20s. Some stay connected to friends; some click through and buy trips.
We are considering moving toward (or also) serving mid-20s+ with good dis-
posable income. And for now, we are not interested in serving customers in their
40s or older.
To serve a customer base of sufficient size and profitability, we should pursue:
Friendship connectors bring in no direct money and only minimal from WOM;
buyers are worth $625 a year (they take one trip every other year, approx. $1,350).
We believe that a focus on this customer base fits with our strategic corporate goals:
Maybe aim a little older, maybe we should stop trying so hard to be hip (we may be
turning off older crowd). We considered other segments, and their relative attractive-
ness is as follows: 25–35; they have better disposable income than younger visitors,
and more time than 35–50 crowd.
In terms of positioning, overall, we will seek a strategic market position of: high
quality. Prices are high, but we say they’re good value. This market space should
compare favorably to our competitors’ positions: No one else is exclusive. The mar-
keting mix variables are described shortly. As an overview: To succeed, we need some
scale, which suggests wide availability/presence and mass promo if very cheap (e.g.,
e-referral program).
17-4 THE 4PS
After segmentation and targeting, we will begin to craft the tactical decisions to achieve
our desired product positioning, using all 4Ps: product, price, promotion, and place. In
Figure 17.4, we see the key questions for each P as we had elaborated on in each of their
respective chapters.
Regarding the product P, there are numerous questions to address in marketing
planning:
• Do we seek a high-end quality position in the market place, or one of offering value
to our customers?
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
301Chapter 17 Marketing Plans
• What is the assortment of product features we wish to offer to satisfy our customers
and attract new customers? And what customer service plans supplement our core
business?
• Is this a new product? Are we taking our product to a new segment?
Figure 17.4
Tactical Plans:
4Ps
• How is our good or
service distinct vs.
competition?
• Our brand strategy,
brand associations,
brand worth?
• Where is our brand in
its “product life cycle”?
• Watching trends?
• How generate buzz?
• Are we hi-end quality
or value-based?
• Are we pursuing new
products, and/or new
segments?
4.1 Product
1. Executive summary
2. Situation analysis (5Cs)
3. Market analysis
and strategies (STP)
4. Tactical plans (4Ps)
5. Appendices
Table of Contents
• Marketing goals of ad
campaign?
• Kind of message?
• How test if effective?
• Concept and copy tests
• After ad, get memory
preference, intentions
• Choose media outlets
and weight, integrate
IMC.
• Monitor effectiveness of
advertising media.
• Re position, promote a
lot or a little, are we
going after mass
markets or exclusivity?
4.4 Promotion
• Do demand and
elasticity enter price
decisions?
• If low, do break-even.
• For high, assess price
sensitivities.
• Keep prices constant
or allow changes?
Coupons, discounts,
loyalty perks?
• Use prices to attract
different segments?
• Are we hi-quality and
skim prices or value
products with low and
penetration pricing?
4.2 Price
• Distribution network
intensive, selective?
• Channel partners good
or need to resolve
con�icts (if so, choose
approach)
• Role in our strategy of
retailing, online, sales
force?
• Customers have
suf�cient access?
• Our sites consistent re
positioning, e.g., mass
or exclusive?
4.3 Place
To do so, we switch once again to offer a breadth of examples and trigger different
thoughts. To illustrate the 4Ps, we’re going to focus on an engineering colleague’s innova-
tion. It’s a hovercraft in a seated chair form. This fellow had been playing around with the
still relatively new models of hoverboards that look like skateboards. But even as he tried to
create improved models, he found that people would be totally excited about the concept
but when they tried it, they’d inevitably lose their balance and fall off the first several tries.
For some people, depending on how badly they got dinged up, the first fall was enough to
kill their interest. For others, after several falls, most people could stay on the hoverboard
for 30 seconds. He figured that amount of time would increase with practice. Still, he didn’t
want to be responsible for creating a product that nearly universally resulted in initial falls,
figuring he, or the company he was hoping to create, would get sued left and right.
So he fooled with the model a bit, attaching the hover mechanics to a plastic molded chair
(he knew he could make the chairs look nicer before launching the product). He was focused on
working out the hovering ability of the machine and the maneuverability. The resulting machine
was operated with a pen-sized joystick on the right arm of the chair (a little like a motorized
wheelchair but of course without the wheels). With this model, balance was not an issue. If
there was an issue at all, it was that users who tested his beta-machine wanted to see how high
they could make the chair go. Altogether, it seemed that this new hovercraft had potential.
The tricky thing about new products, of course, is that they’re so new. We can recom-
mend a company to him that would conduct some interviews (and later surveys).
In terms of the basic product parameters, the thought was to position the hoverchair as
highly innovative, with a rather high-end price point. The features were mostly about fun,
and product was early in a life cycle. At the moment (prelaunch), there are no brand asso-
ciations yet, and he would need to build awareness in a new space.
Product Questions Proposed Answers
• Are we high-end or basic? • High-end, innovative
• What are our primary features? • Convenient, trusted, good product
• What are our brand associations? • Few due to minimal awareness as yet
• Where are we in the product life cycle? • Brand new
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302 Part 5 Capstone
Regarding price, the classic questions are:
• Do we want a high price to be consistent with high-quality positioning or for skim-
ming purposes early in a product’s life cycle, or low price to be consistent with a
value offering or for penetration early in the life cycle?
• What supplement pricing components will we entertain: couponing, occasional
discounting or consistent pricing (e.g., EDLP), warranties, loyalty programs and
rewards in some currency (price rewards or points)?
Your engineering colleague is leaning toward going to market, and you can almost see
the dollar signs in his eyes. In any event, given the novelty and sheer fun appeal of this
hovercraft, he very likely could demand a rather high price. Price discounts probably don’t
make sense yet, and as competitors enter the market (because if he’s successful, they surely
will), he will need to decide whether to keep his price high or drop it as competitors un-
dercut his product.
Price Questions Proposed Answers
• What are our customers’ price
sensitivities?
• Minimal: Price will be too high for many customers, but the
desire for the product may well make those who can afford it
relatively insensitive; i.e., willing to pay a high price.
• Offer occasional price discounts? • No reason: Benefits outweigh the high price, no competition yet.
• Beneficial to price differently
from competitors?
• No competitors yet, but keep price high to gain margin
and return on R&D.
For promotional campaigns, the questions from the marketing framework start us off:
• Do we want to promote a lot for mass exposure or minimally for a more exclusive
appeal?
• What is the goal of the integrated marketing campaign?
• What is the message of the advertising communications?
• What media fit our position, and have we attained true integration in the IMC?
This fellow hasn’t thought very far ahead yet and was somewhat aghast to hear how
much it costs to promote through various media. To help him keep costs down, and rea-
soning that online promotion might be a sensible place for his target segments, we can
help him think about search engine optimization (SEO). He also has an uncle high up
in Brookstone, so he’s hoping to place postcards or some literature in their retail stores
and catalogs. If search engines are all he can advertise on (due to little front money),
and posting some video demos on a Facebook page, then click-thrus would be a natural
measure of ad effectiveness. He wants to be able to afford a one-page print ad soon in
PC Magazine and another maybe in Road and Track, thinking these readers are like his
target customers
Promotional Questions Proposed Answers
• Our marketing communications
(advertising) goals?
• Search engines, get into Brookstone, videos onto
Facebook.
• How to measure ad effectiveness? • Click-thrus.
• How to budget across IMC? • Aim for PC Magazine, Road and Track.
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303Chapter 17 Marketing Plans
For place:
• Will customers be able to find us, e.g., online? For those who do go to the Website, does
it look good, and is it consistent with our intended positioning (e.g., exclusive vs. mass)?
• Is our online arm of the business truly integrated, or are we running an incidental
Website?
Place/Distribution Questions Proposed Answers
• Will we be extensive or selective? • Selective currently.
• Use more pull or push? • Pull.
• Any conflicts to resolve? • No, still forging relationships.
Lastly in developing a marketing plan, we’ll check to see whether plans for the 4Ps are
internally consistent, or are we sending confusing messages—say, signaling exclusivity (via
channel choices) while at the same time screaming “mass” (via low price points or poor
quality)? Are we confident that our proposed Ps are those that our targeted segment desires?
If we’re not confident, let’s go out and retest the mix. Yes, that’s a hassle. Yes, it means a delay
and spending more research money. (Or don’t do it—go ahead and launch something, watch
it fail, and then comfort yourself that, “Gee, at least we saved that research money!” Ha!)
We now compile our final data to create part three of the marketing plan: the 4Ps section.
Market Positioning via 4Ps
Our service is in the initial phase of the product life cycle. The quality should be con-
sidered by customers to be high end and innovative. Our customers primarily seek
novelty and fun. When they think of our brand, they still have minimal awareness or
associations because we’re so new.
Regarding price, our customer price sensitivity is likely to be minimal among cus-
tomers who can afford the product. Price discounts are probably not relevant, at least
yet. We are also not worried about segmentation pricing per se yet. We have no
competitors, though some are likely to follow. We’ll keep prices high to enjoy high
margins and an ability to reinvest in more R&D.
Marketing will
continue to
make consumers’
lives better!
bi
ke
rid
er
lo
nd
on
/S
hu
tte
rs
to
ck
.c
om
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304 Part 5 Capstone
Our marketing communications (advertising) goals are search engines and getting
into Brookstone and similar catalogs and stores. We will measure the effectiveness of
our promotions by click-thrus.
Our ideal distribution system may become more extensive, but currently it is very
selective. We expect to see consumer involvement and pull. We don’t have partner
conflicts yet because we’re still developing retail relationships.
In sum, this marketing plan offers a strategic vision to attain long-term customer
satisfaction, their loyalty, and our firm’s profitability.
17-5 SPENDING TIME AND MONEY
Finally, to make sure that the marketing plan isn’t pie-in-the-sky, we’ll include estimates on
scheduling and expenditures. These logistics and monetary details help keep the marketers
and extended team on track, and it’s the language of the C-suite.
Let’s revisit our friends at the Brain Trust NPO. Their immediate goals are to encourage
more giving online, to give support to more students, and to strengthen brand equity. Their
time line and budget estimates follow.
Time Line Marketing Activities Budget
September Create donor appeal materials $15,000
September–October Create marketing literature for reach beyond lists $17,000
November Refresh video and other content online $3,000
December Direct mailing of donation requests $15,000
January–March Measure response of December push $2,000
April Email version of donor requests $3,000
Eight-month program Total = $55,000
Obviously these time and monetary elements are rough, thumbnail sketches. They
should be included in the plan, along with other appendices as shown in Figure 17.5. When
the elements are elaborated in greater detail, then the estimates of durations and expenses
can also be made more precise. Doing both—more refined detail and more precise esti-
mates—would make the marketing plan much improved. The better the marketing plan
is, the closer it is to being actionable and the more accurately the implementation can be
forecast. When the components of the timeline and budget are more detailed, it enables
even better planning, audits of costs, tighter ops delivery, etc. Finally, more precision can
shed light on weaknesses in the plan, presumably before executing the plan.
1. Executive summary
2. Situation analysis (5Cs)
3. Market analysis
and strategies (STP)
4. Tactical plans (4Ps)
5. Appendices
Table of Contents
• Secondary data
�ndings to support 5Cs
• Focus groups current
brand associations
• Summaries of industry
reports and trends
analyses
Appendix A:
Marketing Research
Appendix B: CLV
• Survey feedback
• Ad copy testing
• Conjoint on line-
extension
Appendix C: Pilot
Tests on 4P
Recommendations
Figure 17.5
Typical Mar-
keting Plan
Appendices
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305Chapter 17 Marketing Plans
MANAGERIAL RECAP
We’ve pored over these questions about the 5Cs, STP, and 4Ps throughout the book. Few of the questions are trivial to answer. But in answer-
ing the prompted questions, you’ll have compiled the heart of the marketing plan. You now have the data of the document, and the rest is
just elaborating and editing. The marketing plan comes together as a document to remind you and your colleagues of the goals and to serve
as a guide in achieving those goals.
It’s important to know that all of marketing (strategy and planning) is iterative. In particular, something to look for is whether there is
internal consistency throughout the plan; it’s critical for good branding and good marketing that the whole of the plan be synchronous. For
example, after working through the 5Cs and STP, you might be well into the 4Ps when you might realize, “Oh shoot! This plan makes no sense,
considering what we said about our target [or whatever].” Thus, return to targeting, tweak, and move forward again.
In a sense, marketing plans are always works in progress. While they’re intended to keep everyone on track, they’re also not carved in
stone. Thus, as situations change, so must we modify the marketing plan. For example, we occasionally encounter challenges that bounce
us back up to earlier considerations that we thought we had nailed down. Perhaps we had ignored economic factors in the context because,
in our country, the economy is stable. Yet if one of our strategic goals is to go into underserved markets in places with poor infrastructures,
then our working assumptions have changed because now we must address new questions: how to set up shop locally with issues we hadn’t
encountered before. Thus, we have to go back and elaborate on the economic conditions under context in the 5Cs. That’s okay. That’s what
cut-and-paste is for. Revise!
Admittedly, our marketing planning exercise is just the beginning. There may be time to talk at just the big-picture level, but not so when
creating marketing plans. Be detailed, listing absolutely every factor even remotely relevant, to cover various contingencies.
Think like an entrepreneur. If this brand is your baby and you have responsibility for it, and if you and you alone will bring it to market,
consider the myriad decisions you need to make. Every one of those zillions of decisions, questions, factors should go into your marketing
plan. Offer all the details, and let your colleagues, partners, or boss shoot holes in it now. Better that than you waving your hands saying, “Oh
don’t worry–it’ll be fine,” going to market, and dealing with disaster. Plan every grueling detail!
Lastly, massage the document to be readable. Use the 5Cs, STP, and 4Ps labels as headers throughout the document. Writing is a lot like
marketing—be sure your document speaks to its intended audience. Writing a plan for your boss will look different from the version you’d
show investors, for example. In other words, market your marketing plan!
That’s All Folks
You’ve seen a zillion marketing issues throughout this book. It’s time to take the concepts and put them into practice. Marketing planning is
the road map or blueprint for the implementation of all the collective marketing decisions.
Having a good understanding of marketing will be extremely useful in your career, whether you’re going to be a marketer or not. Don’t
forget: Put the customer above all else. If you do, you’ll conquer the competition. Yes, it’s that easy. ☺
Go Online
To help you, the online exercise is interactive—a simple spreadsheet—so it’s easy to do what-if
scenarios and tweak the input data and assumptions to see varying results.
Go to www.cengagebrain.com and download the spreadsheet for the marketing plan.
In the first three tabs, input your answers to the questions about the 5Cs, STP, and 4Ps.
Then click on the fourth tab to reveal your marketing plan.
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306 Part 5 Capstone
Chapter Outline in Key Terms and Concepts
1. We put it all together via a “situation analysis”:
the 5Cs
2. STP
3. The 4Ps
4. Spending time and money
5. Managerial recap
Chapter Discussion Questions
1. Pick your favorite brand and look at the 5Cs for that
company. What is the brand’s “situation analysis”?
Based on that assessment and what you know of the
brand, what recommendations would you make to
the company regarding that brand or its business?
2. With talk of elections all over the place, look at vot-
ers through an STP lens. How should a politician of
your favorite party proceed?
3. Imagine a young person, recently graduated from
college, who is trying to launch their career as a
out the best set of 4Ps you could suggest to them
to help them get their ideal jobs and make career
progress toward their goal.
Video Exercise: White Rock (5:02)
White Rock Beverage, a producer of soft drinks and sparkling waters, was founded in 1871. In
1900, White Rock was the upscale beverage of choice, ranked number one in the market; a cen-
tury later, White Rock ranked number 100. When the company’s current president, Larry, who is
the great-great-grandson of the founder, took over the business it was struggling mightily. One
customer controlled half of White Rock’s distribution, and that customer dropped the White Rock brand. To keep
the business afloat, White Rock adopted a hybrid distribution system and acquired a new brand. Growth has been
fueled by the acquisition of the Old Brooklyn brand of beverages. White Rock revamped Old Brooklyn’s production
process to make it a tastier, healthier product—a move that is consistent with White Rock’s positioning as a brand
that is healthy and unique. The Old Brooklyn brand gives White Rock the opportunity to gain entry into premium
outlets like Trader Joe’s and Whole Foods, as well as into supermarkets with premium beverage sections. After
getting the White Rock brand back on track, the company has enjoyed continued growth, but it is nonetheless a
mature brand. The more substantial growth opportunity is in the Old Brooklyn brand.
Video Discussion Questions
1. What does a SWOT analysis reveal about White Rock?
2. How has White Rock used market segmentation, targeting, and positioning in developing and executing a
plan to ensure the survival and success of the company?
3. How has White Rock used the 4Ps of marketing—product, price, place, and promotion—to develop and exe-
cute a plan for ensuring the survival and success of the company?
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307Chapter 17 Marketing Plans
MINI-CASE
Jeeves
When people feel like they have more money than time, certain services flourish. Imagine setting up a butler
service called Jeeves. Jeeves would see to all the logistics details in your life that consume more time than you
wish to grant them. Jeeves will take care of your information needs, from making doctors’ appointments or play
dates for the kids, to stylist appointments for you, to helping you banking, paying bills and even coordinating
and evaluating your investments, if you wish. If you were stinkin’ rich, you’d also have a chef and a driver. While
strictly speaking, these domains fall outside the usual butler responsibilities, in the Jeeves service, the butlers fill in
with whatever household and related duties the customer wishes to be done, and a payment package is chosen
accordingly. Thus, your Jeeves can drive your kids to school, and pick up groceries to have a 7 p.m. dinner ready for
the family, if those are add-ons you desire (and for which you’re willing to pay).
Case Discussion Questions
1. Create a marketing plan to introduce Jeeves to your local community. Gather the secondary data that you can,
to help substantiate the business case. Make clear notes throughout the plan where you would seek addition-
al primary marketing research to provide guidance about those components of the plan. Etch the market and
its segments, and characterize the segment(s) you would target.
2. Create a storyboard for an external Website and an internal one. The external Website would be the positioning
you want customers to see, thus create pages for that Website that is a composition of the 4Ps for Jeeves. The
internal Website is for your sales force to give them parameters about different price packages and the like.
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308 Part 5 Capstone
APPENDIX
On the book’s website at www.cengagebrain.com, you can download an Excel® spreadsheet that contains all of
these Chapter 17 tables.
The Online Marketing Planning Builder will expect the following inputs:
Customer: Fill in descriptions here:
Demographics (e.g., age, income, household composition, ZIP Code):
Psychographics (e.g., attitude to product, to competition, to ads):
Buying behavior (e.g., frequency, only on sale, etc.):
Current levels/measures of customer satisfaction:
Do we have a loyalty program, efforts at CRM?
Why don’t non-buyers buy?
When our buyers buy, what channel do they prefer?
When our buyers buy, do they seem to be price sensitive?
What changes have we seen over buyers? Expect any in future?
Customer 1
Customer 2
Customer 3
Customer 4
Customer 5
Customer 6
Customer 7
Customer 8
Customer 9
Company:
What are we good at? Known for? Do a SWOT!
What do we want to become? Future strategy.
Company 1
Company 2
Context:
Is the economy a factor? Is it stable? Growing? What’s the consumer mood?
Are politics a factor? Are our partners stable?
Is legal a factor? Are any consumer laws looming?
Is technology a threat/opportunity? Machines? IT?
Any societal concerns? Demographic shifts? Attitude shifts?
Context 1
Context 2
Context 3
Context 4
Context 5
Collaborators:
Good relations with supply chain providers?
Good relations with distribution channel members?
Want any modifications?
Collaborators 1
Collaborators 2
Collaborators 3
Competitors:
Who are our major competitors (define this broadly)?
What are our competitors’ strengths?
Competitor 1
Competitor 2
TABLE A17-1
5Cs
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309Chapter 17 Marketing Plans
Segmentation:
Fill in descriptions
here:
Base segments on data; gather marketing research to conduct cluster analyses;
describe marketplace in terms of demographics, psychographics, buyer behaviors:
First, describe current customers:
Next, describe nonusers:
Finally, describe ideal customers:
Segment 1
Segment 2
Segment 3
Targeting:
Estimate size and profitability (lifetime customer value) of segments:
Characterize fit with corporate and marketing strategy of each segment:
Using financial and strategic info jointly, rank desirability of segments:
Target 1
Target 2
Target 3
Positioning:
Strategically choose high-quality/high-price or basic-product/low-price position:
Show how strategic position compares to competitors’ positions:
Sketch distribution (wide or exclusive) and promotion plans (mass, light):
Position 1
Position 2
Position 3
Product: Fill in descriptions here:
Choose high-end quality or basic-quality level:
Use conjoint on target segments to determine primary attributes/features:
What are our brand associations, and what do want to trade in/out:
Where are we in the product life cycle; is it time to jump-start:
Product 1
Product 2
Product 3
Product 4
Price:
Given strategic positioning, shall we price high (skim) or low (penetrate):
If price low, conduct internal audit to assure exceed breakeven.
If price high, conduct marketing research to assess.
Customers’ price sensitivities:
Shall we consider occasional price discounts:
How might we benefit from pricing differentially to our segments:
Price 1
Price 2
Price 3
Place/Distribution:
Design distribution system to be extensive or selective:
Integrate with promotions as push or pull:
Do any conflicts need to be resolved? Communication, contract, profit-share:
Place 1
Place 2
Place 3
Promotion:
What are our marketing communications (advertising) goals?
How to measure the effectiveness of the ads, whether goals were achieved:
How to apportion advertising budget across media for true IMC:
Promo 1
Promo 2
Promo 3
TABLE A17-2
STP
TABLE A17-3
4PS
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310 Part 5 Capstone
Marketing Plan
Executive Summary:
This marketing plan begins with a situation analysis: a description of our current state of affairs and
possible changes to that status quo. We present strategic choices in selections of customer segments to
pursue and the market position that we seek to achieve to best serve them.
Situation Analysis:
Customers:
These are our current customers: Customer 1, Customer 2, Customer 4, Customer 5.
This is what they buy: Customer 3, Customer 7, Customer 8.
Here are possible customer issues to consider: Customer 9, Customer 5, Customer 6.
Company:
Currently, we are: Company 1.
This marketing plan is to facilitate our achieving the goal of becoming: Company 2.
Context:
Our current business environment is economically: Context 1.
Politics and legal factors may include: Context 2, Context 3.
Technology enters in, in that: Context 4.
Overall societal factors may be: Context 5.
Collaborators:
Our business partnerships with our supply chain providers are: Collaborators 1.
Our channel members: Collaborators 2.
Overall, our partner network: Collaborators 3.
Competitors:
Certain competitors (Competitor 1) may be a threat, given their strengths (Competitor 2).
Strategic Development:
Segmentation:
Based on our marketing research, customer segments may be described as follows.
We currently serve: Segment 1. We are considering moving toward (or also) serving Segment 3.
For now, we are not interested in serving Segment 2.
Targeting:
To serve a customer base of sufficient size and profitability, we should pursue: Target 1.
We believe that a focus on this customer base fits with our strategic corporate goals: Target 2.
We considered other segments, and their relative attractiveness is as follows: Target 3.
Positioning:
Overall, we will seek a strategical market position of: Position 1.
This market space should compare favorably to our competitors’ positions: Position 2.
The marketing mix variables are described shortly. As an overview: Position 3.
(continued)
TABLE A17-4
Compiling
the Answers
to Yield a
Marketing
Plan
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311Chapter 17 Marketing Plans
Market Positioning, Strategies and Tactics:
Product:
Our product is at this phase in the product life cycle: Product 4.
The quality of our product should be considered by customers to be: Product 1.
Our customers primarily seek these benefits: Product 2.
When they think of our brand, they think of these associations: Product 3.
Price:
Given our strategic positioning, here are our pricing considerations.
Our customer price sensitivities seem to be: Price 1.
Our suggestions on occasional price discounts are these: Price 2.
We recommend segmentation pricing as follows: Price 3.
Place/Distribution:
Our ideal distribution system would be: Place 1.
We will use promotions to spur trade partners and consumer involvement per: Place 2.
We will address potential partner conflicts via: Place 3.
Promotion:
Our marketing communications (advertising) goals are: Promo 1.
We will measure the effectiveness of our promotions by: Promo 2.
We will apportion our advertising budget across media as per this IMC plan: Promo 3.
In sum, this marketing plan offers a strategic vision to attain long-term customer satisfaction, their loyalty,
and our firm’s profitability.
TABLE A17-4
(continued)
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312 Endnotes
Chapter 1
1 Thank you to Professors Andrea Dixon (University of Cincinnati), Inder Khera (Wright State University), Constantine
Polychroniou (University of Cincinnati), and Larry Robinson (The Ohio State University) for the insightful focus group that
launched this project.
2 This last P also often goes by the term “distribution” or even “channels of distribution,” implying the paths through which goods are
made available from the manufacturer to the consumer. The term “distribution” is used more often than “place,” but “4Ps” sounds
better than “3Ps and 1D.” (It’s better marketing!)
Chapter 2
1 Of course, a customer can choose to delay a purchase, and that is an action too. Delays allow buyers time to gather more
information, form clearer opinions about brand choices, etc. Or they might choose to not purchase altogether. See research by
Professors Ravi Dhar (Yale University), Mary Frances Luce (Duke University), Stephen Nowlis (Washington University in St.
Louis).
2 Buyers’ goals naturally affect their shopping; see research by Professors Margaret Campbell (University of Colorado), Paul Herr
(Virginia Tech), Arie Kruglanski (University of Maryland), Suresh Ramanathan (Texas A&M University), Nader Tavassoli
(London Business School), and Stijn Van Osselaer (Erasmus University Rotterdam).
3 For more on consumer behavior, see books by Professors Wayne Hoyer (University of Texas), Deborah MacInnis (University of
Southern California), and Michael Solomon (Auburn University). In B2B, read the HBRs on value propositions by Professors
James C. Anderson (Northwestern University) and James Narus (Wake Forest University).
Chapter 3
1 Thanks to Professors Darren Boas (Hood College), Richard Brown (Freed-Hardeman University), Renee Foster (Delta State
University), Harry Harmon (University of Central Missouri), Gary Karns (Seattle Pacific University), Ann Little (High Point
University), Chris McCale (Regis College), Chip Miller (Drake University), James Oakley (Lewis University), Antony Peloso
(Arizona State University), Charles Schwepker (University of Central Missouri), Donald Shifter (Fontbonne University), Deborah
Spake (University of South Alabama), Keith Starcher (Geneva College), and Clay Voorhees (Michigan State University) for their
helpful feedback.
2 So, like Goldilocks, we must find segments that are not too big and not too small, but just right.
3 Research by Professors Claes Fornell (University of Michigan), Eugene Anderson (University of Miami), and Michael Johnson
(University of Michigan) suggests that success can bring its own problems. Success usually means more sales from more customers.
Yet, as a segment size grows, the group becomes more heterogeneous (by definition, given human nature). It then becomes
increasingly difficult to serve such a large diverse segment well. At that point, it is worth investing in a new segmentation study to
refine further the current known segment structures and to consider additional product lines.
Chapter 4
1 Thanks to Professors Desislava Budeva (Florida Atlantic University), Robin Coulter (University of Connecticut), Gavan Fitzsimons
(Duke University), Harry Harmon (University of Central Missouri), Devon Johnson (Northeastern University), Ann Little (High
Point University), Chip Miller (Drake University), Nicolas Papadopoulos (Carleton University), Anthony Peloso (Arizona State
University), Donald Shifter (Fontbonne University), Tillmann Wagner (Texas Tech University), and Bruce Weinberg (Bentley
University) for their helpful feedback.
Chapter 5
1 Thanks to Professors Robert Fisher (University of Alberta), Mary Gilly (University of California, Irvine), Kent Grayson (Kellogg
School of Management at Northwestern University), Harry Harmon (University of Central Missouri), Ann Little (High Point
University), Chip Miller (Drake University), Anthony Peloso (Arizona State University), Joe Priester (University of Southern
California), and Donald Shifter (Fontbonne University), for helpful feedback.
312
ENDNOTES
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313Endnotes
2 See Chapter 15 for details on how the graphs are created.
3 This map conveys perceptions, not geography, so the cities are not aligned north-south/east-west as they are IRL.
4 For two fabulous profiles of these extremes, see Fishman’s book, The Wal-Mart Effect, and Michelli’s, The Starbucks Experience.
5 J. D. Power compares cars’ reliability (life spans and maintenance) and shows that quality is not perfectly correlated with price.
Some “overvalued” car brands have been Land Rover, Volkswagen, Volvo, Mercedes. Yah, but they’re cool! Some “undervalued” car
brands have been Mercury, Infinity, Buick, Lincoln, Chrysler.
6 A counter-argument may be made for high-end goods where exclusivity is part of the mystique, e.g., for years, Tiffany & Co.
advertised nationally even though it only had three stores. Yes, the positioning matrix is a simplification, but also note that we are
interested in sustainable strategies. For example, Tiffany bling is now available online, making them less exclusive in terms of retail
presence. Still, the goods are exclusive in that their price point makes them unavailable to many consumers.
Chapter 6
1 Thanks to Professors Melissa Bishop (University of Texas at Arlington), Adam Duhachek (Indiana University), Mary Gilly
(University of California, Irvine), Charles Hofacker (Florida State University), Tracy Meyer (University of North Carolina at
Wilmington), and Donald Shifter (Fontbonne University) for their helpful comments.
2 Pricing is simply one of the easiest of the 4Ps that marketers use to control yield management.
3 The real world is more gray, of course. For example, while services tend to be more perishable than goods, there are certainly some
goods that are more perishable than others (e.g., bananas vs. jet skis). Further, marketers can make goods more perishable when
striving for other desired ends; e.g., just-in-time delivery systems comprise very little (if any) inventory, toward the goal of being
responsive to customers’ needs.
4 See research by Professors Gian Marzocchi and Alexandra Zammit (University of Bologna), Neeli Bendapudi (University of
Kansas), Roland Rust (University of Maryland), Mary Jo Bitner and Amy Ostrom (Arizona State University), and Paul Bloom
(University of North Carolina).
5 Thank you to Professor Kevin Cotter at Saint Mary’s College of California.
Chapter 7
1 Thanks to Professors Harry Harmon (University Central Missouri) and C.W. Park (University of Southern California) for their
helpful feedback.
2 Hey, it’s a compliment. Dorks rule the world!
3 Businessweek.com identified Helvetica as the font common to several companies’ logos: American Airlines, BMW, Jeep, Lufthansa,
Microsoft, Panasonic, Sears, Staples, and 3M.
4 Think of the original “branding” on cattle to discourage poaching from herds.
5 See research by Professor Jennifer Aaker (Stanford University), Kevin Keller (Dartmouth University), Stephen Ball (Sheffield
Hallam University), Karen Becker-Olsen (College of New Jersey), Susan Broniarczyk (University of Texas), Ronald Paul Hill
(Villanova University), Sanjay Sood (UCLA), Isabelle Szmigin and Peter Turnbull (University of Birmingham).
6 See research by Professors Joško Brakus (University of Rochester), Bernd Schmitt (Columbia University), and Lia Zarantonello
(Bocconi University).
7 See research by Professors Albert Muniz (DePaul University), Thomas O’Guinn (University of Illinois), Ann Morales Olazábal
(University of Miami), Hope Jensen Schau (University of Arizona), and John Schouten (University of Portland).
8 A corporate brand (or an umbrella brand) has been shown to enhance consumers’ likelihood of purchase and adoption. (See
research by Professors David Corkindale, University of South Australia.) Umbrella marketing also goes by the names franchise
branding, family branding, or mono-branding.
9 The company has subsequently sold off some of these brands, not because they weren’t good brands, but for strategic purposes, that
is, to focus their business lines. Indeed, because the brands had strong equity, they were profitable transactions.
10 See research by Professors Kusum Ailawadi (Dartmouth University), Paul Berger (Boston University), Pierre Chandon (INSEAD),
Chris Dubelaar (University of Utah), Morris George (University of Connecticut), Robert Jacobson (University of Washington),
Anita Luo (University of Connecticut), Neil Morgan (Indiana University), Scott Neslin (Dartmouth University), Lopo Leotte do
Rego (University of Iowa), Gary Russell (University of Iowa), and Roland Rust (University of Maryland).
Chapter 8
1 Thanks to Professors Rick Briesch (Southern Methodist University), Erin Cavusgil and Serdar Durmusoglu (Michigan State
University), Stefan Michel (Thunderbird School of Global Management), Rebecca Slotegraaf (Indiana University), and Bruce
Weinberg (Bentley University) for their helpful comments. A very handy website is pdma.org (Product Development Management
Association).
2 Sorry to say, little critters.
3 For a meta-analysis on the diffusion model, see research by Professors Fareena Sultan (Northeastern University), John Farley
(Dartmouth University), and Donald Lehmann (Columbia University) in the Journal of Marketing Research. They found that p
tends to range from 0.02 to 0.06, and q from 0.3 to 0.6 and that, for whatever product category and for whatever market (e.g., U.S.
vs. Europe), p:q was on the order of just about 1:10.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
314 Endnotes
4 Internetworldstats.com.
5 Businessweek.com.
Chapter 9
1 Yes, another BE for practice. It’s important to be facile with BEs. As straightforward as it seems, pricing is hard to do well. The
main purpose of some companies is to help others select prices (e.g., IBM’s DemandTec services or SAP’s Khimetrics). Mostly all
they do is break-evens.
2 Price elasticity is also referred to as the “% change in quantity sold, given a 1% change in price.” This equation is simple in being linear
(the effect of changing a price from low to medium would be predicted to be the same as moving price from medium to high), whereas
the effects in real life might be more subtle. (e.g., the effect of changing a price from high to higher might result in a huge drop-off. So
the “line” in Figure 9.1 may be curved at the end.) With luxury goods, customers might want what is more expensive, as an exclusive,
more unique purchase. That curve would rise from the lower-left and increase toward the upper-right.
3 Okay, so pricing is never simple. In this example, the same profit is also obtained at $1.75 (350 – 200) as at $1.50 (450 – 300). Apparently
there’s a flat spot in the demand curve. Thus we could price at 1.50 or 1.75, so the
final decision is one of strategy: Go high for an upscale image, or go low for customer reviews as good value.
Chapter 10
1 Thanks to Professors Jan Heide (University of Wisconsin) and Phil Zerrillo (Singapore Management University) for helpful
feedback.
2 See research by Professors James Anderson (Northwestern University), Sundar Bharadwaj (Emory University), Gary Frazier
(University of Southern California), George John (University of Minnesota), Das Narayandas (Harvard Business School), James
Narus (Wake Forest University), Robert Palmatier (University of Cincinnati), Alberto Sa Vinhas (Washington State University
Vancouver), and Kenneth Wathne (Norwegian School of Management).
3 See research on sales forces by Professors Kevin Bradford (Notre Dame), Kent Grayson (Northwestern University), David Lichtenthal
(Baruch College), Vincent Onyemah (Babson College), Dominique Rouzies (HEC, Hautes Etudes Commerciales de Paris), and
Frederick Hong-kit Yim (Hong Kong Baptist University).
Chapter 11
1 Thanks to Professors Adriana Bóveda-Lambie (University of Rhode Island), Robin Coulter (University of Connecticut), Robert
Fisher (University of Alberta), Kent Grayson (Northwestern), Gary Karns (Seattle Pacific University), Chris McCale (Regis
College), Charles Schwepker (University of Central Missouri), and Keith Starcher (Geneva College) for their helpful comments.
2 For more information, see the vast literature by Professors Richard Petty (Ohio State University) and Joseph Priester (University of
Southern California).
3 Finished commercials cost $100,000s, but animatics cost only about a tenth of that, and the cost is even less for storyboards. While
these draft forms can seem rough, research indicates that the correlation between customer reactions to animatics and a finished
commercial are very high (marketingpower.com).
Chapter 12
1 Thanks to Professors Melissa Bishop (University of Texas, Arlington), Robert Fisher (University of Alberta), and Kent Grayson
(Northwestern University).
2 We’re not claiming causation with this correlation plot: Marketers hope that larger ad budgets enhance sales (ad budget→sales), but
big companies have more money to spend (sales→ad budget), and for that matter, big companies have more dealerships or retail
outlets (distribution→sales), etc.
3 It’s the business of firms like Arbitron and Nielsen to collect these data, so you can imagine they’re continually working to improve
these measures. For example, marketers care that measures of reach and frequency are “unduplicated,” i.e., not capturing the same
eyeballs twice.
4 There’s also a difference between ratings and advertising measures of share. Share is the % of TV sets that are turned in to the
desired show. Together, measures are usually reported as ratings points/share. For example, Nielsen ratings may indicate that a TV
show received a 10/15 during its broadcast, meaning 10% (or 11,200,000) households were watching TV, and 15% of them were
tuned in to this program.
5 According to a recent A. C. Nielsen study, “Annual Survey on Trade Promotion Practices.”
6 Product placement in shows is largely tolerated by U.S. viewers, but showing products on TV for money is illegal in most
of Europe, though the EU is considering alterations in law structures to facilitate commercial funding (Economist.com,
Promomagazine.com).
7 Negative emotions can transfer too, so many brands (e.g., Coke, Pepsi) don’t advertise during news broadcasts. The viewing
experience is usually a bummer, and the brand managers don’t want to inherit the negative baggage.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
315Endnotes
Chapter 13
1 Networkers call this a “power law.”
2 For information on recommendation agents, see research by Professors Anand Bodapati (UCLA) and Muhammad Aljukhadar
(HEC Montreal). Also see research by Professors Wendy Moe and Michael Trusov (University of Maryland); they’ve shown the
social effect of user ratings on subsequent user ratings, and their collective significant effect on sales (albeit more modest than the
influence of unbiased and independent product ratings).
3 Fun introductions to networks include Malcolm Gladwell’s The Tipping Point and Duncan Watts’s Six Degrees.
Chapter 14
1 See research by Professors Leonard Berry (Texas A&M University), Claes Fornell (University of Michigan), Richard Oliver
(Vanderbilt University), A. Parasuraman (University of Miami), Roland Rust (University of Maryland), and Valarie Zeithaml
(University of North Carolina).
2 For more on customer dissatisfaction recovery, see research by Professors Michael Brady and Joseph Cronin (Florida State
University).
3 Nonprofits want to make money too. It’s just that their surpluses go to their social benefits and causes.
4 See research by Professor Robert Leone (Texas Christian University), Katherine Lemon (Boston College), John Roberts (Australian
Graduate School of Management), and Frederick Hong-kit Yim (Hong Kong Baptist University).
5 See research by Professors Douglas Bowman (Emory University), Bruce Hardie (London Business School), Vikas Mittal
(University of Pittsburgh), and Michael Haenlein and Andreas Kaplan (ESCP Europe, Paris).
Chapter 15
1 If you want more, have we got a recommendation for you! Dawn Iacobucci and Gilbert Churchill, Marketing Research:
Methodological Foundations, 11th ed., on Amazon.
2 Cluster analysts say: customers should be homogeneous within a cluster, and heterogeneous across clusters.
3 This overlay is known as attribute-vector-fitting. Imagine a little data set with 4 rows, 1 for each brand, then 2 columns, 1 for each
coordinate (on dimensions 1 and 2). Add a column for the means for each brand on how good it is on the first attribute, e.g., value
(and then add more columns for the means of all the remaining attributes). Then run a regression using the 2 dimensions’ variables
to predict the attribute variable (and run another regression for each additional attribute). The resulting beta weights give you the
coordinates to put in these vectors. Cool, huh? Then, the final step is to overlay respondents onto these maps, in what are called
“ideal points.” That is, if a brand could have just the right set of features to make the customer perfectly happy, what combination
of features would those be? Perceptual maps with ideal points, one point per customer, are frequently used to identify market
opportunities.
4 In standardized regression (β) weights, the model is: Preference = 0.22 Club + 0.44 Upgrade – 0.87 Fee.
5 For research on survey construction, see work by Professors Charlotte Mason and J. B. Steenkamp (University of North Carolina)
and by Geeta Menon and Vicki Morwitz (New York University).
6 The regressions and forecasting examples weren’t exactly random or off the cuff. Let’s say you have a dependent variable like
“intent to purchase” that you’re trying to model as a function of 5 predictors. If 2 of those predictors are themselves pretty highly
correlated, keeping all 5 variables distinct will likely blow up the regressions due to multicollinearity. If an average of the 2 highly
correlated variables is created, so that now there are 4 predictors (3 of the previous variables, plus an average score that replaces the
2 correlated variables), the results are almost always clearer. Magic!
7 Take a look back now at the cluster analysis on these data. Note the x-axis in the left plot of Figure 15.7 and the y-axis of the
middle plot. They were formed using the factors, combining two items each. Cool, right?
Chapter 16
1 Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors.
2 Michael Tracey and Fred Wiersema, The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your
Market.
Chapter 17
1 A great reference is the American Marketing Association at ama.org.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
316 IndexINDEX
A
Aad attitude, 201
Abrand, 201
absolute numbers, pricing psychology and, 148–149
A/B split tests, 235–236
achievement motivation, 38
actors, 227
additional segments growth strateegy, 176
additional services growth strateegy, 176
advertising. See also integrated marketing communication
anatomy of content, 200
cognitive ads, 191–192
content of, 186
defined, 187
designing messages in, 190–201
endorsements, 196–198
ethics in, 195, 219–220
evaluation of, 198–201, 220–222
goals of, 185, 188–201, 218–220
image advertising, 195–196
importance of, 187–188
media decisions in, 205–210
Ms of, 190
placement strategies for, 223
proportion of ad spending to sales in, 206–207
reach and frequency and GRPs in, 207–208
sale force vs., 215–218
affect, advertising and, 188, 192
African American market segment, 36
age
customer behavior and, 28
segmentation and, 36–37
trend monitoring and, 126–128
wealth distribution and, 126–128
AIDA model, 188–190
Airbus, channel partners for, 172, 177–178
alternative currencies, pricing psychology and, 149
ambush marketing, 218
American Marketing Association, 195
anecdotes, data vs., 42
Ansoff ’s product-market growth matrix, 278–279
apps, 127
area test markets, 115–116
Asia, e-commerce in, 179–180
Asian American market segment, 37
association transfer, 196–197
attitudes, defined, 25–26
attitude-to-the ad (Aad), 201
attitude-to-the-brand (Abrand), 201
attractive wearable design case study, 11–12, 274
attribute-based perceptual mapping, 260–261
attribute vectors, multidimensional scaling, 262–264
auctions, dynamic pricing and, 156–158
aural brand association, 19
auto insurance, segmentation variables in, 41–42
awareness, social medial enhancement of, 230–231
B
B2B marketing
buying center roles, 14–15
catalog sales, 190
perceptual mapping and, 263
pricing and, 147
purchase categories, 15–18
segmentation and, 40
types of customers, 16–18
B2C marketing, 15–18
catalog sales, 190
customer involvement, 16–18
pricing and, 147
purchase categories, 15–18
segmentation and, 35–36
baby boomers, 28
backward integration, 174
bait and switch pricing, 150
BCG matrix, 279–280
BE (break-even) analysis, 135–142
behavior
advertising and, 188
market segmentation and, 39–40
in purchasing, 232–233
beliefs clusters, 259–260
benchmark analysis, pricing strategies and, 143
beta-testing, 115–116
biases about pricing, 147–152
Big Data, 268
billboards, 201
blind taste tests, 19
Blu Dot case study, 291
bottom-up management
customer needs assessment, 35–42
product development, 111
316
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
317Index
branding
association networks, 95–98
BCG matrix and, 279–280
brand names, 92
colors and, 18–20
communities, 98
defined, 91–92
equity determination, 104–105
extensions and co-branding, 100–103
on Facebook, 225
global brands, 103
integrated marketing communications and, 214–220
logos and color, 92–93
new products and extensions of, 124–126
personal brand management, 160
personalities, 97–98
positioning matrix and, 72–74
pre-purchase considerations, 231–232
pricing and, 150–151
reasons for, 93–95
scanner data for brand switching, 268–272
store brands, 103–104
strategies, 98–104
umbrella vs. house of brands, 99–100
breadth strategy
branding extensions and co-branding, 100–103
segmentation and, 46
break-even (BE) analysis, 135–142
breaking bulk, 161–162
business format franchising, 178–179
buyers, 14
buzz marketing, 224–225
C
cash cows, 279–280
catalog sales, 180
celebrity endorsements, 196–198, 203, 208
Census data, use of, 58–61
centrality indices, 227–228
chaining model for targeting, 58–61
channel members, 163–165. See also distribution channels
channel profits, 170–171
Chicago White Sox logo, 20
Chief Marketing Officer (CMO), 5
China
branding in, 27–28
customer expectations in, 244
outsourcing to, 176–177
wealth distribution in, 126–128
classical conditioning, 21–22
click-thru rates, 221–222
cluster analysis
B2B vs. B2C, 41
factor analysis vs., 272
for segmentation, 258–260
CLV (Customer Lifetime Value), 251–253
co-branding, 100–103
co-creation, 111
coefficient of imitation, 123–124
coefficient of innovation, 123–124
cognitive advertising, 188, 191–192
cognitive mapping, brand assodiation and, 96–98
collaborators, in marketing framework, 5–9, 297
collectivism, 27
colors, use of, 18–20, 92–93
communication. See advertising; integrated marketing
communications (IMC)
companies. See also 5Cs of marketing management
in marketing framework, 5–9
marketing plan and, 295
pricing strategy and, 132–136
comparative advertising, 192
competence, brand personalities and, 98
competitive comparison analysis, 54–56
competitive pricing, 155–156
competitors
field experiments involving, 270
integrated distribution and, 174
in marketing framework, 5–9, 297–298
perceptual maps for analysis of, 64–67
pricing strategy and, 132–136
compromise effect, pricing psychology and, 149
concept testing, 113–115, 199, 264–265
conflict, in distribution channels, 168–182
conjoint analysis
marketing research, 265–268
new product development, 113–115
pricing strategies, 144–145
consumer bidding systems, 156–158
consumer packaged goods (CPGs), distribution systems, 165–168
consumers
advertising and decision-making by, 188–190
cross-cultural behavior of, 26–27
manufacturers direct to, 163–165
context. See also 5Cs of marketing management
for marketing framework, 5–9, 296–297
pricing psychology and, 148–149
copy testing, 199
core market offering, 84–88
corporate ethics, 283–284
corporate goals
advertising messages for, 190–201
segmentation and, 45
strategic planning and, 283–287
corporate social responsibility, 127
correlation matrix, survey data, 271–272
cost leadership, 281
cost-plus pricing, 136–142
costs
marketing goals and, 275–278
marketing plans, 304–305
coupons, 155, 218, 268–272
creative communications strategies, 211
credence purchasing, 82–83, 241
cultural differences
cross-cultural consumer behavior, 26–28
customer expectations and, 244
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
318 Index
trend monitoring and, 127–128
customer dissatisfaction, 245–248
customer evaluations
importance of, 239
of products, 240–245
customer feedback, new product development and, 111–112
customer intimacy, 74, 282–283
customer lifetime value (CLV), 251–253
customer relationship management (CRM), 5
customer lifetime value and, 251–253
loyalty and, 248–253
recency, frequency, and monetary value (RFM), 249–251
customers. See also 5Cs of marketing management
B2B marketing, 16–18
behavior of, 13–28
branding and loyalty, 94–95
in marketing framework, 5–9, 295–296
marketing science and behavior of, 18–28
pricing strategy and, 132–136
psychology of pricing and, 147–152
customer satisfaction
core- and value-added offerings, 85–88
measurements of, 245–248
responsibility for, 4–5
survey data for, 270–272
D
D2C marketing, 118, 163–165, 170–171, 216–218
DAR (day-after recall), 198–201
dashboard indicators, 287–289
data
in cluster analysis, 258–260
in conjoint analysis, 267–268
in marketing research, 257–258
source, 272
day-after recall (DAR), 198–201
deal segments, pricing and, 150–151
deceptive pricing, 150
decision-making, 25–26
advertising and, 188–190
branding and, 94–95
degree centrality, 227–228
demand
distribution channels and, 161–162
non-linear pricing and, 152–154
pricing and, 131–136
yield/demand management, 152
demand/curve line, 132
demographics
market segmentation and, 28, 35–36, 40, 57
market sizing and, 58–61
trend monitoring and, 126–128
depth strategy, segmentation and, 47
design process
new product development, 113–115
perception and, 18–20
development process, new product development,
113–115
dial procedures, 201
differentiation, 281
diffusion of innovation model, 120, 122–124
direct mail advertising, 213–220
direct to consumer (D2C) models, 118, 163–165,
170–171, 216–218
The Discipline of Market Leaders (Treacy and Wiersema), 282–283
discounts
profitability analysis of, 155
quantity discounts, 151–152
discrimination, in pricing, 150–152
distribution channels
B2B marketing and, 16
catalog sales, 180
characteristics, 161–162
defined, 162–165
e-commerce, 179–180
forms of, 163–165
franchising, 178–179
integration, 173–174, 182
positioning matrix and, 68–74
power and conflict in, 168–182
promotion and, 71–72
push and pull strategies, 167–168
retailing, 175–178
revenue sharing, 170–173
sales forces and, 181–182
smart distribution systems, 165–168
distribution intensity, 165–168
diversification
new products and, 125–126
strategies for, 279
divestment, of old products, 120
dog brands, 279–280
double marginalization, 170–173
drama narrative, in advertising, 192
durations, web analytics, 232
Dutch auctions, 157–158
dynamic strategies
auctions in pricing, 156–158
product positioning, 86–88
E
early adopters, market diffusion and, 122
early majority, market diffusion and, 122
E-commerce, 179–180
80:20 rule, 39–40
elaboration likelihood model (ELM), 197
elasticity in supply and demand, 133–136
electronic test markets, 115–116
embarrassment, in advertising, 194
emotions, 20–22
in advertising, 193–194
endorsements, 196–198, 203
English auctions, 157–158
entertainment marketing case study, 292
environmental responsibility, 127
error term, 147–149
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
319Index
ethics
in advertising, 195, 219–220
corporate ethics, 283–284
in pricing, 150
in targeting, 55–56
trade-off ethics, 151
ethnicity
customer behavior and, 27–28
trend monitoring and, 127
Europe, luxury goods demand in, 27–28
event sponsorships, 217–218
everyday low price providers (EDLPS), 136–142
exchange relationship
marketing as, 1–2
product in, 80–81
exclusive distribution channels, 166–168
expectations
experience and, 243–245
sources of, 241–242
experience marketing, 81–82
brand personalities and, 98
experiential purchasing, 82–83, 241, 243–245
expert power, 179
F
Facebook, 225. See also social media
factor analysis, 271–272
farmer’s markets, 161–162
fast food chains, positioning strategies for, 77–78
fear, in advertising, 194
feasibility assessments, new product development, 113
field experiments, in market research, 270
FIFO (first-in/first-out), 152
5Cs of marketing management, 5–9
pricing strategy and, 132–136
research and, 256–258
situation analysis and, 294–298
strategic planning and, 283–287
fixed costs
break-even pricing and, 139–142
strategies for decreasing, 275–278
flighting scheduling strategy, 209–210
fluctuations in pricing, 155
focused strategy, 282
focus groups, 199–201
concept testing and, 264–265
new product development, 113–115
food retailers, 175
forecasting
new product launches, 116–117
tipping point and, 123
forward integration, 174
4Ps of marketing management, 5–9
market planning and, 300–304
pricing strategy and, 132–136
research and, 256–258
strategic planning and, 286–287
franchising, 178–179
freestanding inserts (FSIs), 218
frequency, in advertising, 207–208
web analytics and, 232
full-frontal product placement, 208
G
game theory, 155–156
gatekeepers, 14
gender, customer behavior and, 27, 40
General Electric model, 280–281
general merchandise retailers, 175
generic (non)brands, 103–104
geographic base for market segmentation, 36–37, 40
globalization
branding strategy and, 103
customer satisfaction and, 254–255
distribution channels and, 174
trend monitoring and, 127–128
goals
in advertising, 185, 188–201, 218–220
corporate goals, 45, 190–201, 283–287
defined, 277
in marketing, 275–278
GoodBite case study, 62
goods-to-services continuum, 81–84
Google PageRank algorithm, 237–238
grocery stores, anatomy of, 17
gross rating points (GRPs), 207–208
growth strategies, 125–126
GRPs (gross rating points), 207–208
H
harvesting, old products, 120
health care tourism, 49–50
hearing, sense of, 19
Hierarchy of Needs, 22–24, 32
higher-involvement purchase, 240
high prices, strategies involving, 142–145
Hispanic American market segment, 36
Hofstede, Geert, 26–27
hospital management, patient/customer opinions and, 243
household composition, market segmentation and, 36
house of brands strategy, 99–100
humorous advertising, 193–194
hygiene attributes, 243
I
idea creation, new product development, 112–113
ideals, market segmentation and, 38
image advertising, 195–196
IMC. See integrated marketing communications (IMC)
imitation effect, 123–124
imperfect competition, 32
India, outsourcing in, 176–177
individualism-collectivisim continuum, 27
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
320 Index
inelastic demand, 133–136
influencers, 14
influentials, identification of, 227–228
information power, 179
ingredient branding, 102–103
initiators, 14
innovation, 120, 122–124
inside-out product development, 110–111
intangibility of products, 81–82
integrated marketing communications (IMC)
branding through, 214–220
budget allocations for, 215–218
cross-media strategies in, 210–220
defined, 187
designing messages in, 190–201
evaluation of, 198–201, 220–222
goals of, 218–220
importance of, 187–188
media decisions in, 205–210
scheduling stategies, 220
integration, distribution channels, 173–174, 182
intensive distribution, 165–168
Interbrand method, 105–106
intermediaries, distribution channels, 170–173
internal validity, in market research, 269
Internet
advertising on, 213–214, 218
mobile marketing and, 224–225
J
jingles, 22
K
key performance indicators (KPIs), 230, 233
knowledge transfer, 196–197
Kodak Graphics Communication Group (GCG), 89
L
laggards (non-adopters), market diffusion and, 122
late majority, market diffusion and, 122
launching of new products, 116–118
learning, 20–22
legal issues in pricing, 150
legitimate power, 179
life cycle stages
market segmentation and, 36
new products, 118–124
lifestyle trends, 127
line extensions, 100–103
links, 227
logistics
supply chain, 162–165
transportation, 177
logos, 21–22, 92–93
long-term orientation, 27
low-involvement purchase, 240
low prices, strategies involving, 136–142
loyalty
branding and, 94–95
customer relationship management and, 248–253
loyalty programs, 16, 22
LSPMA case study, 273
M
magazines, 212–220
manufacturing, marketing metrics for, 289
margin pricing and costs, 158
margins, vs. markups, 176
markdowns, in retailing, 176
market decline phase, product life cycle, 120
market development, new products and, 125–126
market growth phase, product life cycle, 119
marketing
advertising for goals in, 190–201
customer behavior and, 13–28
customer satisfaction and, 4–5
defined, 1
as exchange relationship, 1–2, 80–81
importance of, 2–5
prevalence of, 2–3
time and money issues, 304–305
marketing diagnostics, 201
marketing management framework framework, 5–9
marketing metrics, 287–289
marketing research. See research
marketing strategy. See strategy
market introduction, product life cycle, 119
market maturity, product life cycle, 119
market penetration, 125–126, 154
e-commerce, 179–180
strategies for, 278–279
market planning
5Cs of marketing and, 283–287
4Ps of marketing and, 300–304
overview, 293–294
STP of marketing management and, 298–300
timeline and budget issues, 304–305
market potential (MP)
forecasting and, 116–117
new product development and, 112–113
mark-ups, 158
in retailing, 176
Maslow, Abraham, 22–24, 32
mass marketing, 33–35
MCs (marginal costs), 158
MDS (multidimensional scaling), 261–264
media choices. See also social media
in advertising, 205–210
comparisons of, 212
cross-media strategies, 210–220
effectiveness of advertising in, 220–222
planning and scheduling strategies, 209–210
synergies in, 211
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
321Index
memory, 20–22
mental accounting, 148–149
mere exposure in advertising, 199
Method case study, 107
metrics for strategy, 287–289
midpoint pricing, 145
mobile marketing, 224–225
MobiMed, 251–252
moment-by-moment processing, 201
money categories, pricing psychology and, 149
mood induction, pricing psychology and, 148–149
motivation, 22–24
customer expectations and, 243
MP (market potential), 112–113, 116–117
MR (marginal revenues), 145–146
Ms of advertising, 190
multidimensional scaling, 261–264
multisite strategies
franchising, 178–179
retailing and, 176–178
N
narrative dramas, 192
NASCAR racing, 217–218
naturalistic observation, 269
nearly predatory pricing, 150
needs, hierarchy of, 22–24, 32
network analysis, social media, 227–236
new products
brand extensions and, 124–126
idea creation and market potential, 112–113
importance of, 109–110
launching of, 116–118
life cycle, 118–124
marketing and development of, 110–118
product development philosophies, 110–111
timing launch of, 118
trend monitoring and, 126–128
newspapers, 212–220
news releases, 216–218
niche marketing, 35
noncomparative advertising, 191
noncompensatory mechanisms, 26
nonlinear pricing, 152–154
nonprofits, 41, 191, 258–264, 295–298
Numi Organic Tea, 77
O
objectives, 277
Ogden Publications case study, 203
one-sided arguments, 191
one-to-one marketing, 33–35
online advertising, 221–222
lead users in, 235–236
pre-purchase awareness and, 230–231
online market planning, 305, 307–311
operational excellence, 74, 282–283
opinion leaders, 228
opting behaviors, 25
outsourcing, 176–177
P
partial product placement, 208
patient/customer opinions, 243
Pavlov, Ivan, 21
perception, customer behavior and, 18–20
perceptual mapping
positioning, 64–66, 260–264
segmentation and, 54–56
perishability, product marketing and, 83
personal brand management, 160
personal selling, 214–215
P&G, 278
PI (purchase intention), 116–117
π, pricing strategies and, 136
placement
positioning matrix and, 68–74
product marketing and, 6, 208, 217–218, 303–304
places, branding of, 105
planning, in marketing framework, 293–294
plastic surgery, market sizing for, 58–61
Pmax (profit maximization), 145–146
Porter, Michael, 74
Porter strategy, 281–282
portfolio analysis, BCG matrix for, 279–280
positioning. See also STP of marketing management
importance of, 63–74
in marketing framework, 6–9
matrix for, 66–74, 283
perceptual maps for, 64–66, 260–264
STP framework for, 298–300
written statements on, 74–76
postpurchase phase, 14, 233–234
power, types of, 168–182
power distance, 26
predatory pricing, 150
premium private label branding, 103–104
prepurchase phase, 14
brand consideration, 231–232
in social media, 230–231
press kits, 216–218
price fixing, 150
price wars, 156
pricing
auctions, 156–158
branding and, 95
competitive strategies for, 155–156, 302
coupons and, 155
discrimination/segmentation in, 150–152
fluctuations in, 155
high pricing strategies, 142–145
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
322 Index
importance of, 131
low prices, 136–142
market forecasting and, 116–117
in marketing framework, 7
marketing strategies and, 277
mark-ups vs. margins, 158
mid-point pricing, 145
non-linear pricing, 152–154
positioning matrix and, 67–74
product life cycle and, 154
psychology of, 147–152
quality and, 71–72
quantity discounts, 151–152
scanner data for, 268–272
supply and demand and, 131–136
units vs. revenue, 145–146
volume vs. profits, 145–146
yield/demand management, 152
print advertising, 212–220
probability, market sizing and, 58–61
problem solving, new product development, 112–113
product category extensions, 100–103
product demonstration, 192–193
product leadership, 74, 282–283
product life cycle (PLC), 118–124
pricing and, 154
products. See also new products
breadth and depth of lines, 88–89
core market offering for, 84–88
creation, 6
customers evaluation of, 240–245
defined, 79–80
development philosophies for, 110–111, 125–126, 279
dynamic strategies for positioning, 86–88, 300–304
field experiments on, 270
franchising, 178–179
goods vs. services, 81–84
in marketing exchange, 80–81
placement of, 6, 208, 217–218
positioning matrix and, 67–74
professional service providers, 81–84
profitability
channel profits, 170–171
pricing strategies and, 136, 145–146
segmentation and, 43–46
targeting and, 52–54
promotion, 6. See also 4Ps of marketing management; advertising;
customer satisfaction; integrated marketing communication
budget allocations for, 215–218
distribution and, 71–72
field experiments involving, 270
positioning matrix and, 68–74
price promotions, 155
sales promotion, 218
strategies for, 302–304
psychological traits
market segmentation and, 37–38, 40
pricing strategies and, 147–152
publicity, 217–218
public media, 222
public relations (PR), 216–218
pulsing scheduling strategy, 209–210
purchase intention (PI), market forecasting and, 116–117
purchase process
behavioral engagement and, 232–233
higher-involvement purchases, 240
kinds of purchases, 15–18
low-involvement purchases, 240
phases of, 13–15
push and pull strategies
distribution channels and, 167–168
sales forces vs. advertising, 215–218
Q
quality
branding and, 93–95
customer expectations and, 244, 248
measurements of, 245–248
pricing and, 71–72, 147–149
quantity discounts, 151–152
question mark brands, 279–280
R
radio advertising, 212–220
Raleigh Wheels, 49
rates, in web analytics, 232
reach of advertising, 207–208
recall memory test, 198–201
recency, frequency, and monetary value (RFM), 249–251
recognition memory tests, 198–201
recommendation agents, 229
recommendation systems, 228–230
referent pricing, 149
refined-concept testing, 114–115
relational ties, 227
relative numbers, pricing psychology and, 148–149
research
cluster analysis, 258–260
conjoint studies, 265–268
customer satisfaction surveys, 270–272
focus groups for concept testing, 264–265
importance of, 256–258
perceptual mapping, 260–264
scanner data, 268–270
retailing, distribution channels, 175–178
return on investment (ROI)
media planning and scheduling strategies, 209–210
in social media, 230, 233
return on marketing investment (ROMI)
media planning and scheduling strategies, 209–210
scanner data for, 269
revenue, pricing strategies and, 145–146
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
323Index
revenue sharing, 170–173
RFM (recency, frequency, and monetary) value, 249–251
risk perception, 94–95
S
sales dynamics
in marketing, 4
proportion of ad spending to sales, 206–207
sales forces, 181–182, 214–218
sales potential ($SP), market forecasting and, 116–117
sales promotion, 218
sales volume
marketing strategies and, 276–278
pricing strategies and, 145–146
satisfaction. See customer satisfaction
scanner data
advertising evaluation, 221–222
marketing research, 268–272
pricing analysis and, 142–143
Scholfield Honda, 30
search engine optimization (SEO), 231–232
search goods, 82–83, 241
search qualities, 82
seasonal advertising, 210
second mover advantage, 126
segmentation. See also STP of marketing management
actionability of, 45
anatomy of, 44, 57
branching out from, 47
branding and, 95
cluster analysis for, 258–260
corporate goals and, 45
database access, 43
evaluation of, 42–47
identification data, 43
information as basis for, 35–42
integration of management-customer perspectives, 35–42
by marketers, 42–47
in marketing framework, 6–9, 33–35
market segment anatomy, 266
perceptual mapping, 54–56
pricing strategies and, 135–136, 150–152
profitability and, 43–46
reasons for, 32–33
retailing and, 176–178
STP strategies for, 298–300
variables, 41–42
selective distribution channels, 166–168
self-expression, market segmentation and, 38
self-service, product marketing and, 83–84
sensation, customer behavior and, 18–20
services. See also goods-to-services continuum
branding of, 95
break-even pricing for, 139–142
flowcharts for, 87–88
marketing of, 81–84
retailing and, 176–178
simulated test markets, 116
site location, retailing and, 176–178
situation analysis, 294–298
6MD case study, 108
sizing of markets, targeting and, 56–61
skimming, pricing and, 154
Skinner boxes, 22
sleeper effects, 197
Smart Car case study, 129
smart distribution systems, 165–168
smell, sense of, 19
social class, customer behavior and, 27–28
social media
branding strategies on, 234–235
costs of, 229
defined, 224–225
STP strategies for, 298–300
types of, 225–226
word-of-mouth (WOM) and, 226
social networks, 227–236
social responsibility, trend monitoring and, 127–128
sociograms, 227
sociomatrix, 227–228
source credibility, 197
Southwest Airlines, 10, 22
$SP. See sales potential ($SP)
specialty stores, 175
sponsorships, 208, 217–218
star brands, 279–280
Starbucks, 184
status symbols, brands as, 94–95
store brands, 103–104
STP of marketing management, 5–9. See also positioning;
segmentation; targeting
planning guidelines and, 298–300
positioning statements and, 74–76
research and, 256–258
strategic planning and, 286–287
strategic segment comparison, targeting and, 52–56
strategy
Ansoff ’s product-market growth matrix, 278–279
BCG matrix, 279–280
defined, 277
General Electric model, 280–281
goal identification, 275–278
marketing metrics for, 287–289
planning guidelines, 283–289
Treacy and Wiersema strategies, 282–283
types of, 275–278
structural equivalence, 228–229
subliminal advertising, 20, 194–195, 197–198
success paradox, 248
supply
distribution channels and, 161–162
logistics of supply chain, 162–165
pricing and, 131–136
supply chain management, 164–165
survey data, 199
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
324 Index
customer satisfaction, 245–248, 270–272
pricing strategies and, 144–145
segmentation and, 259–260
SWOT analysis
new products and brand extensions, 124–126
strategic planning and, 280–281, 283–287
targeting and, 53–54
symbiosis, in marketing exchange relationships, 2
T
tailored strategy, segmentation and, 47
targeting. See also STP of marketing management
competitive comparisons in, 54–56
ethics and, 55–56
in marketing framework, 6–9, 298–300
market sizing and, 56–61
motives for, 51
profitability and, 52–54
segment selection for, 52–56, 298–300
tariffs, two-part, 152–154
taste, sense of, 19
Taza Chocolate case study, 183
techno trends, 127
television advertising
planning and scheduling strategies, 209–210
relative strengths of, 212–220
test markets
new product development and, 115–116
public media, 222
3-D TV, 30–31
timing
marketing plans, 304–305
new product launch and, 118
tipping points, 123
top-down management, 35–42
product development, 110–111
touch, sense of, 20
trademark, 94–95
trade-off ethics, 151
transaction cost analysis, distribution channels, 169–182
transaction value analysis, 179–182
transportation, distribution and, 177
Treacy, Michael, 282–283
trends, monitoring of, 126–128
Twitter, 224, 234
two-part tariffs, 152–154
two-sided arguments, 191
U
umbrella brands, 99–100
uncertainty avoidance, 27
unique selling proposition (USP), 75–76
unit pricing, 145–146
users, 14
V
VALS database, 38
value-added offering, 85–88
value hierarchy
branding and, 95–98, 104–106
distribution channels, 169–182
pricing strategies and, 135–136
variability, product marketing and, 83–84
variable costs, 139–142, 275–276
Vfusion, 122
visual stimuli, 18–19
Volta Financial, 90
volume
marketing strategies and, 276–278
pricing strategies and, 145–146
W
Washburn Guitar case study, 159
wealth distribution, 126–128
weather prediction, 24
web analytics, 230–232
behavioral engagement, 232–233
White Rock Beverage case study, 306
Wiersema, Fred, 282–283
Wild Foods case study, 129–130
willingness to pay (WTP), 144–145
word-of-mouth (WOM), social media and, 226
Y
yield management, pricing and, 152
yogis, targeting of, 56
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Cover
Contents
Preface��������������
About the author�����������������������
Part 1: Marketing Strategy
Chapter 1: Why Is Marketing Management Important
1-1 Defining Marketing�����������������������������
1-2 Marketing Is an Exchange Relationship������������������������������������������������
1-2a Marketing is Everywhere�����������������������������������
1-3 Why Is Marketing Management Important������������������������������������������������
1-3a Marketing and Customer Satisfaction is
Everyone’s Responsibility�����������������������������������������������������������������������������
1-4 The “Marketing Framework”: 5Cs, STP, and the 4Ps
1-4a Book Layout�����������������������
1-4b Learning from the Marketing Framework�������������������������������������������������
1-4c The Flow in Each Chapter: What? Why? How?
Chapter 2: Customer Behavior
2-1 Three Phases of the Purchase Process�����������������������������������������������
2-2 Different Kinds of Purchases���������������������������������������
2-3 The Marketing Science of Customer Behavior�����������������������������������������������������
2-3a Sensation and Perception������������������������������������
2-3b Learning, Memory, and Emotions������������������������������������������
2-3c Motivation����������������������
2-3d Attitudes and Decision Making�����������������������������������������
2-3e How Do Cultural Differences Affect Consumers’ Behavior?
Chapter 3: Segmentation
3-1 Why Segment?
3-2 What Are Market Segments?
3-3 What Information Serves as Bases for Segmentation?
3-3a Demographic�����������������������
3-3b Geographic����������������������
3-3c Psychological�������������������������
3-3d Behavioral����������������������
3-3e B2B���������������
3-3f Concept in Action: Segmentation Variables�����������������������������������������������������
3-4 How Do Marketers Segment the Market
3-4a How to Evaluate the
Segmentation Scheme����������������������������������������������������
Chapter 4: Targeting
4-1 What Is Targeting and Why Do Marketers Do It?
4-2 How Do We Choose a Segment
to Target������������������������������������������������
4-2a Profitability and Strategic Fit�������������������������������������������
4-2b Competitive Comparisons�����������������������������������
4-3 Sizing Markets�������������������������
4-3a Concept in Action: How Much of
My Consultative Advice Can I Sell�����������������������������������������������������������������������������
Chapter 5: Positioning
5-1 What Is Positioning and Why Is It Probably the Most Important Aspect of Marketing
5-1a Positioning via Perceptual Maps�������������������������������������������
5-1b The Positioning Matrix����������������������������������
5-2 Writing a Positioning Statement������������������������������������������
Part 2: Product Positioning
Chapter 6: Products: Goods and Services
6-1 What Do We mean by Product?
6-1a The Product in the Marketing Exchange�������������������������������������������������
6-2 How Are Goods Different from Services?
6-2a Intangibility�������������������������
6-2b Search, Experience, Credence����������������������������������������
6-2c Perishability�������������������������
6-2d Variability�����������������������
6-2e To Infinity and Beyond Goods and Services�����������������������������������������������������
6-3 What Is the Firm’s Core Market Offering?
6-3a Dynamic Strategies������������������������������
6-3b Product Lines: Breadth and Depth��������������������������������������������
Chapter 7: Brands
7-1 What Is a Brand?
7-1a Brand Name����������������������
7-1b Logos and Color���������������������������
7-2 Why Brand?
7-3 What Are Brand Associations?
7-3a Brand Personalities�������������������������������
7-3b Brand Communities�����������������������������
7-4 What Are Branding Strategies?
7-4a Umbrella Brands vs. House of Brands�����������������������������������������������
7-4b Brand-Extensions and Co-Branding��������������������������������������������
7-4c How are Brands Best Rolled Out Globally?
7-4d Store Brands������������������������
7-5 How Is Brand Equity Determined?
Chapter 8: New Products and Innovation
8-1 Why Are New Products Important?
8-2 How Does Marketing Develop New Products for Their Customers?
8-2a Philosophies of Product Development�����������������������������������������������
8-2b Marketing���������������������
8-2c Idea Creation and Market Potential����������������������������������������������
8-2d Concept Testing and Design & Development����������������������������������������������������
8-2e Beta-Testing������������������������
8-2f Launch������������������
8-3 What Is the Product Life Cycle?
8-3a Diffusion of Innovation�����������������������������������
8-4 How Do New Products and Brand Extensions Fit in Marketing Strategy
8-4a Strategic Thinking about Growth�������������������������������������������
8-5 What Trends Should I Watch?
Part 3: Positioning via Price, Place, and Promotion
Chapter 9: Pricing
9-1 Why Is Pricing so Important?
9-2 Background: Supply and Demand����������������������������������������
9-3 Low Prices���������������������
9-3a Concept in Action: Break-Even for a Good����������������������������������������������������
9-3b Concept in Action: Break-Even for a Service�������������������������������������������������������
9-4 High Prices����������������������
9-4a Using Scanner Data������������������������������
9-4b Using Survey Data�����������������������������
9-4c Conjoint Analysis�����������������������������
9-5 Units or Revenue; Volume or Profits����������������������������������������������
9-6 Customers and the Psychology of Pricing
9-6a Price Discrimination, a.k.a. Segmentation Pricing�������������������������������������������������������������
9-6b Quantity Discounts������������������������������
9-6c Yield or Demand Management��������������������������������������
9-7 Non-Linear Pricing�����������������������������
9-8 Changes in Cha-Ching�������������������������������
9-8a Pricing and the Product Life Cycle����������������������������������������������
9-8b Price Fluctuations������������������������������
9-8c Coupons�������������������
9-8d Competitive Strategy and Game Theory������������������������������������������������
9-8e Auctions��������������������
Chapter 10: Channels of Distribution
10-1 What Are Distribution Channels, Supply Chain Logistics, and Why Do We Use Them?
10-2 How to Design Smart Distribution Systems: Intensive or Selective?
10-2a Push and Pull��������������������������
10-3 Power and Conflict in Channel Relationships�������������������������������������������������������
10-3a Revenue Sharing����������������������������
10-3b Integration������������������������
10-3c Retailing����������������������
10-3d Franchising������������������������
10-3e E-Commerce�����������������������
10-3f Catalog Sales��������������������������
10-3g Sales Force������������������������
10-3h Integrated Marketing Channels������������������������������������������
Chapter 11: Advertising Messages and Marketing Communications
11-1 What Is Advertising?
11-2 Why Is Advertising Important?
11-3 What Marketing Goals Are sought from Advertising Campaigns?
11-4 Designing Advertising Messages to Meet Marketing and Corporate Goals
11-4a Cognitive Ads��������������������������
11-4b Emotional Ads��������������������������
11-4c Image Ads����������������������
11-4d Endorsements�������������������������
11-5 How Is Advertising Evaluated?
11-5a A-ad and A-brand
Chapter 12: Integrated Marketing Communications and Media Choices
12-1 What Media Decisions Are Made in Advertising Promotional Campaigns?
12-1a Reach and Frequency and GRPs�����������������������������������������
12-1b Media Planning and Scheduling������������������������������������������
12-2 Integrated Marketing Communications Across Media
12-2a Media Comparisons������������������������������
12-2b Beyond Advertising�������������������������������
12-2c Choice Between Advertising and a Sales Force���������������������������������������������������������
12-2d The IMC Choices Depend on
the Marketing Goals�����������������������������������������������������������
12-3 How Is the Effectiveness of Advertising Media Measured?
Chapter 13: Social Media
13-1 What Are Social Media?
13-1a Types of Social Media����������������������������������
13-1b Word-of-mouth��������������������������
13-2 What Are Social Networks?
13-2a Identifying Influentials�������������������������������������
13-2b Recommendation Systems�����������������������������������
13-2c Social Media ROI, KPIs, and Web Analytics������������������������������������������������������
13-2d Pre-purchase: Awareness������������������������������������
13-2e Pre-purchase: Brand Consideration����������������������������������������������
13-2f Purchase or Behavioral Engagement����������������������������������������������
13-2g Post-purchase��������������������������
13-2h How to Proceed?
Part 4 Positioning: Assessment Through the Customer Lens
Chapter 14: Customer Satisfaction and Customer Relationships
14-1 What Are Customer Evaluations, and Why Do We Care?
14-2 How Do Consumers Evaluate Products?
14-2a Sources of Expectations������������������������������������
14-2b Expectation and Experience���������������������������������������
14-3 How Do Marketers Measure Quality and Customer Satisfaction?
14-4 Loyalty and Customer Relationship Management (CRM)
14-4a Recency, Frequency, and Monetary Value (RFM)
14-4b Customer Lifetime Value (CLV)
Chapter 15: Marketing Research Tools
15-1 Why Is Marketing Research so Important?
15-2 Cluster Analysis for Segmentation���������������������������������������������
15-3 Perceptual Mapping for Positioning����������������������������������������������
15-3a Attribute-Based����������������������������
15-4 Focus Groups for Concept Testing��������������������������������������������
15-5 Conjoint for Testing Attributes�������������������������������������������
15-6 Scanner Data for Pricing and Coupon Experiments and Brand
Switching��������������������������������������������������������������������������������
15-7 Surveys for Assessing Customer Satisfaction�������������������������������������������������������
Part 4: Capstone
Chapter 16 Marketing Strategy
16-1 Types of Business and Marketing Goals�������������������������������������������������
16-2 Marketing Strategy������������������������������
16-2a Ansoff’s Product-Market Growth Matrix��������������������������������������������������
16-2b The BCG Matrix���������������������������
16-2c The General Electric Model���������������������������������������
16-2d Porter and Strategies����������������������������������
16-2e Treacy and Wiersema Strategies�������������������������������������������
16-3 How to “Do” Strategy��������������������������������
16-3a SWOT’s S&W�����������������������
16-3b SWOT’s O&T�����������������������
16-4 Key Marketing Metrics to Facilitate Marketing Strategy������������������������������������������������������������������
17 Marketing Plans�������������������������
17-1 How Do We Put it All Together?
17-2 Situation Analysis: The 5Cs���������������������������������������
17-3 STP���������������
17-4 The 4Ps�������������������
17-5 Spending Time and Money�����������������������������������
Endnotes���������������
Index������������
2016-12-21T16:00:45+0000
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